The G20 / OECD Action Plan to curb

aggressive tax planning by multinationals

African Trade Union Tax Justice Campaign:
Providing alternatives for financing Effective Public Social Services
Delivery and the implementation of Social Protection Floors
Abuja, Nigeria
17- 18 January, 2014
 The G20 action plan
• G20 meeting in St Petersburg (Sep 20 13) adopts the
OECD Base Erosion and Profit Shifting (BEPS) Action
Plan to curb MNEs’ aggressive tax planning aiming at
– (i) reducing the taxable income base (“base erosion”) or
– (ii) moving profits away from economically relevant but
high tax-jurisdictions to economically irrelevant but low-
tax jurisdictions (“profit shifting”).
• 15 measures, by 2015.
• Implementation 2016-2018
 BEPS
• contractual arrangements within a MNE and between
a parent company and its subsidiaries can significantly
depart from the commercial arrangements (incl. risk).
• These contracts are deemed valid because of the
presumption that the contracting parties are acting in
full autonomy from one another.
– Does a subsidiary have sufficient legal “autonomy”
however when it is contracting with its parent company?
– Can we speak of a “contract” if, in substance, the
contracting parties defend the same economic interests?
 Why now?
• The figures
– US: USD300bn (19%) of reportable income not properly reported to the
IRS
– EU: €1tr loss, €2000 per citizen, compares with total budget deficit EU27
of €524bn
– Oxfam: £100bn lost in tax avoidance by rich individuals
– BVI – China, Caiman Islands – Brazil, India – Marutius, etc.
– ActionAid: almost half of all FDI to developing countries goes through tax
havens
• OECD public budget deficits are increasing
• Domestic resource mobilisation in developing countries
– half of Sub-Saharan African countries mobilise less than 17% of their GDP
in tax revenues, below the minimum level considered by the UN as
necessary to achieve the Millennium Development Goals
 Tax evasion vs avoidance
• Tax evasion:
– Illegal, part of the shadow economy, links with
criminal activities & money laundering
– transparency, access to bank account identity, force
tax havens, automatic exchange of information
• Tax avoidance
– playing with the rules, part of the MNE business
model
– much more difficult to detect
 Key BEPS practices

• Manipulating intra group transfer pricing;

• Excessive deduction of debt interest and other
payments;
• Hard to value and shifting of intangibles;
• Avoiding permanent establishment status; and
• Opacity of MNE tax schemes.
The changing structure of the MNE
Today’s MNE
Transfer pricing
Hybrid mismatch
Hard to value intangibles
 Orders, buys & owns
License fee (USA)
commodities & raw materials
4,3%
Suppliers
(France) Customers
(France)
Empty Shell
Re-sale, pricing
Primary contractor set to meet
Delivery of (Switerland) 2,5% margin
commodities & raw
materials

Limited risk
Pays for manufacturing distributors
(processing cost + 6%)
(France)
Sale of the product,
pricing set by the
Industrial sites Alpha Europe
(France)

Logistics
& warehouses
Delivery of finished
(France)
products
Group-wide reporting
 What is missing
• Formulary apportionment method
• Country-by-country tax reporting made public
• Transparency of beneficial ownership
• Transparency over dispute resolution
mechanisms
• Developing country perspective
• Impact on MNE workers
 Developing countries
• Challenges
– Capacity to monitor BEPS
• telecom sector.
• dedicating time, resource & audit staff, does not deliver quick results
– OECD Transfer pricing guidelines not implemented
• Kenya (2006), Uganda (2011), Ghana (2012)
• Rwanda , Burundi and Tanzania not yet.
– Bilateral agreements and treaties:
• in most case favor the developed countries.
• Limited treaty network
• Some positive re. transfer pricing
– July 2012, the Kenyan tax administration (KRA) - OECD/WB/IFC training
programme
• increase in the number of audit cases completed, revenue collected
• recent case led to US$12.9m in additional revenue, another to US$10.9m.
 Impact on workers
• Tax avoidance does not happen in a vacuum, it is another form
of corporate short termism
– harms government finance and public services.
– But it also harms other stakeholders
• For workers can be assimilated to a legal restructuring with short
termist goals.
– affects profit levels, capacity to invest
– affects the distribution of wealth created by the company
– tax planning is one form of “regulatory planning” that may undermine
workers’ rights to collective bargaining (“aggressive social planning”)
– Affects workers’ right to information (as a result of greater opacity) –
weakening bargaining power.