OECD efforts to develop international rules for corporate tax avoidance are necessary, if not overdue. The US, however, is playing politics, in spite of its own pressure on foreign governments to comply with FATCA.
Transfer pricing, which deals with the methods corporations use to shift profits to lower-tax jurisdictions, is no longer the humdrum domain of overpriced tax consultants. Thanks to the Organization for Economic Co-operation and Development (OECD) and recent US backlash, it has suddenly become sexy. Not to mention, of momentous importance for governments and the private sector alike.
The Paris-based club of leading market economies organized a conference in Washington last week on its Base Erosion and Profit Sharing (BEPS) project, a work-in-progress encouraging a set of harmonized global tax regulations and tighter tax treaties.
The OECD’s main target? Corporate transfer pricing and related practices, such as earnings stripping/excessive interest deductions, inversion, and relocating ownership of intangible assets (such as brands and patents).
Few dispute the notion that corporate tax avoidance is a problem. Recent furor in both Capitol Hill and Parliament over the tax implications of Pfizer’s proposed takeover of AstraZeneca underlines this. And the issue is particularly sensitive in a time of growing austerity, where study after study further shows that global tax rates have plummeted and income inequality has skyrocketed in the past three decades.
What is more, the strength of corporate lobbies worldwide has resulted in a flurry of bilateral treaties that cut down on double taxation. But this same interaction of domestic tax systems and complex multinational companies has also resulted in strong incentives for corporations to shift profits across jurisdictions, often by illegally flouting the arm’s length principle (that the transfer price should be the same as if the two entities involved were independent actors).
These latter tax gaps, taken to their extreme, can even result in so-called “hybrid mismatch arrangements”, or double non-taxation, and until recently have tended to be tackled in isolation. Given the interconnectedness of such accounting measures across tax jurisdictions, this has meant, in effect, that they have barely been tackled at all.
However, the BEPS is not exactly being universally welcomed.
American companies lobby against BEPS
A number of large American multinationals have been active on the BEPS lobbying front, including the likes of Pfizer, Merck, Starbucks, Pepsi, and DuPont. It is unsurprising that many of these companies have been the recipient of very public criticism of late concerning the amount of their total tax bills.
In addition, influential GOP lawmakers have also voiced their displeasure.
“We are concerned that the BEPS project is now being used as a way for other countries to simply increase taxes on American taxpayers,” said Chairman of the House Ways and Means Committee, Republican Dave Camp, and the top Republican on the Senate Finance Committee, Orrin Hatch, in a statement. The pair’s strong words were also, somewhat worryingly, echoed by IRS Commissioner John Koskinen himself at the OECD conference.
Drawn into the debate, and muddying the GOP position, is the 2010 Foreign Account Tax Compliance Act (FATCA), the controversial US law requiring foreign financial institutions to hand over to the Internal Revenue Service (IRS) the names and information of large bank accounts and investments held by US citizens and entities.
Coming into effect on July 1 and accompanied with a harsh 30% withholding tax on US income for non-compliers, it has been begrudgingly accepted by most of the financial world in spite of impinging on a number of banking secrecy statutes and privacy concerns in foreign jurisdictions. Its reach even extends to international customers of US financial institutions who have no financial connection with the US.
Uncle Sam, which often champions financial multilateralism, should follow the OECD’s lead, especially in light of its FATCA demands, which are not actually returned to foreign governments on a reciprocal basis. Yet, what is clear is that the growing spotlight on transfer pricing is “unprecedented” and “unlikely to subside in the foreseeable future”.
Already, publications by notable consulting firms on “How to Manage Transfer Pricing Risks” abound, as do online newsletters and forums dealing with readying companies for transfer pricing audits. Republicans may try to link action on BEPS to lowering US corporate tax rates, which are the highest in the OECD (of course, before taking into account generous tax breaks).
Democrats may talk the talk and defend the US private sector from what many of its members see as “extraterritorial taxes on US business income,” but will probably hold off on walking the walk until after November elections.
Regardless, both sides will be hard-pressed to keep the OECD’s efforts at multilateral tax diplomacy at arm’s length for long.
