The action plan: tax avoidance and common practices

6 December 2016

Tax avoidance may not be illegal, but it has severe consequences for national governments and their public-spending policies. Jim Banks speaks to Pascal Saint-Amans, director of tax policy at the OECD, which, along with the G20, has been busy finding ways to control common practices such as base erosion and profit shifting, to see how quickly the legislative loopholes are closing.

For a man with a central  role in addressing a complex global problem that costs governments billions of dollars in  tax revenue every year, Pascal Saint-Amans, director of the Centre  of Tax Policy and Administration  for The Organisation for Economic Co-operation and Development (OECD), has a very positive outlook. When we speak, he has recently returned from the latest G20 summit, where the OECD/G20 base erosion and profit shifting (BEPS) project was high on the agenda.

The project has comprehensively analysed the problem of legal practices that exploit mismatches  in tax rules to enable international companies to shift profits to low  or no-tax jurisdictions. The issue recently hit the headlines with the European Commission’s demand  that Ireland recoup €13 billion in  back taxes from Apple, which has arbitraged differences in national  tax regimes to significantly reduce  its tax burden. Apple, which faced a maximum tax rate of just 1.0 rather than 12.5% through an agreement with Ireland’s tax authorities, may be the biggest name making headlines, but it is by no means alone.

“The phenomenon of BEPS is a big problem. It is a conservative estimate to say that between €110 billion and €240 billion of government revenue is at stake every year. It affects developed and developing countries, though the latter are more exposed to corporate income tax. It is a problem that undermines confidence in the fairness of the tax system,” says Saint-Amans.

“There are big cases like Apple, and other European and US companies where legal arrangements make aggressive tax planning routine business. The problem is that CEOs may confuse fair with legal, but the system is not fair. Policies may be legal, but they should also be fair because there is an effect on poorer people and the middle class, who have paid for the tax shortfall through rises in VAT and other measures. Apple may be able to pay just 0.005% tax on overseas profit as it did in 2014, but that does not mean it should,” he adds.

The OECD team has taken the  view that because such practices are legal; the solution to the problem is  to change the law. The BEPS project  is designed to close the gap between international tax rules and the practices of multinational companies to get to the root of the problem. The intent is noble, but the road towards  a solution is not an easy one to  travel. Progress is nevertheless being made, which is why Saint-Amans is optimistic about the future.

“Their big challenge is to make sure there is proper, consistent and holistic implementation of what was agreed in November 2015. We are seeing it implemented in the EU, and we have put in place an inclusive framework for implementation, review and oversight. We are helping countries  to change domestic legislation. It  is a complex process, but we have robust processes based on peer input, so countries are interacting with  each other, and they report to the  G20 and to the public to ensure transparency. The new mechanism should put 85 countries on an equal footing,” he remarks.

Building fairness into the tax system

The BEPS project has taken a comprehensive approach to the  many complex issues that arise from harmonising international legislation. It has covered all the bases with its  action areas [see ‘The action areas’, page 18] in all of which there is considerable progress.

During the summer, the OECD council took many steps towards implementation. For example, it approved amendments to transfer-pricing guidelines for multinational enterprises and tax administrations, which provide substantive guidance and, in some OECD countries, governing law. It also issued guidance on the implementation of country-by-country reporting.

The project’s recommendations contained in its final 2015 reports  are, in fact, being implemented in the 35 OECD member countries and in many other non-member jurisdictions.  EU member states have reached agreement on the Anti-Tax Avoidance Directive (ATAD), which builds on the OECD recommendations and requires the adoption of rules on the reporting of tax-related information by multinationals and the exchange  of that data between countries.

“We are seeing major change already, which is very reassuring. The 15 measures are progressing, including the most high-profile one, which is country-by-country reporting. Many countries are enacting legislation for that on time. Three years ago, this was just an idea, but in 2017 it will become a reality. Action 15, which deals with tax treaty changes, is a challenge because there are around 3,500 bilateral treaties around the world,  but we have developed an instrument for renegotiation that will change thousands of treaties at once,” says Saint-Amans.

“There is a hierarchy among the  15 action areas, but all of them  are important. It is too early to say whether companies are changing their behaviour, but the international tax environment is changing. After all, the OECD and the G20 together represent 90% of the world’s economy.”

The phenomenon of BEPS is a big problem. It is a conservative estimate to say that between €110 billion and €240 billion of government revenue is at stake every year.


While there is little concrete evidence that multinational companies are changing their tax practices, there are some signs that they are braced for impact. Analysis undertaken by the Financial Times  in March suggests that the number  of US companies warning investors of the risk of higher taxes had doubled compared with the previous year.  A similar trend was noted among European companies.

There is also another nascent trend that is expected to gather momentum – companies moving out of tax havens such as Bermuda, to which Google moved €10.7 billion in 2014 through the Netherlands. The tax strategy Google used is known as ‘double Irish, Dutch sandwich’ because it involved moving the revenue of Google Netherlands, which came mainly in the form of royalties from an Irish affiliate, to a Bermuda-based but  Irish-registered affiliate.

“We have started to see moves out of Bermuda and other tax havens,  and we are seeing Irish GDP rise as companies move their operations there. Companies should be risk-averse and those first movers send the right message. They help to restore trust. There is a public relations benefit for them in compliance with a fair tax system. The past was about rules that could be abused but things are changing,” Saint-Amans remarks.

“We are talking about the globalisation of tax governance. The old system was broken. It was not  fair for big players to use loopholes  in legislation. This is a reputational issue for big companies, which can be assertive in a new policy environment. CEOs must understand that times have changed. Tax avoidance is now on the public radar and, in order to be fair and socially responsible, companies now have to comply with the new international tax regime. Risk-taking now has a different profile.”

Stick to the plan

There are still many tax havens around the world – Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman Islands and Panama to name but a few – and by some estimates they hold as much as $27 trillion in private financial assets that have not come under the global  tax regime. Similarly, cross-border financial flows to tax havens from developing economies could be as great as $2.3 trillion annually every year.

Getting consensus between many national governments over how to tackle the problem of tax havens, where financial dealings are deliberately opaque, is no easy task. Saint-Amans believes, however, that the ultimate benefits are sufficient to get everyone talking the same language.

“Governments have a real appetite  for exchanging views but the issue  is complex because there may  be conflicting interests. But they understand that cooperation is  the better option for protecting tax sovereignty. It used to be the other  way around but globalisation changed that,” he notes.

“As for business stakeholders, there were some very aggressive comments from some companies when we had public consultations within the OECD. Now, however, they want to see consistent implementation of BEPS packages – even those that wanted  to kill the project at the start. What  we have to do is provide better tax certainty to business while also fighting tax avoidance. We get that with consistent implementation, fairness and balance. Since July,  tax certainty has been a new pillar  of the project. It will help us in our mission to fight non-taxation and  avoid double taxation.”

The BEPS project is currently on schedule and, if all parties remain engaged, then that should remain the case. Saint-Amans’ optimism is justified because the project is firmly rooted in the notion of fairness and so benefits  all parties in the long run.

Pascal Saint-Amans took on his duties as director of the Centre for Tax Policy and Administration at the OECD on 1 February 2012...