Implementing OECD taxation initiatives

Budget Review 2016–17 Index

Les Nielson

The Budget includes several tax integrity measures one of which is to implement two more components of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting Project (BEPS)[1]. These are:

  • eliminating hybrid mismatch arrangements and
  • updating transfer pricing rules. [2]

What problems are being addressed?

A hybrid mismatch occurs where a company’s financial instrument is treated as, say, debt, in one tax jurisdiction and as, say, equity, in another tax jurisdiction. The outcome can be double non-taxation of the cash flows associated with this instrument. These arrangements are wide spread and have resulted in ‘substantial erosion’ of countries’ tax bases.[3]

Transfer pricing occurs where a company in a low or no tax country (the source country) charges an artificially high price for goods or services sold to an affiliate in a higher tax country (the destination country). The price to the affiliate in the destination country is an operating cost which reduces its profit and tax payable in the high tax destination country. The price to the company in the source country is recorded as revenue so that most of the profit is effectively transferred to that country where little or no tax is payable. Overall, tax is either minimised or eliminated altogether.

Transfer pricing can also work in reverse, where a source country company charges an affiliate an artificially low price for a commodity (say, iron ore) that the affiliate then sells for a much higher price in a low or non-tax jurisdiction. Such sales are suspected of occurring through Singapore-based commodity trading facilities by affiliates of major Australian resource companies.[4]

How are they being addressed?

The OECD has published substantial guidance on measures to address these issues, which Australia has undertaken to implement.[5] The Australian Board of Taxation has already reported to the Government on implementing the OECD’s recommendations on the hybrid mismatch rules.[6] This Budget initiative undertakes to implement that report as well as take action on the transfer pricing issue.

Revenue effects

Measures to deal with hybrid mismatch arrangements will apply no earlier than1 January 2018 and changes to the transfer pricing rules from 1 July 2016[7]. The Government has not provided estimates of the revenue effects for either measure for the forward estimates.[8]

Background

Australia has been a strong supporter of the OECD’s BEPS project.[9] This project is the most substantial renovation of the international tax standards in almost a century.[10] Its main output is fifteen ‘Actions’ or policy recommendations that countries can implement in order to tackle multinational tax avoidance.[11] The view of the OECD is that it is preferable that these Actions be implemented in a coordinated fashion.[12] To date Australia has taken the following BEPS-consistent actions in relation to:

  • stronger transfer pricing legislation [13]
  • multinational anti-avoidance laws to ensure multinationals that make sales in Australia do not avoid tax by booking revenue offshore [14]
  • implementation of OECD recommendations on country-by-country reporting, tax treaty abuse, harmful tax practices and exchange of rulings [15]
  • exchange of information with other countries on activities of multinational corporations [16]
  • new tax requirements on foreign investment applications to ensure multinational companies investing in Australia pay tax here on what they earn here [17] and
  • introduction of legislation to remove the competitive tax advantage for overseas companies by applying the GST to digital product and other services sold overseas. [18]

What is the rest of the world doing?

As mentioned, it is desirable that the BEPS package is implemented in a coordinated way. To this end, the OECD has established a co-ordination mechanism for participating countries to do just that. There are far more countries participating in the BEPS process than there are members of the OECD.[19]

In addition, BEPS-consistent actions have already been undertaken by a number of countries. For example:

  • a large number of countries (including Australia) have entered into agreements for the automatic exchange of tax information, particularly information on multinational corporations [20]
  • the UK government is legislating the BEPS hybrid mismatch rules, in particular, and is undertaking work on legislating other BEPS Actions and [21]
  • Japan has introduced legislation to:
    • impose a consumption tax for the provision of cross-border digital services (Action 1: Address tax challengers of digital society)
    • eliminate dividend exclusion for hybrid arrangements (Action 2: Neutralise the effects of hybrid mismatch arrangements) and
    • introduce an exit tax for individuals (Action 6: Prevent treaty abuse).[22]


[1].          Organisation for Economic Co-operation and Development (OECD), Base Erosion and Profit Shifting Project website.

[2].          Australian Government, Budget measures: budget paper no. 2: 2016–17, pp.34 –35.

[4].          Senate Economics References Committee, Corporate tax avoidance: Part I: You cannot tax what you cannot see, The Senate, Canberra, August 2015, pp. 25–27. For example, BHP operates such a hub in Singapore and its associated profits are not taxed in that jurisdiction. BHP has paid additional Australian tax in respect of these operations under the Controlled Foreign Company Rules, but it has publicly acknowledged that it has a number of outstanding disputes with the Australian Tax Office over the operation of its Singapore marketing hub (p. 26).

[5].          OECD, Neutralising the effects of hybrid mismatch arrangements, op. cit.; OECD, Aligning transfer pricing outcomes with value creation: Actions 8–10: 2015 final report, 5 October 2015.

[6].          The Board of Taxation, Implementation of the OECD hybrid mismatch rules, Australian Government, March 2016.

[7]            Australian Government, op. cit. p. 34-35.

[8]           Ibid.

[9].          S Morrison (Treasurer), Tougher measures to tackle tax evasion pass Parliament, media release, 29 February 2016; J Hockey (Treasurer), Global leaders tackle profit shifting and tax evasion, media release, 20 September 2014; D Bradbury (Assistant Treasurer), Address at the launch of the Tax and Transfer Policy Institute, Canberra: Supporting better tax policy for a stronger, smarter and fairer society, media release, 27 June 2013.

[10].       OECD, Neutralising the effects of hybrid mismatch arrangements, op. cit.

[11]        OECD, Action Plan on Base Erosion and Profit Shifting, 2013, p. 13.

[12].       For further information see OECD, ‘OECD/G20 Base Erosion and Profit Shifting Project: Explanatory statement: 2015 final reports’, OECD, 2015.

[15].       Ibid; Tax Laws Amendment (Implementation of the Common Reporting Standard) Act 2016; M Konza (ATO Deputy Commissioner, International), Address to the Tax Institute NSW 7th Annual Tax Forum: BEPS Action Plan Update, transcript, 22 May 2014. See also Australian Government, Budget measures: budget paper no 2: 2015–16, p. 15–16.

[16].       S Morrison (Treasurer) and K O’Dwyer (Assistant Treasurer), Coalition bolsters ATO in fight against multinational tax avoidance, media release, 28 January 2016.

[17].       S Morrison, Tougher measures to tackle tax evasion pass Parliament op. cit.

[18].       Tax Laws Amendment (Implementation of the Common Reporting Standard) Act 2016, op. cit.; S Morrison (Treasurer), OECD report supports Australian Government action on multinational tax avoidance, media release, 6 October 2015; S Morrison, Tougher measures to tackle tax evasion pass Parliament op. cit.

[21].       HM Treasury, Business tax road map, UK Government, March 2016, pp. 21–23 (Box 2B), 25.

[22].       Zeirishi-Hojin PricewaterhouseCoopers, ‘Changes in the Japanese tax laws following the OECD BEPS proposals – The 2015 Tax Reform Proposal’, BEPS News, Zeirishi-Hojin PricewaterhouseCoopers, 25 February 2015.

 

All online articles accessed May 2016. 

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