Wednesday, September 18, 2013

How serious is the OECD about mending the system for taxing multinational corporations?

Professor Sol Picciotto, a Senior Adviser to TJN, has an article published in the esteemed U.S. publication Tax Analysts, entitled Can the OECD Mend the International Tax System? It looks at the OECD's much-hyped Base Erosion and Profit Shifting (BEPS) project, which admits that the international tax system it helped design is fatally flawed, and proposes to redesign it. The OECD bills this project as no less than ‘‘a turning point in the history of international co-operation on taxation.’’ And, as Picciotto notes, the BEPS project aims"
"to remodel the international tax system to ensure that TNCs are taxed according to where they actually do business. This is a major shift of perspective for the OECD: For decades it has prioritized the prevention of double taxation, but only recently has it begun to talk about the problem of double nontaxation."
This is a significant shift, and we at TJN like to think that we have been contributors to this global shift in attention. However, one of the big questions we have asked before is whether the OECD is serious - really serious - about reform here. Picciotto's new article notes:
The BEPS action plan entails taking a new look at most of the key elements of the international tax system concerning TNCs. To keep the project within some sort of bounds, the report states that it does not aim to reconsider the basic allocation of taxation rights between residence and source countries, although some countries consider that this is needed. Nevertheless, the actions envisaged would, if taken seriously, involve significant changes, indeed some reversals, of countries’ tax policies, and of the positions taken by the OECD itself. The exercise can be likened to disassembling a malfunctioning machine, refashioning the parts, and then putting them back together in the hope that it will work better.
This article looks first at the parts identified by the report as in need of repair, then at the reassembly methods proposed, and concludes by assessing whether and how the renovated machine might work.

Under a sub-heading entitled Will it Work?, Picciotto notes that
In opting for repair rather than a redesign, the OECD has taken on a difficult task. It will have to surmount significant political obstacles as well as technical difficulties to come up with effective measures under the various actions in the plan, as well as coordinating the overall reform.

There are of course many who have argued that it is time to abandon the separate entity/ arm’s-length principle and move toward a unitary approach to taxation of TNCs.
The OECD has cited political obstacles to unitary taxation as a reason for inaction. But Picciotto does not really buy this line of argument, for two particularly big reasons.
"The method chosen by the OECD faces equivalent difficulties. The difference is that its preferred part-by-part repair of the existing system will mean tackling a series of political obstacles over a period of time, instead of the more direct confrontation that a comprehensive reform would require. It is possible that this salami-slicing approach will be easier, but the danger is that it may lead to drawn-out debates over detailed technical issues, resulting in a series of watered-down compromises. There are doubtless many who will hope that the spotlight of political attention will move to other issues, and perhaps even that economic growth will return and fiscal pressures abate, so that the project gradually dissipates into ineffectiveness.

The bigger question, however, is whether even a serious and sustained repair effort can result in a functioning system. The power of the argument for a unitary approach is that it would provide a more sound foundation for the international tax system."
More on unitary taxation here. If the OECD won't move forwards on examining it, others certainly will be doing so.

Full citation: Picciotto, S (2013) Can the OECD Mend the International Tax System? Tax Notes International 71: 1105-1115


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