WORK OF THE OECD IN THE TAX AREA

Martin JarešTax Policy and Statistics DivisionOECD Centre for Tax Policy and Administrationmartin.jares@oecd.org

• 1. Introduction• 2. Work of the OECD in the Tax Area

– Tax Conventions

– Transfer Pricing

– Harmful Tax Practices

– Tax Administration

– Consumption Taxes

• 3. Tax Statistics and Tax Policy Analysis– Revenue Statistics

– Taxing Wages

– Tax Database

– Tax Policy Studies

• 4. Base Erosion and Profit Shifting

Overview

1. INTRODUCTION

• Since the 20th century, the economy is more and more globalised.

• Tax systems are national.

• This could lead to double taxation, i.e. two countries taxing the same income.

• This would in turn cause economic distortions which would create disincentives to invest abroad.

• This has been traditionally addressed through bilateral double-taxation treaties.

Introduction

• It was realised that international co-operation would be beneficial.

• First attempts were undertaken by the League of Nations in 1920‘s.

• Since 1950‘s, OECD (or its predecessor, the OEEC) assumed a leading role in this area.

• The mandate was gradually broadened.

Introduction

• OECD works through the committees which consist of delegates from all OECD member countries.

• Committee on Fiscal Affairs (CFA) is responsible for taxation.

• Within the OECD, Centre for Tax Policy and Administration serves as the Secretariat to the CFA.

• Committees create subsidiary bodies (working parties, working group) to conduct the actual work.

Introduction

• The core work of the OECD consists in setting standards.

• They are not binding, OECD does not have any legislative power to enforce them.

• However, they are in general highly regarded and also many non-OECD countries follow recommendations formulated by the OECD.

• There is no voting, the aim is to find unanimous support.

Introduction

• Recently, OECD has tried to engage not only members but also non-members through establishing Global Fora which include also non-members on equal footing.

• There are Global Fora on– Tax Treaties and Transfer Pricing,

– Transparency and Exchange of Information for Tax Purposes,

– VAT.

Introduction

2. WORK of the OECD in the tax area

• As it was mentioned in the beginning, double-taxation treaties are the traditional domain of the OECD.

• The main outcome of the work is the Model Tax Convention on Income and on Capital.– Model Tax Convention is a model for bilateral double-

taxation treaty.– It sets general principles and allocation of taxing rights

of the two contracting countries.– Used by all OECD countries and some non-OECD

countries as a basis for negotiation with other countries.– Model Tax Convention is regularly updated.– The full version has more than 2,000 pages.

Tax Conventions

• National tax system operating in the globalised world require that multinational corporations allocate its profit to particular jurisdictions where they operate.

• Companies must produce separate accounts for all its members and record intra-group transactions according to the “arm‘s length principle”.

• Otherwise they could easily shift profit from high-tax countries to low-tax countries by overpricing exports from low-tax countries and underpricing imports to low-tax countries.

Transfer Pricing

• The main outcome of OECD‘s work on transfer pricing is the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

• The Guidelines– provide guidance on the application of the arm's length

principle for the valuation, for tax purposes, of cross-border transactions between associated enterprises,

– are used by all OECD countries as a basis for their legislation.

– The full version has almost 400 pages.

Transfer Pricing

• In the last decades, countries have been decreasing corporate income tax rates in order to attract more investment.

• This is called tax competition.

• There are instances of tax competition which is regarded as harmful.– For example, a country might introduce tax incentives

only for new, foreign-owned companies.

• There are instances of tax competition which is regarded as harmful.

Harmful Tax Practices

• OECD produced a report Harmful Tax Competition: An Emerging Global Issue in 1998.– Subsequent progress reports.

• Ineffective exchange of information was identified as one of the obstacles to eliminate harmful tax practices.

• As an outcome, Model Agreement on Exchange of Information on Tax Matters was worked out.– Since its release in 2002, more than 500 bilateral TIEAs

were signed.– It was used as a basis to update the Multilateral

Convention on Mutual Administrative Assistance in Tax Matters signed by 60 countries.

Harmful Tax Practices

• Work of the OECD in the area of tax administration consist mainly of sharing best practices and experiences.

• Main areas of concern are– compliance,

– taxpayer services (e-services),

• Two work streams:– taxpayers with global interests (multinational companies,

high net worth individuals),

– small and medium enterprises.

• One of the outcomes is the biennial report Tax Administration: Comparative Information.

Tax Administration

• Traditionally, OECD worked only in the are of direct taxation.

• With the rising importance of indirect (consumption) taxation, it was found that these taxes could also cause double-taxation and other obstacles to the free trade if countries do not follow similar principles.– One of the reasons for harmonisation of VAT and excises in

the EU.

• That is why OECD started to work also in this area.

• Work on the OECD International VAT/GST Guidelines.– “the development of the VAT/GST Guidelines is without

any doubt the most prestigious indirect tax project in the world” (prof. Walter Hellerstein)

Consumption Taxes

3. Tax Statistics AND Tax Policy Analysis

• Work on tax policy analyis and tax statistics is carried on by– Working Party No. 2 on tax policy analyis and tax

statistics

– Joint Meeting of Tax and Environment Experts

• Regular statistical products– Revenue Statistics

– Taxing Wages

– Tax Database

– Environmental Tax Database

• Analysis of tax policy– Tax policy studies and Working papers

Overview

• The Interpretative Guide defines what is tax.– In the OECD classification the term “taxes” is confined

to compulsory unrequited payments to general government.

• Data on tax revenues of all member states from 1965

• Data on accrual basis.– Tax revenue is recorded at the time that the tax liability

was created.

• Breakdown by type of tax and level of government.

Revenue Statistics

• Classification of taxes– 1000 Taxes on income, profits and capital gains

• 1100 Taxes on income, profits and capital gains of individuals

• 1200 Corporate taxes on income, profits and capital gains

– 2000 Social security contributions

– 3000 Taxes on payroll and workforce

– 4000 Taxes on property

– 5000 Taxes on goods and services• 5100 Taxes on production, sale, transfer, leasing and delivery of goods

and rendering of services– 5110 General taxes (5111 Value added taxes)

– 5120 Taxes on specific goods and services (5121 Excises)

• 5200 Taxes on use of goods, or on permission to use goods or perform activities

– 5210 Recurrent taxes (5211, 5212 Paid in respect of motor vehicles)

Revenue Statistics

• Attribution of tax revenues to levels of government

• In general, a tax is attributed to the government unit that– exercises the authority to impose the tax (either as a

principal or through the delegated authority of the principal),

– has final discretion to set and vary the rate of the tax, and

– also final discretion over the use of the tax proceeds.

• Link: http://www.oecd.org/tax/tax-policy/revenue-statistics.htm.

Revenue Statistics

• Total tax burden in the Czech Republic has been slightly above the average of the OECD countries.

Revenue Statistics & Czech Republic

• Czech Republic has higher share of social security contributions and lower share of personal income tax and property taxes..

Revenue Statistics & Czech Republic

• Provides comparative information of tax burden on labour income of OECD countries.

• Contains information on– income tax paid by workers

– social security contributions levied on employees and their employers

– family benefits paid as cash transfers.

Taxing Wages

• Average and marginal effective tax rates are calculated.

• Not based on actual data but on a model.

• Results are presented for different household types which differ by– income level (in percentage of average wage)

– household composition (one- and two-earner families, different number of children)

• Link: http://www.oecd.org/ctp/tax-policy/taxing-wages.htm.

Taxing Wages

• Czech Republic has higher tax burden of single persons without children but lower tax burden of persons with children than the OECD average.

Taxing Wages & Czech Republic

• Even with the single tax rate of personal income tax, Czech tax system (blue) is progressive in basically the same way as tax systems of OECD countries on average (purple).

Taxing Wages & Czech Republic

• Comparative information on a range of tax statistics on– personal income taxes,

– social security contributions

– non-tax compulsory payments,

– corporate and capital income taxes

– taxes on consumption.

– (data from Revenue Statistics and Taxing Wages also included here.)

Tax Database

• Comparative information on a range of tax statistics on– personal taxes,

– corporate and capital income taxes

– taxes on consumption.

– data from Revenue Statistics and Taxing Wages also included here.

Tax Database

• Personal taxes,– personal income taxes,

– social security contributions paid by• employees,

• employers,

• self-employed.

Tax Database

• Personal taxes,– non-tax compulsory payments

• compulsory payments made to organizations outside the government sector or because they are not unrequited,

– measures of tax burden• average rate,

• marginal rate,

• tax wedge (income tax, employer and employee social security contributions and pay roll tax as a percentage of labour costs).

Tax Database

• Corporate and capital income taxes– basic (non-targeted) rates,

– small business tax rates,

– Corporate income taxes relating to sub-central governments.

Tax Database

• Taxes on consumption– value added tax

• Rates of VAT

• registration threshholds

– excise duties on• beer,

• wine,

• alcoholic beverages,

• mineral oils,

• tobacco .

• Link: http://www.oecd.org/ctp/tax-policy/tax-database.htm

Tax Database

• Since 1999, 21 studies published.

• Studies deal with specific tax policy topics, e.g.– Corporate Tax Incentives for Foreign Direct Investment,

– Tax Effects on Foreign Direct Investment: Recent Evidence and Policy Analysis,

– Taxation of SMEs: Key Issues and Policy Considerations,

– Choosing a Broad Base – Low Rate Approach to Taxation,

– Tax Policy Reform and Economic Growth,

– Taxation and Employment.

• Link: http://www.oecd.org/ctp/tax-policy/tax-policy-studies.htm

Tax Policy Studies

3. BASE EROSION AND PROFIT SHIFTING

• International tax avoidance is as old as international trade.

• Both individuals and corporations use tax havens and inconsistencies between national tax legislations to avoid taxes.

• After the recent crisis, governments started to increase taxes and cut expenditures.

• Suddenly, the issue that the large, usually very profitable MNE were able to avoid taxes while small companies or ordinary people faced higher tax burden, started to matter.

Introduction

• International tax avoidance started to be a real political problem.

• OECD emerged as the natural discussion forum on these issues during 2012 and the “Base Erosion and Profit Shifting” project was defined.

• In February 2013, CFA approved “Addressing Base Erosion and Profit Shifting” report.

Introduction

• In July 2013, “Action Plan on Base Erosion and Profit Shifting” was approved by the CFA.

• It was endorsed also by all G20 countries (8 G20 countries are non-OECD countries).– “We welcome the establishment of the G20/OECD BEPS

project and we encourage all interested countries to participate” - G20 Leaders, September 2013, Saint Petersburg Summit

• The Action Plan defines 15 Actions to tackle BEPS. Most actions aim at changing rules of international taxation system.

• Outcomes should be delivered by September 2015.

Introduction

• Action Plan describes BEPS as:– “BEPS relates chiefly to instances where the interaction

of different tax rules leads to double non-taxation or less than single taxation. It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place. No or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it.”

• BEPS project deals only with corporate income tax avoidance, not with personal income taxes.

What is BEPS

• Typical strategies used by companies to shift profits– transfer pricing (use of non-arm‘s length prices),

– intra-group• payments of interest,

• royalties,

• transfer of risk,

– use of hybrid instrument (deductible in one country, exempt in another country),

– allocation of third-pary interest payments to high-tax country,

– Allocation of sales to low-tax countries,

– treaty shopping.

What is BEPS

• Example of tax avoidance arrangement:– subsidiary located in Ireland with place of effective

management in a tax haven (e.g. Bermuda), i.e. not conisdered as an Irish tax resident by Ireland,

– this subsidiary co-develops software with its headquarters in the US and it owns the patents resulting from to joint R&D,

– this subsidiary owns another Irish subsidiary which makes sales in all European countries,

– the second subsidiary pays royalties for the use of intellectual property to the first subsidiary,

– profit are “invested indefinitely abroad” to avoid US tax.

What is BEPS

• Decrease of CIT revenues which means that (especially in times of crisis and low economic growth) other taxes must be increased even more.

• Impacts on production efficiency and competition– incentives to invest abroad instead in the home country,– might actually increase attractiveness of high tax

countries (“taxes do not matter anymore”),– purely domestic companies face higher tax burden than

MNEs because they do not have so many tax avoidance possibilities,

• Impacts on equity : upper income classes invest more in shares (and derive non-taxed income) than lower income classes.

Impacts of BEPS

• Spillover effects– tax policy of one country can influence other countries

and may erode their tax bases,

– the affected countries might react and trigger tax competition (“race to the bottom”).

Impacts of BEPS

Solutions?

Thank you for your attention.