By S C Tiwari, IRS (Retd) – The views expressed in the article are author’s own views.
The recent OECD publications outlining Pillar One and Pillar Two approach to cross-border taxation of digital business has received an enthusiastic response in Indian tax circles. Since ecommerce activities present a significant taxation issue, do the options presented by OECD offer a fair and reasonable solution for cross-border ecommerce taxation?
The OECD, in July 2013, embarked on a very ambitious project to end Base Erosion and Profit Shifting (BEPS) and to improve tax transparency. It set out 15 BEPS actions aimed at rooting out BEPS. Most of these issues resonated with Indian tax officers as these were the issues causing significant loss of revenue. The OECD action generated considerable excitement as to how things were going to become tough for MNEs engaged in BEPS. Tax Heavens were expected to be a thing of past with transparency provisions. The OECD published its final reports on 5th October, 2015 along with a draft of multilateral instruments (MLI) required to be ratified by various states. The OECD and G20 countries continued further action through BEPS “Inclusive Framework or IF” group which brought together a much larger group of countries in the said project. The recent Pillar One and Pillar Two approach is a continuation of Action 1 on “Addressing the Tax Challenges of the Digital Economy”. In my view, the signing of the MLI and implementation of the BEPS suggestions has hardly resulted in any significant change in behaviour of MNEs.
Are OECD members, in cooperation with the G-20 and the IF group, actually desirous of ensuring total tax transparency and consequently eliminate BEPS? Can OECD act as a reliable global platform as far as base erosion and tax transparency is concerned? The present plight of powerful multilateral institutions like EU, UN and UNSC and their abject failure to guard weaker countries against the excess of the powerful ones, reveals the impotence of such institutions in current environment. To understand the issue, it is necessary to analyse the past approach of OECD in dealing with tax heavens and BEPS.
The biggest hurdle which OECD faces is that it comprises of members many of which are tax heavens themselves. The role of tax heavens has been crucial in facilitating BEPS through illegal income transfer from high tax jurisdictions to low tax jurisdictions. The tax heavens, in addition to having a very low or nil taxation, facilitate the same through loose capital flow and tight data dissemination laws. Hence, if the BEPS has to be stopped, it is necessary that such tax heavens are clearly identified and forced to cease such activities. It would be revealing to note that it is the western countries, many of them a part of OECD, who either indulge in or facilitate such tax heavens. A report dated 3rd Sept., 2010 prepared by Congressional Research Service for members of US Congress gives a thoughtful insight on the role of tax heavens as well as the inability of the OECD to identify tax heavens. In its earlier reports prior to 2002, OECD relied on consensus to identify tax heavens rather than an objective yardstick. The result was a lopsided report which excluded tax heavens such as Ireland and Switzerland which were OECD members and Hongkong and Macau on China objections. Even US, an OECD member, in its own list contained in S 396, introduced in the 110th Congress (page 3 of the report) excluded British Virgin Islands, known world over as a tax heaven!
Even now, the OECD does not identify tax heavens on factual yardsticks like low tax rates and laws promoting base erosion but solely based on tax transparency commitments. In April 2002, the OECD’s Committee on Fiscal Affairs had identified seven jurisdictions (Andorra, The Principality of Liechtenstein, Liberia, The Principality of Monaco, The Republic of the Marshall Islands, The Republic of Nauru and The Republic of Vanuatu) as un-cooperative tax havens. By May 2009, the Committee had decided to remove all these jurisdictions from the list of uncooperative tax havens in the light of their commitments to implement the OECD standards of transparency and effective exchange of information and the timetable they set for the implementation. As a result, no jurisdiction is currently listed as an un-cooperative tax haven by OECD. (Source – https://www.oecd.org/tax/harmful/ list-of-unco-operative-tax-havens.htm). Really!! No tax heavens in the world! Congrats OECD.
The very premise of excluding Countries with tax information exchange agreements (TIEAs) from the list of tax heavens is flawed. The TIEAs usually allow for information only on request after identification of tax evaders in advance. If the person is already identified as tax evader, where is the need for information! In addition, they generally do not override the Bank Secrecy Laws of the State which are quite strong in tax heaven countries. The laws of tax heavens are lax with reference to identity and significant transaction data and hence, they hardly have any useful data to share. In fact, the above referred US Congress Report observes that – “In some cases, the countries themselves have little or no information of value. One article, for example, discussing the possibility of an information exchange agreement with the British Virgin Islands, a country with more than 400,000 registered corporations, where laws require no identification of shareholders or directors, and require no financial records, noted: “Even if the BVI signs an information exchange agreement, it is not clear what information could be exchanged” The OECD categorisation of tax heavens is severely flawed and hardly serves any purpose. It also shows its lack of intent to root out such practices.
The studies by independent scholars reveal a very contrasting story. Such studies have identified Delaware, Nevada and Wyoming of USA, Campione d’Italia, an Italian Town located within Switzerland, major countries such as the UK, Netherlands, Denmark, Hungary, Iceland, Israel, Portugal and Canada as tax heavens. (Congressional Report on Tax Heavens dated 3-9-2010). This report also notes that in addition to Bahamas, Bermuda, BVI, Cayman Islands, Jersey, Liberia, Marshall Islands etc., the Tax Justice Network has identified some specific cities and areas as tax heaven which include New York and Uruguay in the Americas and Caribbean; Mellila, Sao Tome e Principe, Somalia, and South Africa in Africa; Dubai, Labuan (Malaysia), Tel Aviv, and Taipei in the Middle East and Asia; Alderney, Belgium, Campione d’Italia, City of London, Dublin, Ingushetia, Madeira, Sark, Trieste, Turkish Republic of Northern Cyprus, and Frankfurt in Europe and the Marianas in the Indian and Pacific oceans. No wonder that the global tax evaders seek refuge in Europe. If the OECD is not capable of even identifying a tax heaven, can it actually work as a sentinel of tax transparency?
The second issue is the voluminous ambiguous guidance published by OECD. The motto of the BEPS is – profits should be taxed where value is created or services are rendered. However, in its effort to justify market practices of European MNEs, the OECD has made the reports ambiguous and contradictory, the ultimate effect being that the multinationals are able to wringle out of taxing situations. For instance, the OECD TP guidance requires an agreement between the parties for services to be final document for cost allocation in intra-group services, but in later discussion, it gives a huge leeway by talking about market practices making the entire guidance subjective and ambiguous. Such language has been successfully used by the MNEs before Indian Courts. Such ambiguous guidance, while being contrary to the local laws, also works against the local businesses who are required to pay higher taxes.
Similarly, the Report on Hybrid Structures is over 450 pages long and the scope of various rules, conditions under which they would apply and the exceptions to the Rule taken together make the Rule incomprehensible. In the recent report outlining Pillar One and Pillar Two concept, the OECD has excelled itself in creating a new level of complexity previously unimaginable. Read Article 6 to 9 to get a taste of such complexity. The recommendation to institute a panel mechanism (of tax administrators and MNE representatives) beats me. Will Chinese firms share the huge data demanded in this Report. The BVI ones will not have any data. The OECD has miserably failed to achieve the objectives with which it started this enterprise – a simple process, limited compliances and administrative burdens and a level playing field for all.
Taxation is a sovereign right and independent countries arrive at their own decision with regard to taxation of their residents. The OECD expects the multitude of countries, many of them being tax heavens complicit in the MNE’s tax planning scheme, to sit together and arrive at a multitude of variables contemplated in these Pillars. What the OECD has ultimately achieved is creating a utopian literature with fancy names which is impossible to implement by less developed countries while taking away the power vested in them for taxing the digital businesses based on processes best suited to them.
OECD has created these reports keeping in view data available in western countries. Such tools and data are not available in other jurisdictions where capabilities of tax authorities to handle complicated tax guidance is seriously limited. Assessing Officers do not have access to historical corporate data. The Higher Courts have grimaced at failure of Revenue to avail of services of domain experts while deciding / arguing cases while MNEs marshal the best brains on the issue. These complicated and ambiguous reports, having no unique solutions to offer, are bound to work against the State and local businesses and in favour of MNEs.
Do these Publications mean that OECD has turned into a tax crusader? While OECD has correctly identified the issues, the solution miserably fails to redress the Problems vis-à-vis developing countries. Complexities associated with these solutions clearly favour the US and European States / their MNEs which are resourceful enough to handle such complexity to their benefit, while the South East Asian countries and their MNEs are clearly at a disadvantage being resource deficient. It appears that such solutions are designed to dissuade the local MNEs of these countries from growing beyond a certain level as they do not have the level playing field on the global stage. Why has the OECD suddenly woken up to source-based taxation just when a significant number of Indian and Chinese Enterprises were looking up to challenge Western MNEs.
An unintended consequence of these hyper-technical reports on BEPS requiring maintenance of complex documentation by MNEs is the distinct advantage in favour of big multinational consultancy firms while discouraging local firms, even if competent. Not merely MNEs but even local enterprises feel comfortable in hiring these bigger firms under a notion that these firms will be able to do a better job, being better exposed. Even competent local accounting firms have found it difficult to grow in the area of transfer pricing and international taxation because of this notion.
The sincerely of OECD in coming up with these complex guidances, in face of its failure to end tax-competition within its own members and failure to ensure that member countries cease to act as tax heaven, is doubtful. Historically, India has charted its own course but has now aligned with the OECD. But it is not difficult to understand the hollowness of the OECD efforts as far as India is concerned. Global agreements are entered into not merely to close tax loopholes for non-residents but also to promote ease of global business for local businesses. The growing band of Indian MNEs would be at a huge disadvantage due to formidable compliance obstacles now being put in place through OECD induced binding processes. While cooperation with OECD for ensuring transparency and tax compliance is indeed welcome, India needs to develop its own systems and processes rather than blindly towing a suspect OECD line.