The Organization for Economic Cooperation and Development (OECD) has gradually carved for itself a central role in global tax matters over the past two decades. Today, its many initiatives impact global economic activity in a variety of ways. “OECD Watch” summarizes and analyzes the organization’s recent activities relating to international finance and tax matters.
Base Erosion and Profit Shifting
The BEPS project remains the primary focus of the OECD’s tax-related activity. In November, negotiations were concluded on a multilateral instrument – called the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS – which will “transpose results from the OECD/G20 Base Erosion and Profit Shifting Project into more than 2,000 tax treaties worldwide.” A signing ceremony will be held June 2017 in Paris.
The new Inclusive Framework – whereby small and low-tax jurisdictions are given the appearance of having meaningful input in the project – held its first regional meetings for Latin America and the Caribbean in Montevideo, Uruguay, on Sept. 21-23; for French-speaking countries in Tunis, Tunisia on Nov. 22-24; for the Asia-Pacific region in Manila on Nov. 29-Dec. 1; and for Eastern Europe and Central Asia in Vilnius, Lithuania, on Dec. 14-16.
Andorra, Panama, Macau, Mauritius, and Ukraine all recently joined the Inclusive Framework, giving it a total of 91 members as of early December 2016. Five new jurisdictions – Brazil, Guernsey, Jersey, the Isle of Man and Latvia – joined the Multilateral Competent Authority Agreement for exchange of CbC reports.
New documents were released relating to BEPS Action items 13 and 14. The documents included a list of jurisdictions and their domestic legal frameworks for Country-by-Country reporting (Action 13), as well as additional interpretive guidance on the CbC standard.
According to the OECD, “The additional guidance relates to the case where a notification to the tax administration may be required to identify the reporting entity within a MNE Group (as provided in Article 3 of the Model Legislation in the Action 13 Report). The guidance confirms that if such notifications are required, jurisdictions have flexibility as to the due date for such notifications.”
Also released were documents which will form the basis of the Mutual Agreement Procedure (MAP) peer review and monitoring process under Action 14 (Making Dispute Resolution Mechanisms More Effective). Stage 1 of the peer reviews will be conducted in batches, with the first (consisting of Belgium, Canada, Netherlands, Switzerland, United Kingdom and United States) beginning December 2016, and a new batch following every four months. Review has been deferred until at least 2020 for the following developing nations: Benin, Costa Rica, Egypt, Gabon, Georgia, Jamaica, Kenya, Pakistan, Paraguay, Senegal, Seychelles and Uruguay.
Global Forum meets
The Global Forum on Transparency and Exchange of Information for Tax Purposes met for its annual meeting in Tbilisi, Georgia, on Nov. 2-4. The Forum announced the completion of the first round of the exchange of information on request peer review process with the qualification of Peru, Lebanon, Nauru and Vanuatu for Phase 2 review. Of the Phase 2 reports released, the following jurisdictions were assessed as “Largely Compliant”: Azerbaijan, Brunei Darussalam, Burkina Faso, Lesotho, Morocco, Romania, Bulgaria, Barbados and Israel.
Dominica and the Dominican Republic were rated “Partially Compliant,” while the Marshall Islands and Panama were given “Non-compliant” ratings.
Rather than reject the process for the hypocritical farce that it is, the two newly minted non-compliant jurisdictions prostrated themselves and begged for mercy. Or as the OECD says, they “announced that they had already taken or were taking steps to address recommendations made in the review process.” A fast-track process was agreed to that would allow the Global Forum to recognize progress made by mid-2017 from non- and partially compliant jurisdictions in time to meet the deadline set for the G20 Summit in July.
The Global Forum also reported that its budget has run in the red for the last two years. It tapped into its available surplus to make up the shortfall, but will apply an inflation adjustment to membership fees starting in 2018 and “re-examine the membership fees as a whole in 2017 taking into account the financial situation at that time.” That’s a fancy way of saying that they’ll soon be charging jurisdictions more money for the pleasure of browbeating them into adopting counterproductive fiscal policy.
Preparing for automatic exchange
With the automatic exchange of information set to begin in 2017, the Global Forum notes that 101 jurisdictions have made a commitment to implement the AEOI Standard. Fifty-four jurisdictions have pledged to begin exchanges in 2017, including Bermuda, BVI and the Cayman Islands. Another 47 are set to begin exchanges in by 2018, including Hong Kong, Panama and Switzerland. The Forum now intends to shift focus to “the delivery of the commitments made in order to ensure a level playing field.”
The ongoing monitoring process reports that almost all jurisdictions have both the international legal framework and domestic laws in place for automatic exchange. The Global Forum called for a monitoring report to be delivered by the end of 2016 on the progress made by committed jurisdictions in order to “identify any gaps at an early stage.” Once sufficient data has been exchanged, the Global Forum “will carry out comprehensive reviews of the effectiveness of the implementation of the AEOI Standard.”
More nations have joined the Convention on Mutual Administrative Assistance in Tax Matters. Pakistan, Panama, Cook Islands and St. Lucia signed The Convention, while Switzerland announced its ratification, bringing the total number of participating jurisdictions to 107. The Convention can be used for both the sharing of rulings under BEPS Action 5 and of CbC reports under Action 13, as well as to implement the automatic exchange standard. It is slated to go into effect in 2017, though almost half of the signatories – including the United States – have not yet ratified it.
In July 2016, the OECD laid out its plan to move toward seeing tax decisions through the lens of “inclusive growth.” Under this rubric, the organization would put less emphasis on “the impact of taxes on economic growth from an efficiency perspective,” and pay more attention to “equity outcomes,” like “redistributive goals” and the “progressivity of tax systems.”
The politicization of the OECD has since only gotten worse. In a publication called Revenue Statistics in Asian Countries, the OECD not only suggested a need for Asian countries to raise taxes, but came to the jaw-dropping conclusion that a nation is not developed unless its government consumes at least 25 percent of GDP through taxes. This is particularly ironic given that the OECD had just recently published a working paper from two economists which acknowledged that “larger governments are associated with lower long-term growth.”
In addition to its increasingly ideological view on taxes, top OECD officials inserted the organization into the U.S. presidential campaign in unprecedented fashion. Secretary General José Ángel Gurria said that “the word racist can be applied” to then-candidate Donald Trump, while Deputy Secretary General Doug Frantz called Trump a “lunatic” and likened his rise to that of Hitler and Mussolini. Regardless of whether one agrees with these sentiments or not, their expression by top OECD officials demonstrates that it is not the neutral, consensus driven body it still pretends to be.
Mr. Frantz has also expressed rather disturbing views toward multinational businesses. Namely, he asserts that they are “greedy” for undertaking the common sense “search for the best tax opportunities available to them.” More tellingly, he said: “I think that the idea that your only responsibility as a CEO is to the shareholders is wrong. I think you have social responsibilities, I think you have responsibilities to your workforce and I think that those responsibilities mean you should pay your own fair share of taxes …We need to make it less palatable for multinational enterprises to engage in these legal tax avoidance measures.”
On that front, the OECD released the first edition of a new annual publication called Tax Policy Reforms in the OECD. It provides an overview of the tax reforms implemented, legislated or announced by OECD member nations during the course of the year. The report noted – much to the agency’s chagrin – that 2015 saw reductions in corporate income tax rates as more nations focused on pro-growth policies. BEPS and other ongoing OECD efforts to undermine tax competition will unfortunately make such trends less likely in the future.
Their Global Forum meeting also provided yet more reason to expect sanctions or other aggressive actions against holdout jurisdictions which have not adopted a sufficient number of the OECD’s “recommended” policies. There, a “constructive discussion” was held “against a backdrop of calls for preparation of lists of non-cooperative jurisdictions.” Ominous words for those who support tax competition and fiscal sovereignty.