 "BEPS will affect around 9,000 companies globally: Grace Perez-Navarro")
The Organisation for Economic Cooperation and Development (OECD) has been leading the charge to improve transparency in tax administration and curb tax avoidance by multinational companies. Endorsed by the G20 nations, including India, OECD recently came out with a package of measures and a road map to tackle base erosion and profit shifting (BEPS). Grace Perez-Navarro, deputy director, Centre for Tax Policy and Administration, OECD, in an interaction with Sudipto Dey, shares her insights on how the proposed action plan for attacking tax avoidance will change the way multinational companies are taxed the world over. Edited excerpts:
Is the BEPS Project the end of the road for tax avoidance?
Tax minimalisation is likely to continue. What we are trying to tackle is aggressive tax avoidance - such as double non-taxation, which was an adverse consequence of the laws.
This situation came into focus during the economic crisis (2008). The media and the civil society pointed out how multinational companies were paying less tax when countries were grappling with the effect of the deficits.
There was a comparative disadvantage for companies that operated in a purely domestic market as opposed to those in international markets. Large multinationals were able to use mismatches in domestic tax laws and gaps in the international tax system to dramatically reduce their corporate taxes. A purely domestic company - large or small - did not have that advantage.
One of our BEPS reports shows that multinationals were paying four to eight per cent less taxes than purely domestic companies.
How is the BEPS project different from other similar projects directed at tax avoidance?
The most important difference is the very broad involvement of countries and the highest level of political support for the BEPS Project. With the political impetus from the G20 you already have a very powerful motor behind it. We already have over 62 countries that have directly worked on the BEPS Project - and over 90 involved in the follow up work on a multilateral instrument.
What will the post-BEPS international tax scenario look like? Is there a timeframe for the transition?
We are starting to work on the architecture. Our aim is to present that to the G20 finance ministers in February 2016 at Shanghai. We want countries to implement BEPS measures in a consistent manner. We hope to have the framework up and running next year.
What are the early elements of BEPS that one is likely to see?
UK, Ireland and Spain have already started implementing some of the BEPS measures. Each country has its own legislative cycles. So when the time comes they have to build these measures in. It will take some time for some of these measures to be implemented. Although I think the adaptation will be swift as smart businesses start adapting their structures to be BEPS-compliant.
Any estimates of how many companies will be affected by the BEPS measure?
As per our estimates, BEPS will affect around 9,000 companies globally. Only the very large Indian companies will be affected by these measures.
How should corporate India react to BEPS?
Corporate India should look at BEPS positively. More so because the government of India has been part of this process, signalling that it is participating in, and adhering to international standards so that all companies are treated in the same way.
Lot of businesses looked at this project as anti-business. It was not intended to be so. The real reason we undertook this project was that the rules were outdated. We needed to change those rules taking into account current business practices, and the business environment. We are laying down the rules for business in 21st century.
Do the governments have the capacity to handle the flow of data and information that the BEPS measures will unleash?
Even in country-by-country reporting, each government will decide with which partner country they would want to exchange information with. They will decide who gets the information, how it is transferred and used. They can stop the transfer if they find any abuse of the information. Any responsible government would not like to lose the status of being a recipient of this information.
Is the BEPS Project the end of the road for tax avoidance?
Tax minimalisation is likely to continue. What we are trying to tackle is aggressive tax avoidance - such as double non-taxation, which was an adverse consequence of the laws.
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With changing business models, globalisation, elimination of trade barriers, it became clear that some of the international tax rules were not working anymore. Some companies were not paying tax anywhere.
This situation came into focus during the economic crisis (2008). The media and the civil society pointed out how multinational companies were paying less tax when countries were grappling with the effect of the deficits.
There was a comparative disadvantage for companies that operated in a purely domestic market as opposed to those in international markets. Large multinationals were able to use mismatches in domestic tax laws and gaps in the international tax system to dramatically reduce their corporate taxes. A purely domestic company - large or small - did not have that advantage.
One of our BEPS reports shows that multinationals were paying four to eight per cent less taxes than purely domestic companies.
How is the BEPS project different from other similar projects directed at tax avoidance?
The most important difference is the very broad involvement of countries and the highest level of political support for the BEPS Project. With the political impetus from the G20 you already have a very powerful motor behind it. We already have over 62 countries that have directly worked on the BEPS Project - and over 90 involved in the follow up work on a multilateral instrument.
What will the post-BEPS international tax scenario look like? Is there a timeframe for the transition?
We are starting to work on the architecture. Our aim is to present that to the G20 finance ministers in February 2016 at Shanghai. We want countries to implement BEPS measures in a consistent manner. We hope to have the framework up and running next year.
What are the early elements of BEPS that one is likely to see?
UK, Ireland and Spain have already started implementing some of the BEPS measures. Each country has its own legislative cycles. So when the time comes they have to build these measures in. It will take some time for some of these measures to be implemented. Although I think the adaptation will be swift as smart businesses start adapting their structures to be BEPS-compliant.
Any estimates of how many companies will be affected by the BEPS measure?
As per our estimates, BEPS will affect around 9,000 companies globally. Only the very large Indian companies will be affected by these measures.
How should corporate India react to BEPS?
Corporate India should look at BEPS positively. More so because the government of India has been part of this process, signalling that it is participating in, and adhering to international standards so that all companies are treated in the same way.
Lot of businesses looked at this project as anti-business. It was not intended to be so. The real reason we undertook this project was that the rules were outdated. We needed to change those rules taking into account current business practices, and the business environment. We are laying down the rules for business in 21st century.
Do the governments have the capacity to handle the flow of data and information that the BEPS measures will unleash?
Even in country-by-country reporting, each government will decide with which partner country they would want to exchange information with. They will decide who gets the information, how it is transferred and used. They can stop the transfer if they find any abuse of the information. Any responsible government would not like to lose the status of being a recipient of this information.