Improving multinational tax behaviour

OECD's Multilateral Instrument is a first step whose details need etching

The OECD’s Base Erosion and Profit Shifting (BEPS) project under the auspices of the G20 is for combating abusive transactions relating to multinationals’ (MNE) tax activities to reduce their global tax burdens through hybrid arrangements, transfer pricing and permanent establishments.  Thus there are two sides to this — governments and MNEs — and a tug of war to collect or retain revenue. On June 7, the Multilateral Instrument (MLI) was signed by 67 countries, including India, in Paris. The Indian finance minister appeared in the front row centre of the group of finance ministers. It was a noteworthy moment.  It took steady urging and handholding since 2006 at the Ministry of Finance to change a persistent view that the OECD was merely a rich-country club. 

The MLI’s — Action 15 of BEPS — objective is to simultaneously modify bilateral tax treaties of countries that sign the MLI, thus enabling the other BEPS Actions to take immediate effect instead of through a slower process of modifying bilateral treaties by each pair of signatory countries.*The OECD broadened the scope of country participation so that more countries could join in the deliberations. Broadly there are two initiatives —Inclusive Framework for BEPS and Global Forum on Tax Transparency — in which India is in a key position and is participating on equal footing with OECD members.   

On June 19 there was an academic conference organised by Maastricht University, the Netherlands, on Action 15. What emerged at the conference was revealing in many aspects. Maikel Evers of the OECD explained that the MLI document is additional to a bilateral treaty and does not replace the latter. There are minimum standards to be met by every country before signing the MLI but there is also considerable flexibility allowing a signatory to register its reservations on selected aspects of the MLI. Indeed, some one-third of those who are involved in the process have not yet signed the MLI. For example, Mauritius needs some more time to study it while Norway declared constitutional constraints.  

Illustration by Binay Sinha

Stig Sollund of the UN elaborated on the UN view, emphasised that BEPS was a G20 initiative, and elaborated how the UN varies from the OECD. He explained that UN Commentaries were issued simultaneously as OECD’s. He pointed to the continuing need for a forum where developing nations could feel comfortable to present and discuss their point of view; that forum remains the UN. He clarified that the UN had not recommended signing the MLI to developing countries. And Uwe Ihli of the European Union also informed how the EU stood apart on some counts. Therefore, it became clear that multilateral organisations are not necessarily on the same wavelength. 

Independent experts followed with remaining constraints on MLI implementation. Hans Mooij hypothesised if BEPS would cause more disputes together with more dispute resolution reflecting expected higher transparency with BEPS Actions.  He cautioned against pressure on countries for, when countries do not sign the MLI, it could reflect different needs: They may work at different speeds, and there could be other factors than just intransigence. Hence there is continuing need for specialised platforms to bring together countries with common interests, examples being the MLI Ad Hoc Group (though too large) and the MLI Ad Hoc Group on Arbitration (about the right size). Finally, noting that international taxation—and associated with it, arbitration—is a latecomer than international protocols on investment, trade etc, why not open up to outside experience and involve them as well in the formulation of international taxation rules?

Other experts pointed to as yet unknown areas of application of BEPS rules, for example, apportionment of revenue among countries that should reflect income where genuine economic substance occurs. David Spencer raised issues with the use of unitary taxation — which he felt was difficult to define due to subjectivity involved — for MNE taxation. He differentiated unitary taxation from the Common Consolidated Corporate Tax Base (CCCTB) for the taxation of MNEs, and cautioned that rules for MNEs—entity basis, unitary business basis, or consolidated income or combined reporting—remain to be specified. Sol Picciotto took the position that unitary should simply mean treating firms in a way to reflect “economic reality”, and contended that BEPS does not solve such issues. He emphasised the need for simplicity in any formula used, based on employee number or payroll, sales by destination (though it is not easy to get data on this), and production factors. 

BEPS cannot be to collect government revenue willy nilly. For BEPS to be successful, MNEs also need guidance. Edwin Visser of PricewaterhouseCoopers (PwC) explained this from the MNE standpoint. For example, CCCTB should be simplified by using well-understood accounting bases such as the IFRS. There is a need for rules to increase certainty — statute of limitations, and limiting retroactive application. A permanent arbitration court needs to be developed. There should be a rethink on residence as taxable presence, or profit as the corporate income tax (CIT) base. The revenue allocation basis should be more neutral. And, reflecting the increasingly higher global revenues from VAT/GST compared to CIT, tax treaties on VAT/GST should be contemplated. Visser also pointed to the practical constraints of MNCs having to work against constrained tax administrations characterised by lack of legacy and talent in the face of budget cuts, little sustainable technology, and pressure to do more for less.

This author spoke on India’s experience in formulating and legislating international taxation policy and the hurdles faced and overcome during 2012-17. Given that BEPS could be viewed as a movement away from destination-based taxation, it is not entirely surprising that India, a proponent of source-based taxation, came on board. However, India has not signed on to mandatory arbitration which it should reconsider. 

To conclude, India played a lead role in the MLI. It comprises a good step for India in benchmarking itself in international taxation. To bear fruit, its participation should continue at the highest knowledge level for which subject specialisation has to be encouraged. India’s continued presence at the table remains crucial. 

*See N. Nigam in P. Shome ed. (2016), BEPS: Global Taxation Agenda, ITRAF/Wolters Kluwer, New Delhi.