OECD, Digital Taxation and BEPS
All About OECD
· To run the Marshall plan in 1948, after the 2nd World War, a body called the Organisation of European Economic Cooperation was established with an aim to help European governments to recognize their economic interdependence.
· When Marshall Plan was executed, the United States along with Canada also joined the OECC and a body called Organisation for Economic Cooperation and Development (OECD) came into existence.
· The member countries include 34 European Nations including France, Germany, Greece, Hungary, Italy, Ireland, UK, Sweden, Switzerland, etc. along with four American Countries Chile, Columbia, Mexico, and the USA. There are 4 pacific countries too namely Australia, Japan, Korea, and New Zealand.
· To be added to the OECD, the country has to pass from various review exercises from the organization and it must be willing to transform its economy in different areas like corporate governance, anti-corruption framework, Environmental Protection, etc. After the country meets the standards and benchmarks, it’s awarded the membership.
· India is currently not a member of the OCED but it is designated as a Key Partner along with Brazil, Indonesia, and South Africa.
What is BEPS?
· The term BEPS or Base Erosion and Profit Sharing refer to tax planning strategies used by multinational companies to use loopholes and gaps in the taxation rules in order to avoid payment of taxes.
· Most of the schemes that are used in the system are legally done by bending the rules rather than breaking them. Sometimes, enterprises resort to illegal means to avoid heavy taxes too.
· BEPS Practices lead to a revenue loss of $100-240 Billion each year.
· The countries within Organisation for Economic Cooperation and Development (OECD) /G20 Inclusive Framework on BEPS, over 135 countries have collaborated to implement 3 key measures to eliminate BEPS practices. These 3 measures are
Implementation of 15 measures to tackle tax avoidance.
Improvement of coherence of International Tax Rules.
Ensuring a more transparent tax environment.
Effects of BEPS on Taxation System
· Negative Impact on Domestic Firms
When various companies resort to BEPS, they’re able to save more and more money which can then be used for production or services. These unfair practices give them a buffer to gain a competitive advantage over the domestic entities which pay their taxes in a fairway.
· Decline in Tax Revenue
A democratic government relies heavily on the corporate tax money for development and functioning as this money is channeled towards governmental activities. Countries involved in BEPS evade taxes which hurt the economy badly.
· BEPS setting a wrong precedent
While many corporates resort to BEPS to save taxes cleverly, some comply with the taxation norms of the country religiously. The companies involved in BEPS set a wrong example for the economic environment of a country and undermines the compliance by honest taxpayers.
OECD Policy Note on Taxation of Digitalized Economy
· After identifying numerous challenges of the digitalization of the economy, OECD released a Policy Note in 2015.
· OECD realized that the focus on taxing digital entities peaked when countries started taking unilateral measures to tackle BEPS leading to an uncoordinated implementation.
· The OCED policy Note had BEPS Action I Report that said that the new international discussions will be focussed on two pillars.
· PILLAR I: This pillar will address the broader challenges related to the digitalization of the economy and will focus on the allocation of taxing rights
· Aim of Pillar-I was to hold talks and reach a global agreement on the adaptation of taxation rights on business profits in such a way that it expands these rights for these market jurisdictions.
· Blueprint of the Pillar-I provides for a robust agreement between the participant countries to adhere to the concept of net taxation of income, avoiding double taxation and keeping the administration as simple as possible.
· PILLAR II: will sort out the remaining BEPS concerns (collectively, BEPS 2 project)
Making the Policy note consensual
Although the blueprint promises significant changes, the policy note is a unilateral document and not a consensual one. This implies that countries will have to come to a consensus which is a challenge as the political and economic circumstances of every member country are different.
Making member nations take Political Decisions
The Blueprint highlights that many political decisions are required on several issues including the amount of residual profit to be allocated under the new taxing right, the scope of mandatory binding dispute resolution, etc.
Change in Worldwide Tax Regime
If implemented, the Pillar-I would lead to a significant impact on the international taxation system and its rules and regulations. It has the potential to change the way multinational businesses operate all over the world. This may also affect tax revenues and tax liabilities.
Although OCED has pitched the right idea to regulate the companies resorting to BEPS for tax evasion but looking at the blueprint, it would be tough for the OCED countries to come to a consensus and implement the same measures in all countries as every country has a different political and economic scenario.