This post builds on some comments I have made in a number of meetings and my reflections on listening to the G8 transparency meeting, the European Commission, the OECD and various governments over the last month. As the date for the publication of the BEPS workplan approaches Business needs to think about its response.
It seems to me that business faces a real challenge in responding in the context of the current tax political agenda. That challenge is not helped by the beginning of a fracture between business in different regions. The one course of action which I believe business cannot follow is to oppose measures proposed in the BEPS work plan wholesale, if it does oppose measures it will have to do so in a selective, well thought out and well-argued way.
But first, I think it’s worth focusing on a key strategic challenge. Business has long campaigned for a framework to avoid double taxation. I completely agree with this and have worked to support this both in principle and in practice and this work must go on. I had understood that this approach was based on the concept that business profits should be taxed but only once. As a result the key challenge was the allocation of taxing rights. Governments have the right to forego taxing rights in their jurisdiction to encourage economic activity and business supports this approach. But this approach does not mean that double non taxation is acceptable without qualification or should be sought by business.
I thought I’d quote from a piece last month by Dan Witt. Dan leads ITIC The International Tax and Investment Center (ITIC) which serves as a clearinghouse for information on best practices in taxation and investment policy, and as a training center to transfer such know how to improve the investment climates of transition and developing countries, thereby spurring formation and development of business and economic prosperity.
“Many of BEPS’s goals are laudable such as the need for more transparency about how much in taxes major companies are actually paying to various countries. Corporations shouldn’t be assessed for the same income twice, which unfortunately happens too often. Complete escape from taxation is also a bad outcome unless a government specifically enacts tax breaks as a way to attract capital or jobs.” It’s a much more concise way of saying what I am in this blog.
How one allocates the profits is the challenge. The arms length principle is being challenged by those who believe it does not tax all profits and that unitary taxation would be preferable. This is an incorrect analysis, the arms length principle like unitary taxation, subjects all profits to tax, it is tax incentives ,differences of tax treatment and tax incentive regimes which cause double non taxation not the arms length principle per se.
The ICC is scoping a project to consider the issue of allocating taxing rights. Some people are becoming exercised about this being “unhelpful”, so the publication of the scope will hopefully make clear what is intended. What is not intended is undermining the arms length principle (and anyone who suggests that is being disingenuous) but finding an agreed manner of allocating taxing rights which is acceptable in the new world economy – this is no longer an OECD issue its a G8 and G20 issue, it is in fact a global issue . ICC with its global membership has a clear role in that dialogue.
What also concerns me is those voices who seem to be defending double non taxation. I cannot support that position. Non taxation is acceptable where it has been introduced for good policy reasons and where the government making the decision gives up the right to tax economic activity conducted within its jurisdiction. Facilitating non taxation in another jurisdiction is another matter. And supporting or defending such facilitation is a dangerous path to take.