TAX US IF YOU CAN - Taxation in the 21st century and beyond

The long awaited OECD report on tackling the taxation issues that have been vexing all tax authorities has now been released . The BEPS issue of harmonizing  legislation with current business practices will no doubt create much discussion. The challenge is to have “real” agreement for a multi lateral approach to international tax reform requiring all jurisdictions to be more open minded while not sacrificing to much in their own territory . The US by way of example has indicated that any proposal that severely  impacts its revenue base ,will not be accepted.The OECD noted that the increase prospect of double taxation is real which will lead to disputes over the rules. The conflict is in part with double non taxation and so there is no doubt the proposals are designed to impact. How these issues will be resolved , is too early to tell but one prospect may be an escalation in turf wars between jurisdictions . This may result in jurisdictions not adopting all the recommendations of the OECD or delaying  participation on all fronts. The prospect of going it alone is unlikely but how the local taxation rules will be amended is yet to be seen . Former Australian Treasurer Joe Hockey was criticised by the OECD when Australia headed up the G20 and he introduced tax legislation ahead of the OECD report. The Hockey law changes may be irrelevant under the new OECD recommendations but it demonstrates how difficult the landscape still is with the result that increased litigation is a likely outcome .Hong Kong was another jurisdiction that announced previously that they would listen but not necessarily implement the recommendations as the H K authorities were of the view that the rules they have implemented , worked for them.  The OECD is optimistic that the naysayers will be proved wrong based on the position that some 90 countries have agreed in principle with what the OECD is wanting to do . In principle agreement versus actual implementation is the hurdle yet to be tested. 

What appears to be “out” is the unitary tax methods in favour of the more traditional arms length principle . In essence the rules require that there is to be sound  economics behind any structural decisions when planning the manner in which a company’s cross border dealings are handled .   

As anticipated there is considerable attention given to the concept of the Permanent Establishment and the digital economy . This is a space to watch as the prospect of a deemed PE is very much on the table and will no doubt be the subject of robust discussion  . All the old rules such as  where contracts are finalised etc are being reconsidered. As only one simple example shows, the area is still a minefield.  If an on line seller has lead generation staff in a jurisdiction , does a tax liability arise in the country of the lead generation ?  Staff functions ,while relevant ,  are not considered determinative of the end game in todays environment ? The OECD paper also  moves away from the automatic exemption from PE status where only warehousing / logistics are involved . In fact , are any of the traditional rules relevant or is the country of the buyer the determining factor ? The country of origin may have a different view especially if they are going to have to give tax offsets for tax paid in the country of the buyer.

What is certain is that the large multi nationals which were the focal point of this initiative will be looking at the drafts , lobbying and working strategies to  secure the best outcome in this new world order of multi-lateral cooperation . In the meantime the initial response from the G20 , on October 8th , will be interesting to watch .