5 Point Post-g20Russia Strategic Plan for OFCs.

1. Keep Calm and Don’t Rush

OFCs should not be in a rush to embrace or reject the 15 point OECD Action Plan to reform the international tax system to counter base erosion and profits shifting by MNCs (BEPS).

Instead, as a group non-OECD/G20 OFCs should become active participants in the debate occasioned by the G20’s recent endorsement of the OECD BEPS Action Plan focussing on ‘big picture’ issues like the true size and complexity of the reform undertaking given that it would be the first major overhaul of the rules in 75 years; and the  imperative of multilateral solutions to multilateral issues.

Moreover, as a group with more than 20 years experience with the OECD methodologies in global tax policy  OFCs are best placed to discuss the track record of the OECD in these matters and raise pertinent questions like the appropriateness or otherwise of the OECD as the principal driver of international tax reform given that it remains a ‘special interest’ group.

2. Keep Calm and Do Not Panic

OFCs should be careful at this stage not to frame their interventions as a defence to perceived threats to their livelihood,  sovereignty, free trade and fair competition; which though valid are hackneyed and will be met with equally well-worn, well- rehearsed  rebuttals.

Instead the clear message should emphasize  OFC concerns about the lukewarm response by the U.S to proposed BEPS solutions, despite G20 endorsement; suggestions to renegotiate almost  2,000 tax treaties to address the double non-taxation of digital companies; the EU’s parallel anti-tax avoidance agenda; and the demonstrable apathy by both the US Congress and the UK government to new international measures that might undermine the profitability of their MNCs.

In this regard FATCA presents a relevant and topical.

The OECD has two years to perfect their BEPS Action Plan; but 24 months is a long time in national, regional and international politics. It is also a long time to maintain public interest and momentum in the parallel issues like development, poverty, corruption, bribery and other pulse points that together have provided the sound track to the OECD’s ambitious anti-tax avoidance plans.

Moreover,if the increasing ‘green-shoots’ of economic recovery become more ‘hardy’ enthusiasm for the arduous task of tax reform, domestic or international may wane.

3. Keep Calm and Be Mindful

That said, OFCs should be mindful that the OECD will have to demonstrate some early dividends long before the end of 2015; and history has shown that this comes at the expense of OFCs. Indeed this modus is currently on display as after five years, having failed to dislodge secrecy from Switzerland’s competitive profile, the OECD has instead focussed on applying wrong-sized solutions to OFCs who have never resorted to secrecy as a means of attracting investment.

This has no doubt left OFCs committed to transparency and information exchange ‘on request’ wondering what all the fuss about in the first place because nothing has changed.

Added to that, this past week, the OFC members of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes who have been working to bring the legal and regulatory regimes in line with the ‘on request’ bench-mark were informed by G20 communiqué that the standard had been replaced by automatic information exchange through the adoption of the OECD Convention on Mutual Administrative Assistance in Tax Matters.

OFCs should know by now that there are no ‘brownie points‘ to be earned by enthusiastic application of the first draft’ of any OECD rules.

4. Keep Calm and Wait Your Turn

keepcalm

Already the business community has made some telling comments about the OECD Action Plan. That  coupled with very public criticism by the tax justice lobby makes it likely that accelerated action on BEPS may well end up on the back -burner.

Strategically therefore, OFCs should allow the G20’s  multinationals, who have been identified as the main target of new anti-tax avoidance rules, to be the first to make the case against the OECD BEPS Action Plan. 

According to Martin A. Sullivan, Blogger for Tax Analyst (subscription Service) some key elements of the business case against the OECD BEPS Plan include the following:

  • The current international tax rules work well in most cases. So all that is needed are some targeted anti-abuse rules to thwart the most aggressive varieties of tax planning;
  • The problem of base erosion and profits shifting is overstated and not well understood by the public. In particular, when it is observed that a large proportion of multinational profits are in tax havens, this is not necessarily an indication of inappropriate profit shifting because subsidiaries in tax havens have paid for valuable intangible assets that are generating those profits. Nobody can tell whether a multinational has inappropriately shifted profits without an exhaustive facts and circumstances study of each case;
  • Contracts between related parties within a corporation should be respected for tax purposes. Therefore, multinationals by writing contracts should be able to shift intangible assets and risks to affiliates in tax havens with a relatively small number of employees. This type of “restructuring” serves important business purposes;and
  • If a low-tax subsidiary of a multinational pays its share of costs of developing an intangible asset, it is entitled to its share of the profits—regardless of the level of real business activity undertaken by that subsidiary. If business activity is required to book profits in tax havens, the rules should require only a minimal physical presence. In particular, the rules should allow outsourcing of functions so requirements can be met by employees assigned to the subsidiary but not physically present at the location.

5. Keep Calm and Stay Focussed

In light of the above, in the short term OFCs should express agreement in broad outline with coordinated action to reform international tax policy; emphasizing the wisdom of applying of right-sized solutions to the clear examples of abuse.

Finally, as I have advocated before, OFCs should get on with the business of remaining competitive and innovative in attracting legitimate investment; and making their collective voice heard in the design and application of international tax rules.

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