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The G20 / OECD Action Plan to curb aggressive tax planning by multinationals

The G20 / OECD Action Plan to curb aggressive tax planning by multinationals. African Trade Union Tax Justice Campaign: Providing alternatives for financing Effective Public Social Services Delivery and the implementation of Social Protection Floors Abuja , Nigeria 17- 18 January, 2014.

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The G20 / OECD Action Plan to curb aggressive tax planning by multinationals

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  1. The G20 / OECD Action Plan to curbaggressivetax planning by multinationals African Trade Union Tax Justice Campaign: Providing alternatives for financing Effective Public Social Services Delivery and the implementation of Social Protection Floors Abuja, Nigeria 17- 18 January, 2014

  2. The G20 action plan • G20 meeting in St Petersburg (Sep 20 13) adopts the OECD Base Erosion and Profit Shifting (BEPS) Action Plan to curb MNEs’ aggressive tax planning aiming at • (i) reducing the taxable income base (“base erosion”) or • (ii) moving profits away from economically relevant but high tax-jurisdictions to economically irrelevant but low-tax jurisdictions (“profit shifting”). • 15 measures, by 2015. • Implementation 2016-2018

  3. BEPS • contractual arrangements within a MNE and between a parent company and its subsidiaries can significantly depart from the commercial arrangements (incl. risk). • These contracts are deemed valid because of the presumption that the contracting parties are acting in full autonomy from one another. • Does a subsidiary have sufficient legal “autonomy” however when it is contracting with its parent company? • Can we speak of a “contract” if, in substance, the contracting parties defend the same economic interests?

  4. Whynow? • The figures • US: USD300bn (19%) of reportable income not properly reported to the IRS • EU: €1tr loss, €2000 per citizen, compares with total budget deficit EU27 of €524bn • Oxfam: £100bn lost in tax avoidance by rich individuals • BVI – China, Caiman Islands – Brazil, India – Marutius, etc. • ActionAid: almost half of all FDI to developing countries goes through tax havens • OECD public budget deficits are increasing • Domesticresource mobilisation in developing countries • half of Sub-Saharan African countries mobilise less than 17% of their GDP in tax revenues, below the minimum level considered by the UN as necessary to achieve the Millennium Development Goals

  5. Tax evasion vs avoidance • Tax evasion: • Illegal, part of the shadow economy, links with criminal activities & money laundering • transparency, access to bank account identity, force tax havens, automatic exchange of information • Tax avoidance • playing with the rules, part of the MNE business model • much more difficult to detect

  6. Key BEPS practices • Manipulating intra group transfer pricing; • Excessive deduction of debt interest and other payments; • Hard to value and shifting of intangibles; • Avoiding permanent establishment status; and • Opacity of MNE tax schemes.

  7. The changing structure of the MNE

  8. Today’s MNE

  9. Transfer pricing

  10. Hybridmismatch

  11. Hard to value intangibles

  12. Orders, buys & owns commodities & raw materials License fee (USA) 4,3% Suppliers (France) Customers (France) Empty Shell Primarycontractor (Switerland) Re-sale, pricing set to meet2,5% margin Delivery of commodities & rawmaterials Limited riskdistributors (France) Pays for manufacturing(processingcost + 6%) Sale of the product, pricing set by the Alpha Europe Industrial sites (France) Logistics & warehouses (France) Deliveryof finishedproducts

  13. Group-widereporting

  14. Whatismissing • Formulary apportionment method • Country-by-country tax reporting made public • Transparency of beneficial ownership • Transparency over dispute resolution mechanisms • Developing country perspective • Impact on MNE workers

  15. Developing countries • Challenges • Capacity to monitor BEPS • telecom sector. • dedicating time, resource & audit staff, does not deliver quick results • OECD Transfer pricing guidelines not implemented • Kenya (2006), Uganda (2011), Ghana (2012) • Rwanda , Burundi and Tanzania not yet. • Bilateral agreements and treaties: • in most case favor the developed countries. • Limited treaty network • Some positive re. transfer pricing • July 2012, the Kenyan tax administration (KRA) - OECD/WB/IFC training programme • increase in the number of audit cases completed, revenue collected • recent case led to US$12.9m in additional revenue, another to US$10.9m.

  16. Impact on workers • Tax avoidance does not happen in a vacuum, it is another form of corporate short termism • harms government finance and public services. • But it also harms other stakeholders • For workers can be assimilated to a legal restructuring with short termist goals. • affects profit levels, capacity to invest • affects the distribution of wealth created by the company • tax planning is one form of “regulatory planning” that may undermine workers’ rights to collective bargaining (“aggressive social planning”) • Affects workers’ right to information (as a result of greater opacity) – weakening bargaining power.

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