15 Steps to Deal with Double Non-Taxation

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The OECD report offers 15 action steps to address what sometimes is referred to as “double non-taxation.”

In many countries, the current corporate tax laws help to ensure that companies don’t end up paying taxes on the same income twice – once in one country and then again in another, noted OECD Secretary-General Angel Gurría in a recent speech. That’s only appropriate, of course.

At the same time, the laws also can allow companies to avoid paying taxes in any country, Gurria added. This recognition is behind the release of a new OECD report, “Action Plan on Base Erosion and Profit Shifting,” which was produced at the request of the G20. As the OECD states, “National tax laws have not kept pace with the globalization of corporations and the digital economy, leaving gaps that can be exploited by multi-national corporations to artificially reduce their taxes.” (Base erosion refers to companies’ efforts to shift profits from the location where the profit-making activity occurs to locations with more favorable tax treatments.)

The OECD, while it doesn’t have independent legal authority, has played a significant role in developing and maintaining international standards, says Manal Corwin, national leader in KPMG’s international corporate services practice. The standards are agreed to by both OECD members (including the U.S.) and, in many cases, non-members. For instance, many treaties between countries are based on the OECD’s model income tax treaty. The OECD also has had a significant impact on transfer pricing guidelines, Corwin says.

And in this, case, “there is fairly wide consensus that the current rules can lead to base erosion,” Corwin says. “The rules that have been around may not have kept pace with the way many businesses operate.”

The OECD report offers 15 action steps to address what sometimes is referred to as “double non-taxation.” Among them:

1. Address the tax challenges of the digital economy.A first step in developing effective regulation is to examine how and where the current rules fall short. This includes, according to the report, a company’s abilityto enjoy a significant digital presence in the economy of another country, yet not have to pay taxes due to the lack of “nexus” under current international rules. Another issue to be examined: ensuring the effective collection of VAT/GST (value-added tax/goods and service tax) when it comes to the cross-border supply of digital goods and services.

2. Neutralize the effects of hybrid mismatch arrangements.This refers to the fact that an organization may be treated as, for instance, a corporation in one country and a pass-through entity in another. Similarly, a financial instrument may be considered debt in one country and equity in another. “Hybrid mismatches often create opportunities to avoid tax,” Corwin says.

3. Strengthen CFC (controlled foreign company) rules.This addresses the issue of just how companies treat income from a subsidiary, Corwin says. The concern? That a company can create an affiliated non-resident taxpayer, then route the income from a resident enterprise through the non-resident affiliate. The OECD faces challenges here, however, as any changes may require many jurisdictions to change their own laws, Corwin notes.

The policy concerns underlying the OECD’s proposals are “not inconsistent” with those addressed by the Obama Administration. In addition, some of the proposals reflect concerns on Capital Hill about base erosion, Corwin says. She notes that most countries’ corporate tax regimes – including both territorial and worldwide structures – are concerned with base erosion.

The OECD’s report “is relevant to the U.S. tax reform debate,” Corwin notes. Moreover, some of the changes proposed could be accomplished by regulatory changes – not all require legislative action. Should the actions be implemented, companies’ tax obligations could be affected.

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Karen Kroll supplies the Business Finance community with reporting and commentary examining cash management and treasury-related topics.

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