Another 36 jurisdictions have signed up to new rules on corporate tax avoidance as a global crackdown on aggressive tax planning picks up speed. In a boost for a project that aims to capture as much as $240bn a year in lost tax revenue around the world, business centres such as Singapore and Hong Kong have agreed to back the base erosion and profit shifting (BEPS) initiative, originally developed by the G20 and the OECD. A large group of developing countries, including Nigeria, Egypt and Kenya, also signed up to BEPS at a two-day meeting that kicked off in Kyoto, Japan on Thursday. With the number of signatories now at 82, the gathering is aimed at expanding the framework across the globe.
Widening the number of jurisdictions in BEPS is critical in clamping down on avoidance because companies can use loopholes in any bilateral tax treaty to book revenues in low tax jurisdictions or shift profits out of high tax locations. “It was very important that small open economies also commit to make sure we reach the goal of eliminating treaty shopping and harmful tax practices on the global scale,” said Pascal Saint-Amans, director of the OECD’s centre for tax policy. There has been a global outcry at multinationals using complicated structures such as the “double Irish” to shift profits offshore and pay little tax in large, advanced economies. That anger was fuelled by the publication of the Panama Papers earlier this year — a huge leak of legal documents showing the use of offshore companies by a host of politicians and public figures.
Without a sophisticated tax collection infrastructure, developing countries often suffer even bigger losses of revenue as a result of profit shifting than their richer counterparts. But a number of important countries are yet to sign up, with Malaysia and Thailand attending the Kyoto meeting but so far not committed. The BEPS rules contain provisions designed to prevent abuse of tax treaties, standardise country-by-country reporting of where multinationals generate sales and profits, and tackle “transfer pricing”, by which companies move profits around within a corporate group. A number of multinational companies have warned their investors of higher tax rates and lower profits due to BEPS. The Kyoto meeting is also preparing recommendations for next month’s G20 finance ministers meeting in Chengdu, China on how to define jurisdictions that are not co-operating on tax transparency.
There are set to be three criteria: committing to automatic exchange of tax information; being assessed as “largely compliant” on rules for exchanging tax information; and signing the Convention on Mutual Administrative Assistance in Tax Matters. If a country does not meet two of the criteria, or is “non compliant” on exchanging tax information, it could be classed as a tax haven and face “defensive measures” from the G20. That could create difficulties for Panama, which does not meet the second two criteria at present.
