Taking on the tax avoiders

13 March 2018

With tax avoidance back in the news as a result of the Paradise Papers, pressure is mounting for a clampdown on loopholes enjoyed by some multinationals. However, change won’t happen overnight, as Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, tells Ross Davies.

Once again, the tax affairs of the world’s elite are under intense scrutiny, this time as a result of November’s Paradise Papers revelations.

For some of the world’s biggest companies, politicians and heads of state – including the Queen of England – the implications of the leak of 13.4 million files from two offshore service providers are serious and far-reaching.

The material reveals the complicated and artificial ways in which the richest entities are able to use secretive tax havens to protect their wealth from the attention of the authorities.

Similar to 2016’s Panama Papers leak, the fallout from this latest set of revelations has been one of public anger and consternation on what has become an emotive topic.

US Senator Bernie Sanders decried the rise of an “international oligarchy”, while the European Commission called for a blacklist to be enforced on tax havens. UK pressure group Republic has seized on the papers as grounds for the abolition of the monarchy.

According to research conducted by French economist Gabriel Zucman, multinationals shifted €600 billion of profits offshore in 2016 alone. Ratings agency Moody’s estimates that US corporations held an offshore cash pile worth $1.3 trillion at the end of 2016.

Corporate loopholes

Nonetheless, big businesses continue to trade for the simple reason that, technically, they have not broken the law.

Ever since the global financial crisis, multinationals have come under fire for funnelling profits between subsidiaries, so as to exploit the differences between country regulations and minimise their taxes.

Apple, in particular, has been criticised for the conduct of its business activities in Ireland, where it was found by the European Commission to have paid a tax rate of just 0.005% in 2014.

Last year, the commission ordered the tech giant to repay €13 billion in back taxes to Ireland in compensation for illegal state aid – a move described by Apple CEO Tim Cook as “total political crap”.

Yet documents from the Paradise Papers reveal the Apple group subsequently moved a portion of its empire to Jersey in order to maintain an ultra-low tax rate. In conflating legality with fairness, are CEOs such as Cook guilty of abusing the public trust?

Companies should now see that the writing is on the wall and tax is being brought back into the boardroom.

“I definitely think they need to bear some social responsibility,” says Pascal Saint-Amans, director of the Organisation for Economic Co-operation and Development’s (OECD) Centre for Tax Policy and Administration. “Instead of leading by example, some companies are still seen to be dragging their feet and continuing to use schemes, such as the double Irish. Yes, it’s legal, but this kind of planning doesn’t look good when companies are forced to explain their tax structures to the people.”

According to Saint-Amans, the corporation tax environment is in the midst of transition, with the financial crisis marking the dividing line. Before the 2008 crash, some governments “actively encouraged and facilitated” aggressive tax planning by businesses to exploit loopholes.

“For a long time, governments made it easy for companies,” he says. “But since the financial crisis, there has been a lot of political action to change this. Companies should now see that the writing is on the wall and tax is being brought back into the boardroom.”

The BEPS project

Since 2012, Saint-Amans has headed the OECD’s Base Erosion and Profit Shifting (BEPS) project, aimed at closing the gap between international tax rules and the practices of multinationals.

The initiative is based on three central pillars: connecting legislation between different tax sovereignties; enhanced cooperation between tax authorities; and the greater exchange of tax data between countries. “We’re making some real progress,” says Saint-Amans. “Looking back to ten years ago, there was hardly any cross-border collaboration. Tax administrations didn’t know one another – they were enclosed systems with very poor cooperation. Today, cooperation is becoming the rule.”

Saint-Amans cites the success of the OECD’s multilateral convention on mutual administrative assistance, which requires member countries to cooperate with cross-border requests for information, assist with audits and enforce tax claims. Currently, 116 countries are signed to the convention.

“As a result of new exchange-of-information instruments, there is now something like 7,000 agreements in place to exchange bank information between tax havens and other countries,” he says. “When I started out at the OECD in 2007, there were around 40 agreements.”

Offshore versus onshore

The Paradise Papers leak also reinforced the stereotype of tax havens as small palm-fringed islands, far removed from the world’s financial hubs. Do such perceptions risk deflecting attention away from onshore centres that practice their own modes of secrecy?

“I wouldn’t limit the question to secrecy,” answers Saint-Amans. “There are always two aspects when we talk about tax fraud and avoidance. Yes, you have the secrecy aspect, which I agree isn’t limited to offshore.

“But then you also have the BEPS aspect, which isn’t limited to offshore either. Treaty shopping can happen anywhere, and in some of the world’s most significant economies. Take the Netherlands – it’s the world’s foremost treaty shopping hub. Do we class it as offshore?

“So if we want a level playing field, we’re not just talking about tackling small jurisdictions in the Caribbean. We need to tackle this issue across the board, including real economies.”

Over the past year, the EU has made noticeable strides to crack down on tax avoidance. Apple aside, Brussels has also ordered Amazon to pay out about €250 million in back taxes for receiving illegal state aid in Luxembourg.

The European Commission is in favour of member states establishing a common corporate tax base to secure increased contributions from tech companies.

“I agree that a regional grouping should have its own tax policy,” says Saint-Amans. “In many ways, a common corporate tax base makes sense. However, due to issues over tax sovereignty and unanimity, I think it could be tricky to enforce.”

French President Emmanuel Macron has also been drawn into the debate, spearheading a push to tax digital players on revenues, as opposed to profits. Might this be an avenue worth pursuing? “I think we all agree with President Macron that tax rules need to be reinvented for the future, especially with the rise of the digital economy,” says Saint-Amans.

“This means looking at existing rules that were initially designed at a time when to be commercially present in a country, you also had to have a physical presence. With digitalisation, this is clearly challenged, and needs a new response.

“The question really concerns what we do in the interim. A short-term solution could indeed include revenue taxes, or turnover taxes. But do we let big digital companies continue to make a profit without having any physical presence? This needs to be tackled before we talk about long-term solutions.”

Tackling treaty shopping

And what of BEPS? Over the past year, the project’s successes include the signing of a new unilateral instrument in June aimed at ending treaty shopping. The new agreement, signed by 70 countries, replaces more than 1,100 bilateral tax treaties signed over the past century to avoid double taxation. “We have also implemented changes in terms of pricing, which are resulting in many companies restructuring their policies,” says Saint-Amans. “There have also been changes in hybrid mismatches. We have completed a thorough review of harmful tax practices. Most OECD member countries – although not all – have changed, or are committed to change, any harmful regimes.”

The timeframe for BEPS’ completion is, admits Saint-Amans, somewhat nebulous. The country-by-country reporting on hybrid mismatches is already happening, while the “dismantlement of harmful tax practices” should be finished by the end of 2018. “It’s an ongoing, democratic process that really depends on action,” explains Saint- Amans. “If we take the end of treaty shopping, we need to amend bilateral treaties, which is something that can take up to two to three years. So, we are looking at 2019–20 for full implementation.”

In contrast to the media noise generated by the Paradise Papers, and the Panama Papers before it, BEPS lies fairly low on the general public’s register. Does this frustrate Saint-Amans and his colleagues at the OECD? “It does annoy me, yes,” he confesses. “People hear about the Paradise Papers, tax avoidance and profit-shifting in the media like it’s something completely new. What people don’t see is the real progress that’s being made on the ground all the time.”

While public recognition may continue to elude the project, its reforms, if realised in their entirety, could one day help international tax transparency become the rule, rather than the exception.

This would only benefit the societies that are increasingly forced to ponder the efficiency of their tax system every time a local school or hospital is shut down.

Transfer pricing

In July this year, the OECD updated its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The new guidelines aim to provide clarification on the ‘arm’s length principle’, representing the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises – more commonly known as transfer pricing.

In November, the OECD also published updated versions of transfer pricing country profiles, reflecting the current transfer pricing legislation and practices of 31 participating countries.

The profiles contain updated and harmonised data on key aspects of transfer pricing legislation, provided by states themselves.

Transfer pricing has been high up the agenda of tax administrations and taxpayers for a number of years. In 2014, a leak of documents from auditor PricewaterhouseCoopers revealed how scores of multinationals managed to slash corporate tax rates to just 1–2% by funnelling money through business units in Luxembourg.

The ensuing fallout – known as the LuxLeaks affair – led to calls from tax justice campaigners and the European Parliament to put an end to transfer pricing strategies. Since then, the EU has come down hard on US tech companies Apple and Amazon, handing out hefty fines in return for unfair tax deals in Ireland and Luxembourg.

However, transfer pricing is yet to give up the ghost. In October, figures from HMRC revealed multinationals avoided paying as much £5.8 billion in corporate taxes in the UK in 2016 by sending profits to overseas entities. This is a 50% increase on forecasts previously made by the government.