Rich countries spearhead global tax reform framework

MANILA, Philippines - Tax-erring multinational companies, abuse of tax treaties and even online shopping are the subject of a 15-point tax reform package from which a treaty among developed and emerging economies, including the Philippines, will be based.

The Organization for Economic Cooperation and Development (OECD) and the Group of 20 (G20) Finance Ministers are devising a framework to limit tax base erosion and profit sharing (BEPS) under a project which the country is participating in.

“The country is the vice-chair of the group drafting a multilateral treaty based on the action plan. Discussions will begin in November,” Internal Revenue commissioner Kim Jacinto-Henares said yesterday.

In meetings being held in Lima, Peru, finance chiefs are taking up the draft “action plan” that aims for a “coherent and coordinated” response against BEPS practices that tend to minimize government revenue sources through income cross-border transfers.

Under the 15-point plan, participating countries vowed to develop strategies to corner forgone revenues from the “digital economy” which circumvents “cross-border” value-added tax collections from consumers.

“Business-to-consumer transactions” should be taxable “where the consumer is located,” the plan pointed out.

For businesses, controlled foreign company (CFC) rules will need to be strengthened, with the OECD eyeing to prevent taxpayers from shifting income into foreign subsidiaries to avoid hefty tax payments.

This include harmful practice of re-defining multinational corporations’ “permanent establishment” status to avoid paying taxes where their headquarters are.  

A country-to-country “mismatch” on qualified tax deductions should also be discussed with an end in view of harmonizing domestic laws with treaty obligations. Interest rate deductions from debt issuances – which effectively limits the amount of tax to be collected from securities – must also be tackled.

“Current concerns on harmful tax practices are primarily about preferential regimes which can be used for artificial profit sharing and about a lack of transparency,” the OECD said.

“Going forward, enhancing the economic analysis and monitoring of BEPS will require countries to improve the collection, compilation, and analysis of data,” it added.

The plan, targeted to be completed by 2020, also call for countries to develop mechanisms to avoid “treaty shopping” for nation invoking and “abusing” tax treaties to avoid payments. Dispute mechanisms to solve problems in this area should also be strengthened.

“The effectiveness of the project will be determined by its widespread and consistent implementation… We call on the OECD to prepare a framework by early 2016 with the involvement of interested non-G20 countries,” the plan said.

Despite the action plan, Henares said the BEPS project is on its initial stages and that without a multilateral treaty, nothing is enforceable.

“We will just begin the discussions. And once you have the treaty, you will still have to sign it then ratified by Congress so that it can become part of the law of the land,” she said.