Diverted Profits Tax – Centre for Business Taxation

I had the pleasure of attending this conference on Tuesday 13th January, which was as usual well planned and organised by the CBT. It was a fascinating couple of hours as much for what was not said as for what was.

A number of speakers quoted to support their case, but I felt I was in early Bob Dylan territory for most of the evening – more of that later. What surprised me most was the level of denial about the political process of many of the comments, this isn’t a technical debate anymore and it’s a debate being conducted within a political concensus in the UK. Mike Williams made reference to the agenda being determined by whoever forms the next government after the May election – anyone who thinks that a government comprising elements of the Labour, Scots Nats or UKIP will be any more friendly to business is living in a strange world. I wrote a blog at the beginning of the BEPS process which quoted Bob Dylan “You don’t need a weatherman to know which way the wind blows”, now this referred to what we would now call a terrorist organisation – the weathermen – but the message is clear – we all know which way this particular wind is blowing and it is blowing across virtually all Europe, the UK is not acting alone. Consider this letter from the German, French and Italian Finance Ministers to the EU last month:

In the context of the OECD/G20’s final adoption of the BEPS conclusions by the end of 2015, the appropriate response by the EU is the adoption of a set of common, binding rules on corporate taxation to curb tax competition and fight aggressive tax planning.

We, Finance Ministers of France, Germany and Italy, are convinced that this can only be reached through a comprehensive anti-BEPS Directive, to be adopted by the 28 Member States before end-2015. The diagnosis is made and the solutions are already known, so we should act without any delay.

First, the lack of transparency between tax administrations fosters aggressive tax planning, as their decisions may have an impact on the location of the tax base within the internal market. The Commission’s proposal to make information exchanges on cross-border tax rulings mandatory and automatic, which should also cover decisions relating to transfer pricing, is necessary. Moreover, one should think about stricter conditions and rules for the issuance of such unilateral rulings.

In addition, we have a real opportunity to go further in this area. For instance, the EU law could do more on trusts, shell companies and other non transparent entities, by establishing registers or other mechanisms requiring that beneficial owners are identified and available for tax administrations. The directive should also include disclosure requirements for companies’ intra-European cross-border restructuring and other operations.

Second, transparency is not enough. We can surely not concede that situations where Treaty freedoms are misused in order to avoid tax remain unaddressed. For this reason, the anti-BEPS Directive should set a general principle of effective taxation.

As a consequence, the exemptions provided for by the Interest-Royalties and the Parent-Subsidiary Directives should be denied if they lead to no effective taxation. On the issue of the hybrid arrangements, it is particularly crucial to prevent double non-taxation in any sort of cross border situation.

Consistently, the anti-BEPS Directive should ensure at the EU level that tax benefits are not obtained through inappropriate arrangements. Thus, our work on a common general anti-abuse provision has to be achieved and it must be incorporated into the EU law.”

Critics of the UK should consider whether this is a preferable road to follow?

Mike Williams gave a clear exposition of what the purpose of the legislation is and of why it was felt that legislation not guidance was needed. I was surprised that people were suggesting guidance. We have senior corporate staff from a number of global corporations going on the record that their tax planning in using structures which result in income not being subject to tax anywhere is within the “letter and the spirit of the law” so if the UK government and other governments don’t agree then their only method they have to change is to change the law.

Other comments were made about the short period for comment on legislation and the shortened legislative process as a result of the election. Again I was surprised, if you read most of the submissions to the BEPS papers from business they read as though nothing is wrong with the international tax system and that little needs to be done. Part of the reason for the truncation of the process is that business has not put forward a positive approach to the BEPS agenda saying which measures are needed and which wrong, it has generally put forward a united front opposing proposals, this approach best serves those whose tax planning is most aggressive. In some cases buisness has defended the indefensible, and this approach does not help those businesses which do not engage in aggressive tax planning – that is one of the main reasons we are where we are.

I thought Philip Bakers presentation was excellent, but the reaction to it was fascinating. He was very clear in his analysis (as usual) that he believed the new measure did not fall foul of either current UK treaty provisions or EU law. To be challenged that at least eight lawyers in the room were preparing challenges based on EU law sat in stark contrast to a call to “give BEPS a chance”.

Isn’t there a contradiction in complaining about the speed of legislation with one breath and then championing the challenging of that legislation with the next. Faced with opposition like this, it is not  surprising that the government follows a path of more legislation to implement its view of tax policy.

Paul Morton gave a very clever presentation on the possible consequences of the proposed legislation on a UK entrepreneur whose main issues seemed to have been being seduced by various siren calls from other countries when his best bet would have been to stay in the UK where he developed the process and benefited from the 20% corporate tax rate.

Again Bob came to mind in All along the Watchtower “There are many here among us who feel that life is but a joke, But you and I, we’ve been through that, and this is not our fate, So let us not talk falsely now, the hour is getting late”. The hour is getting late and we are in the beginning of the key phase of BEPS. Governments want to raise the corporate tax they believe is being avoided, as Mike Williams said, Corporations operating in countries with OECD level tax rates shouldn’t have effective tax rates of 10% and below. I don’t disagree with the government’s aim, particularly as the probable alternative is that my tax will be raised.

At the beginning of the BEPS process a number of senior people told me that BEPS wouldn’t achieve anything and would run out of steam. So far they are wrong. Prevarication and ignoring the issue hasn’t worked and will not work. If you want good tax policy, you have to engage with the politicians and policy makers to frame that policy and its implementation, but you also have to accept what the political imperative behind that policy is to do that, in the end governments make laws. Sitting outside that context only allows one to complain from a position of powerlessness.

On the way to the meeting I read about the challenge made to Uber by London taxi drivers on Uber’s VAT planning. Uber has come up with a clever wheeze to be able to charge a lower rate of VAT on the London taxi fares it charges than the UK rate. This aggressive tax planning gives it a competitive advantage. Unfortunately for Uber, its victims have the opportunity to regale their customers with this aggressive tax planning. “Clever” tax planning like this only adds to the political pressure to tackle it as quickly as possible, it also poses the question – does it comply with the letter and the spirit of the law in accordance with the OECD MNC guidelines?

 

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