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Implementing BEPS: The Firm Exclusive Interview

Published on Thu, Oct 22,2015 | 15:08, Updated at Tue, Oct 27 at 23:37Source : CNBC-TV18 |   Watch Video :

Earlier this month, the OECD announced its ambitious BEPS programme. It lays down 15 new standards that cover the digital economy, hybrid mismatch arrangements, new CFC rules, new rules for interest deductions, curbs on treaty benefits in inappropriate circumstances, the artificial avoidance of a permanent establishment, transfer pricing issues, additional disclosure rules, more documentation including country-by-country reporting and the development of a multilateral instrument to modify bilateral treaties. These the OECD hopes will help curb USD 100-240 billion in tax revenue that is lost every year on account of base erosion and profit shifting. In this exclusive interview, Grace Perez-Navarro, the Deputy Director at the OECD Centre for Tax Policy & Administration talks about implementing BEPS.

Doshi: THE CBDT Chairperson, the head of the Central Board of Direct Taxes, has said that the OECD BEPS report was like music to her ears. I want to know what kind of reception you think you have gotten from revenue across the world?

Grace Perez-Navarro

Deputy Director, OECD Centre for Tax Policy & Administration

Perez-Navarro: I have to say that is the best and most positive comment that I have heard and so this was from Anita Kapur, right? I very much appreciate it because I know she is a very exacting woman.

In terms of the reaction around the world, we have had so many countries working on this project with us and they were working on it with us -- developed and developing countries -- because they saw a serious risk to the revenues. So I think they are quite happy overall with the package. Of course every country may have one thing, they might have wanted more but the key and a big value of this whole package is that there is consensus on these measures.

Doshi: I think your report suggests that because of base erosion and profit shifting, the loss in corporate income tax revenue is somewhere between USD 150 billion and USD 250 billion if I have got the numbers correct. Have you all estimated if based on the BEPS standard, new policies are implemented, what that revenue loss could come down to?

Perez-Navarro: No, we haven’t but one of the key aspects of the BEPS package is action 11 which is about the data needed in order to be able to measure that and so for us, we did the analysis to measure the current loss but the key for us is to get the data going forward. So we are able to measure whether these new recommendations will have a serious impact on base reversion and profit shifting.

Doshi: I know that most Indian companies are now going through the fineprint to try and understand the impact of the 15 action for points that you have laid down and there are some specific areas that interest Indian companies more than elsewhere in the world. I know that there has been a lot of conversation around permanent establishments around the artificial avoidance using treaties, what impact that will have on the India-Mauritius Treaty but I am curious to know what you have heard from India, has India expressed whether it is the Indian revenue or Indian companies, any specific concerns about those 15 action points?

Perez-Navarro: I think from the companies what we are hearing is there is a concern mainly about the increased transparency and not so much that they don’t want to provide that increased transparency. What they are concerned about is how will that information be used and what are the protections around the use of that information and I think whenever you change policies, there is always a bit of uncertainty, there is a need to have trust between different actors and this is something that we have heard also from other countries and companies. So I think once the measures are implemented, people will be more comfortable, certainly all revenue authorities knew that if they abuse or they are misusing information, the information flow will just shut down from other countries.

Doshi: You speak of information flow and that has been one big concern area whether it is the country-by-country reporting requirements or in transfer pricing the master file and the local file requirements, the integrity of data -- how much it is protected, how much it is shared, what it means for global business, what it means for them in the competitive landscape, how will or can be OECD addressed those concerns if at all?

Perez-Navarro: We have done a lot of work on the protection of information that is exchanged pursuant to tax treaties or our multilateral convention and right now there is a major initiative underway in the global forum on transparency to do confidentiality reviews of all 127 of its members and so every country will be assessed against these standards to make sure that the proper protections are in place for whatever information is exchanged between countries.

Doshi: What about the next steps? You put up in your conversation earlier today a slide that talks about the road ahead, the work that yet has to be done for this to be in fact implemented. Talk us through that.

Perez-Navarro: There are actually quite a number of things and I won't go into all of the details, but there is a block of additional technical work that needs to be done and one of the key things is to look at the attribution of profits to Price-Earnings (PE), you may know that for permanent establishments we revised the definitions of permanent establishments and so of course that is important, but you also want to know what are the implications of that, where will profits be allocated on the basis of these new rules. So, that is the key element, we also need to do the work that we were not able to finish within the first two years on transactional profit split methods, again a key transact pricing issue. Then there are some other loose ends. A big thing that we are working on right now is the multilateral instrument in order to implement all of the treaty related aspects of the Base Erosion and Profit Shifting (BEPS) project.

Doshi: So that is a list of 90 countries that is working together to get that in place by the end of next year.

Perez-Navarro: By the end of next year, yes. And then it will be open for signature to all interested countries. We have opened up this negotiation of this instrument to all countries and so far we have 92 countries, I suspect by the time we get to the November meeting, we will have a number much closer to 100.

Doshi: Is India on that list?

Perez-Navarro: Yes, as is Mauritius.

Doshi: Do you have any thought what it could potentially mean for let us say the Mauritius-India treaty or treaties of that nature, which were at one time signed to clearly give or to give an impetus to incoming investment and whether you think some of those benefits will get flattened out as the world moves towards these new BEPS standards?

Perez-Navarro: Well, I think each government has to decide that on its own. Its investment policy, at the same time, the whole treaty abuse measure of the BEPS package is one of the minimum standards in our project. What this means is that all the countries thought that this was very important to address and so the question will be, for India, how they go about implementing this, will they do it through bilateral negotiations or through the multilateral. Now I think we heard it today at the conference that the idea would be, if Mauritius does sign this multilateral instrument at the end of the day, with an anti-abuse provision, whether an Line of Business (LoB), or a principal purpose test type of measure, then India would sign the multilateral instrument.

Doshi: So it is an open program, right? Because once that instrument is devised by the end of next year, it really is up to countries to sign up or not sign up.

Perez-Navarro: Exactly, and it is going to be a complex instrument because maybe countries won't want sign up to every article and so we are going to have some sort of matrix to ensure that it all fits together, with not only the bilateral tax treaties in place, but also how countries decide with which countries which articles they will be applying the instrument. So it is quite a challenging project, but I think in the end we hope that this will set a path for more multilateral treaties rather than these endless negotiations of bilateral ones.

Doshi: Or it could negate the benefits of whatever you are trying to achieve through BEPS, if you have too many countries carving out too many different provisions and signing only portions of that multilateral instrument that is the risk as well.

Perez-Navarro: I suppose there is that risk, but again there are so many countries interested in implementing these measure and to do it quickly, we have already seen a number of countries move ahead on the legislative aspects, like on country by country reporting a number of countries have already started that process, hybrid mismatch arrangements, legislation is already in place in some countries. So, for the most part countries will be using this to try and implement as many of the treaty measures as possible.

Doshi: The other area countries have come together is in dispute resolution where I think a smaller group of countries have come together to provide for binding sort of Mutual Agreement Procedures (MAP) in that sense, India is not part of that either. Does that group need to be big enough for the effort that the Organisation for Economic Co-operation and Development (OECD) is making on the dispute resolution front to be meaningful?

Perez-Navarro: We have done two things in the dispute resolution area. One is to set a minimum standard to improve the way that disputes are resolved under tax treaties right now. The other thing that you mentioned is that there is a sub set of countries that have agreed to implement binding mandatory arbitration and that is about 20 countries and you are right India is not in that group. I do not think that is a disaster from the dispute resolution perspective. Why? Because the new minimum standard, if it is fully enforced through the peer review process that we are establishing will have equivalent impact. As I said today, arbitration really serves the purpose of spurring the two countries to reach agreement before the two years are up well then you go to arbitration and so we have built into our minimum standard a two year period in which countries should be resolving their mutual agreements and so I think that that will have a positive impact.

The other thing that we heard from the emerging economies is that there is not a whole lot of experience on binding arbitration, which is true in the tax area, why, because people generally agree before they hit that two year mark and so some of them said look we are not opposed, it is just we need to see how it works, so we are not saying ‘we are saying no now, but not no forever’. And so I think that is where when we need to wait and see build experience and I expect that more countries will come in.

Doshi: The vision with which OECD first set out the 15 action points, thereafter followed up reports and standards. How long is it going to take for this vision to be implemented in some ways? Are we going to see the full effects of the BEPS program only 10 or 20 years from now or could it happen faster than that?

Perez-Navarro: I think it will happen faster than that.

Doshi: By when?

Perez-Navarro: Well there are different elements to the project but as you well know, the country by country reporting, the master file reporting those things have deadlines that are coming up in the next couple of years. So that is going to happen now. We are seeing countries pass legislation about hybrid mismatches, mandatory disclosures, lots of these different aspects and then of course we design the multilateral instruments specifically to make sure that it does not take a century to modify the 3,600 bilateral tax treaties that are out there today, so we will not be waiting 20 years for the results, no.

Doshi: Five or seven years is what you expect?

Perez-Navarro: I think in five years, we will be able to make an assessment of whether BEPS measures have had an impact. And I say that because we have a number of elements of the BEPS package that we will actually be reviewing in 2020. So, we will be reviewing country by country then, we will be looking at the digital economy then.

Doshi: You mentioned the digital economy and I think the OECD has come in for some criticisms there as to not having done enough in that space, not having made more specific suggestions or proposals. I wonder how you react to that? It is a terribly complex issue and I think the visibility of what you are trying to do with BEPS is in fact been brought home by digital companies. It is when we have seen the Amazon’s of the world get slammed by their own governments for not paying enough taxes, that a broader audience has understood what base erosion means, what profit shifting means. So I wonder why it is that you all have not suggested more specific proposals in that space?

Perez-Navarro: Well that is a very good question, in fact you are right that it was the digital economy which have really put the spotlight on this issue and that is why the digital economy is action number one and we have learned a lot of things from our work and discussions with business about what is the digital economy and I think initially people, countries, were thinking that we need to come up with a new tax for this new way of doing business and as we talk to the digital companies and other companies, we have realized the whole economy is digital. We had companies, car companies, truck manufacturers, industrial companies showing us how much technology as an information gathering data, is in cars, trucks, washing machines, everything and this is all the countries not just those of us working in the OECD but the 44 plus countries working on this project concluded that the digital economy is the economy itself.

Doshi: I remember reading that in your report.

Perez-Navarro: So, we said ok, we have all these other measures to deal with BEPS in the economy and so let us see if those work before we start applying new additional taxes. Now of course business was very happy with that outcome. There are some governments, you may remember that France was quite keen to have a Google tax, but they have reached this consensus, there are other countries that wanted to apply withholding taxes or whatever. So what our report says is look, the consensus among everybody is that we need to see how the other BEPS measures deal with it and we think they will go a long way towards dealing with this.

But having said that, there are these other options that countries may want to implement domestically, but they need to make sure that they comply with treaties. Now if you look at a country like India or another country, what are they going to think about when they asses whether they go that route and one of the things will be competitiveness, because if they are the only country that starts applying that kind of tax, what is that going to do, and so we are going to continue monitoring this to see whether the BEPS measures in the 15 actions are delivering results in the digital space and if not then we will have to take a look at this again.

Doshi: I am glad you mentioned competitiveness and I know because when I saw the news last week, of Ireland cutting some of its rates, tax rates that is, and I thought this flies in the face of what the OECD and many of the other countries are trying to do and I am just curious to get your reaction on how you see that, not directly linked to the BEPS program, but the effort to prevent base erosion, to prevent profit shifting taking a bit of a knock, because the country otherwise known for lower tax rates, a haven for moving your IP to etc has said look we are going to continue to do the same thing.

Perez-Navarro: I would not characterize it that way. I do not think they are saying they are going to continue to do the same thing. They are lowering their rate to be competitive, because they are going to have to get rid of some of the things that they used to do, but I do not think there is anything wrong with countries competing on the basis of rates, as long as they are transparent. But what you had was a situation where you had all of those secret rulings where a country would have a headline rate, but then a company would come in and get a unilateral reduction and nobody else was the wiser. So I think transparency will remain important in this area and in addition, Ireland and other countries are going to have to continue to apply the standard of substance. So, in order for them to be able to things they will have to be this substance. And at the end of the day Ireland like other countries needs to collect revenue in order to provide the public services that their citizens demand.

Doshi: Do you think that all the efforts that OECD has put in, whether it is the exchange of information or it is even now the BEPS program will take the wind out of tax heavens?

Perez-Navarro: I think it already has had important effects on a lot of jurisdictions that used to be secrecy jurisdictions. If you look at the work of the global form on transparency and the number of changes that have taken place in terms of getting rid of bank secrecy, in terms of getting rid of bear shares, there is an enormous amount of work that has been done there. I think that is the real question, will tax payers continue to try to evade or avoid taxes and I recall one of the former revenue commissioners of the Isle of Man, which is known as a low tax jurisdiction, he said that as long as there is a tax, people will try to avoid it and so we need to keep working, we cannot be complacent, we need to keep our eye on the ball and make sure that whatever new gaps, new structures come up, that we are ready to address them, and I think a lot of what the BEPS project is doing particularly in the transparency area, for example exchange of rulings, this is going to help us see what is happening on the ground and address it sooner than in the past.

Doshi: You said it will take maybe five to seven years to see the full effect of the BEPS program play out, but we are going to be faced with a multi speed adoption by different countries. This entire program is designed to avoid double non-taxation. What are the risks that we even end up, thanks to the multi speed adoption process with double taxation?

Perez-Navarro: Well, one of the things that we are very keen to do is to support countries in the implementation of the BEPS measures so that there is consistency in that implementation. The other thing that we are going to be doing is monitoring the implementation again, to ensure consistency, to identify gaps if there are any and I think that will help quite a bit in trying to minimize the double taxation, because if everyone is applying the rules in the same way, then you have less risk.

Now we did recognize at the beginning of the project that whenever you change rules, there will be initially different interpretation and that is why we put the action in there about dispute resolution, because we wanted to make sure that we strengthened something that many countries considered to be weak, so that we could facilitate the elimination of double taxation.

 
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