G20/ OECD BEPS outcomes will fail to reach objectives and make global tax system even more complex

Added 06 Oct 2015
A much-feted package of international tax reforms will fail to achieve the stated objectives and instead make the system even more complex. Rather than removing some of the most controversial tax tricks, such as the ‘Patent Boxes’ and secret tax rulings, the package legitimises their use.

The G20/ OECD Base Erosion and Profit-Shifting (BEPS) outcomes will be launched on Monday October 5, but the package faces serious criticism from tax justice campaigners across the world.

Tove Maria Ryding, tax justice coordinator at the European Network on Debt and Development (Eurodad), said: “
It’s clear that BEPS will fail to reach the stated objective of ensuring that multinational corporations pay their taxes ‘where economic activities take place and value is created’. It will also fail to reach the objective of ensuring that developing countries benefit from the process.

Instead of abolishing the so-called patent boxes (or ‘innovation boxes’) which allow countries to give harmful tax incentives, the OECD has decided to develop weak and unclear guidelines for their use, thus legitimising them and adding further complexity to the international tax system. Furthermore, the OECD has decided that all existing innovation boxes can continue unchanged until 2021.

Ryding said: “We’ve seen companies such as McDonald’s exploit innovation boxes to carry out very aggressive tax avoidance. Thanks to this new package from the OECD, McDonald’s now has a guarantee that they can keep their current tax arrangements until 2021, and even after this date they will only have to comply with a new system full of loopholes”.

Today, complex transfer pricing rules and harmful tax practices open the space for secret tax negotiations and tax rulings, also known as ‘sweetheart deals’, between tax administrations and multinational corporations, to agree how the unclear laws will be applied to the individual company. This is what led to the LuxLeaks scandal, and with the new and even more complex international tax rules, campaigners fear that we will see even more secret ‘sweetheart deals’.

Ryding said: “You would think that after the LuxLeaks scandal, governments would rethink their use of secret sweetheart deals with multinational corporations. Instead, the OECD package legitimises these deals and introduces some very complex rules that will increase the space for them to be used. This will create an even bigger Eldorado for tax lawyers and multinational corporations who want to circumvent the tax rules.”

The OECD also excluded the majority of the world’s nations from the decision-making table when the BEPS plan was put together. They have now announced that all countries will expected to follow the rules ‘on an equal footing’.

Ryding said: “If I lived in a country where a small group of rich people made the rules and decisions, and afterwards announced that all people in the country were welcome to participate on an equal footing in following the rules, and risk getting sanctioned if we didn't, I wouldn't say I was living in a democracy.

It is ordinary citizens, national small and medium-sized businesses and the poorest countries in the world that will lose out unless we get a real reform of the global tax system.”

The OECD package doesn’t only fall short on solving the problems. Campaigners also fear that this package will be misused by EU governments to reduce corporate transparency in the EU. The OECD package endorses multinational corporations reporting about their tax payments and economic activity on a country by country reporting basis, but says that none of this information can be shared with the public.

"It’s good that the OECD recognises the value of country by country reporting, but it’s very unhelpful that they have decided that none of this information can be shared with the public. Thankfully, the EU has already gone far beyond this, as its citizens currently have the right to know what multinational banks pay in taxes and where they do business. The EU is now considering whether to expand this to cover all multinational corporations, and Member States should back this. The OECD guidelines should not instead be misused by member states to block this proposal and try to reduce corporate transparency in the EU”, said Ryding.

For a full briefing on the BEPS outcomes please click here.


For more information or to request an interview with Tove Ryding please call Julia Ravenscroft, Communications Manager at Eurodad, on + 32 2 893 0854.

Notes to Editors:

Tax scandals that are likely to continue:

Example: LuxLeaks
The LuxLeaks scandal unfolded when a number of secret tax rulings – also known as Sweetheart Deals – were leaked from Luxembourg. These secret rulings are negotiated between the tax administration and a multinational corporation (often represented by one of the big four accounting firms), and can provide the company with an up-front agreement on how the tax administration intends to apply the tax laws to the company. The fact that such rulings exist is strongly linked to the fact that the international tax laws are highly complex, full of loopholes and that many countries have introduced different types of special tax arrangements for multinational corporations.
Whereas the OECD BEPS will not change the practice to use secret tax rulings, it will increase the complexity of the international tax system. The problems that were exposed in LuxLeaks therefore continue to exist and might even get worse after BEPS.

Example: McDonald’s
The report ‘Unhappy Meal’, which was released in early 2015, revealed how McDonald’s is using the so called ‘innovation box’ in Luxembourg to lower the company’s tax payments. BEPS failed to reach agreement on abolishing these ‘innovation boxes’ and instead issued a guarantee that the existing arrangements can be kept in place until 2021, and even created a window until June 2016 where new arrangements of the same sort can be set up. After June 2016, new arrangements should follow a set up complex guidelines adopted under BEPS, which will be implemented through voluntary guidelines and ‘policed’ by a secret discussion forum on harmful tax practices. This approach dates back to 1998, when the OECD first started working on harmful tax practices, and has proved to be deeply dysfunctional.
Whereas the countries defending ‘innovation boxes’ where few at the beginning of the BEPS process, more and more OECD countries are now announcing their intention to introduce this kind of arrangement.

The number of tax conflicts are likely to increase
OECD BEPS has increased the complexity of the global tax system and thus made it more difficult to define what the rules actually say. This situation will likely to make it very difficult for tax administrations to tax multinational corporations, and there is a clear likelihood that tax administrations who attempt to challenge the transfer pricing arrangements of multinational corporations will face lawsuits.

Example: Coca-Cola
When the U.S. Internal Revenue Service recently challenged the tax arrangements of Coca-Cola and concluded that the company owes $3.3 billion in extra tax, Cola-Cola announced that ‘we will vigorously defend our position’ and made it clear that it expects to file a petition in the U.S. Tax Court to challenge the decision.
This is an example of the consequences of the complex global tax system. Rather than providing solutions, OECD has started considering options for arbitration, something which risks undermining the ability of countries to apply their own tax laws even further.