Saturday, March 30, 2013

US to OECD: target your anti-BEPS regime carefully

This is rich. The US wants the OECD to not go overboard on the BEPS thing.  From Tax Analysts [gated], Treasury International Tax Counsel Danielle Rolfes said that the Treasury wants to
"make sure that any suggested solutions are targeted at addressing the source of the problems and don't go beyond the scope of the BEPS project."

We are talking about a country that can't seem to distinguish between an au pair financing a trip to Europe and a billionaire stashing money in a series of hidden offshore accounts. Yet there's more:
...The BEPS project carries a risk of "scope creep," Rolfes said. ... "We want to stay mindful of what BEPS is and make sure that in trying to solve those problems we don't come up with solutions that are broader than necessary or that have other implications, particularly with respect to the allocation of taxing rights between two taxing jurisdictions," she said.
...While Treasury endorses the sense of urgency around the BEPS project and the feeling that the problems must be fixed, Rolfes said that U.S. officials intend to be thoughtful about how the rules should or should not be changed.  
I'm not sure what is meant by being thoughtful. Being thoughtful might mean thinking through what you need to change, how you mean to change it, how you avoid over-breadth and under-breadth at the same time, how much everyone has to spend in order to get the result you seek, and whether what you write as rules can be coherently implemented in practice.

Perhaps Rolfes is worried that if the OECD looks too closely at the allocation of taxing rights between two taxing jurisdictions, the world will see clearly that (1) the US is the most overreaching in this respect given that it taxes on the basis of citizenship and (2) the global North has long arranged the allocation to favor itself at the expense of the global South.  

Maybe it is just that Rolfes does not appreciate the finger pointing at US companies:
"It's not just U.S. companies that engage in BEPS. Moreover, all agree that the BEPS we are primarily concerned with is driven by tax planning that is perfectly legal."
Rolfes called some of the moralizing on this issue "ironic," though I think she means "hypocritical." It might not not sound right for the Treasury to use that word when talking about tax competition, so maybe this is carefully chosen rhetoric:
Rolfes [added]that while much of BEPS income lands in zero-tax jurisdictions, some of the elements of tax laws that enable BEPS are attributable to tax competition that's occurring between the same taxing jurisdictions that are trying to solve BEPS.
"This tax competition itself contributes to BEPS," she said.
She acknowledges that "many of the current international standards, such as those relating to transfer pricing and tax treaties, have been developed over many years by U.S. tax policymakers working with their counterparts in the OECD."  She says "We at Treasury are humbled ...And we want to make sure that any solutions we have are targeted to that problem and not to other problems."

Treasury economist Michael McDonald added that
The BEPS project should clearly undertake a cost-benefit analysis of the possible alternatives...clearly I think if the BEPS project is going to be successful, one has to weigh the benefits of the current [OECD] Transfer Pricing Guidelines, in addition to the costs."
Tax Analysts economist Martin A. Sullivan can't understand why the US is focused on the BEPS thing at all, since Dave Camp has a proposal for switching the U.S. to a territorial system:
"To me, that seems much more important than an OECD initiative. I don't understand how the two are going to work together. If Chairman Camp achieves his goal by the end of the year of putting the entire international tax system up for a vote, shouldn't that be our starting point?"
Rolfes responded that the BEPS project would still matter even if the US changed to territorial, since such a switch would not in any way make profit shifting less an issue. She also had some interesting things to say about participation and influence in tax policymaking via the OECD:
Treasury needs to be engaged in a significant tax policy initiative like BEPS, which would be undertaken by other countries with or without the U.S. ...Having a seat at the OECD table provides the United States the opportunity to be a part of the dialogue and to have an influence on how international tax rules are developed ... [and] other countries are not going to wait for the conclusion of the U.S. Congress's reform debate.
So the US sees the OECD as playing an important role, and one that could have negative impacts on US policymaking choices absent Treasury's involvement. And this exchange shows that at least some at the Treasury are capable of articulating at least a sense of understanding the concept of regulatory overbreadth. But you could interpret these statements as at best tepid support for the OECD's initiative, at worst a foreshadowing of resistance to come. The US torpedoed the OECD's efforts on harmful tax practices, only to come up with the much more expansive and awe-inspiring FATCA on its own. If the US torpedoes BEPS, what will be in store for the taxation of multinationals? It should be a fascinating ride.


  1. Allison, excellent comments. Perhaps we could label it an “identity crisis” of sorts of how much the U.S. wants to support group action versus wanting to retain individual sovereignty.

    In January, I wrote a letter to the BEPS project suggesting an approach that could actually reduce the strong motivation for MNC profit shifting that exists under deferral and territorial taxation systems. Major countries that are home countries of MNCs could abandon their deferral and territorial systems and adopt worldwide full-inclusion systems that force home country taxation on all income, including that in foreign subsidiaries. If they were to do so, then MNCs, knowing that there’s a current home country tax that cannot be avoided (save by a foreign tax credit mechanism) would have significantly less motivation for profit shifting.

    This approach has a number of beneficial effects on competition, potential simplification, and tax base-broadening. Regarding competition, it would solve the current inequality between pure domestic businesses and MNCs as well as reduce differences regarding competition between MNCs from different countries.

    With such a system broadening the corporate tax base of adopting countries, it allows corporate tax rate reductions for all, thereby making the adoption of the approach politically palatable.

    For anyone interested, a link to the letter to the OECD is at And a link to a Tax Notes item is at These items provide more detail and issues that would have to be considered. And an item written for a non-tax audience that was included on The Economist Schumpeter site is at

  2. Jeff511W

    I think there are a couple of issues with your approach while working in theory. One is everyone would have to adopt an almost uniform corporate tax base. I am not sure any country is willing to give up that level of sovereignty in terms of tax policy. If they didn't you would have the issue of "host" country tax credits and deductions decided for local political reasons not being recognized by the "home" country government. This already occurs with non resident US citizens and is a source of increasing friction. I do think corporate tax policy is though easier to harmonize than that of personal taxation. The main carrot of full inclusion is the possibility of sharply lower CIT rates. If everyone's CIT rate is around 15% give or take perhaps that would enough incentive.

    The second issue is perhaps other than the US it is not clear which countries would have a benefit into shifting to such a system. Countries like Canada and Australia(or even the UK) do have their own multinationals and the risk of base erosion but they also have a lot of FDI(primarily from the US). I question how willing they would be to lose some degree of tax sovereignty(in terms of recognition of local credits and deductions) towards the US as the "home" country. The have already lost this sovereignty in terms of subpart F but only to a limited degree(keeping in mind the same country exception of subpart F).

    1. Tim, good comments.

      Regarding your first issue, actually, there's no need for uniformity in what each "home country" passes. I love the concept of a worldwide unitary system, which is the other approach that would eliminate the profit-shifting motivation. With such a system, though, uniformity of what each country passes regarding both the tax base and the method of allocation is extremely important. And all countries, big and small have to buy in to the same rules and formula. Where there's not uniformity, then a unitary system will cause some amount of double taxation or double-non-taxation. I agree with you that sovereignty being what it is, the world will never get to a unitary system.

      On the other hand, with a full-inclusion approach, each home country can do what it wants regarding mechanism (e.g. worldwide consolidation, foreign subs being transparent, etc.), what incentive deductions and credits to offer (e.g. accelerated depreciation, R&D credits, etc.), and what tax rate to apply. And only those countries that have some number of multinationals based therein will need to buy in. The many small developing countries don't need to buy in or pass anything. Of course, the more uniformity, the better, but there really doesn't need to be any.

      On you're second issue, you're right that not all home countries of MNCs would necessarily want to buy in. If they don't, then there will be more competition issues between MNCs from other countries that have bought in and those that haven't. Having said that, though, even these countries that don't buy in still have CFC regimes. And where those CFC regimes kick in (e.g. when a company tries to profit shift profits into a tax haven), then the competition issues will decrease. It's worth noting in this regard that one outcome from BEPS will likely be a strong recommendation to strengthen CFC rules in the future. It seems likely that territorial system countries not moving to a full-inclusion system would take at least this recommendation seriously.

      In any case, even if some home countries don't buy in, the continuation of some tax competition issues amongst MNCs from different home countries seems a small price to pay for the tax policy improvements, tax base increase, and level playing field between each country's pure domestic businesses and MNCs. And of course, the lower motivation of many MNCs to profit shift.


  3. I think one problem is many in the US see the issue of international taxation too much from the hub and spoke perspective of the US having 60 something DTT's fined tuned in deviation from the OECD model to the wishes and desire of the US tax and political establishment(re: citizenship based taxation, limitation of benefits, no sparing credits etc). Then you have this increasingly thick spider web of DTT's the rest of the world is signing among themselves encircling the US based on the "straight" OECD model or increasingly the UN model and allocating up taxation rights and authorities in ways that from the standpoint of the Treasury Dept and SFRC are totally unacceptable.

    The problems is as the rest of world goes to town signing "straight" OECD and UN model treaties alternative standards of tax allocation increasingly become a form of customary international law. The US view continues to be basically we have own treaty policy and the fact that North Korea and Indonesia have a DTT prohibiting each state from taxing its non resident citizens in the other state through the tie breaker clauses is basically irrelevant(And there is some symbolism in that even "pariah" nations like Iran, Cuba, Myanmar, and North Korea don't just have a couple of DTT's they have numerous ones). In fact there are only a few countries on the planet without any DTT's.

  4. One other thing to remember and this gets far too little attention is that corporates have far less skin in the game than they did in the past. What do I mean that well for most of the 20th century business generally viewed the income tax as a form of "tax" as far better the alternatives which tended to be things like MST(Manufacturers Sales Tax), WST(Wholesale Sales Tax), and plain old tariffs for raising revenue. Thus in the 1930s and 1950s when you has serious proposals to introduce a Manufacturers Sales Tax in the US similar to one that existed in Canada from 1920 to 1991 business could be counted to heartily oppose. Even during World War II in Canada when Ottawa was desperate for revenue the government of the day refused to raise MST due to what were already considered negative economic side effects.

    In the last part of the 20th century something happened though to dramatically upend this relationship between business and the income tax. That is introduce of 2G VAT's in countries such as New Zealand, Canada, and Australia. In a short period of time business went from having a quite inferior alternative to the income tax in MST to having a quite superior alternative in GST. With GST and its TVQ and HST offspring all of the tax burden can quite efficiently "flow through" business and land like a two by four on the foreheads of consumers and individuals. In Canadian system businesses even get to keep the historical North American practice(from sub national Retail Sales Taxes) of tax "excluded" pricing quite in your facedly shifting ALL the burden of tax to consumers and individuals.

    Funny videos on the tax excluded pricing elements of GST

  5. Tim, I certainly agree that there is diversity amongst the increasing number of bilateral treaties, but I don't see that as a problem for full-inclusion. In the same sense that there doesn't need to be home country uniformity of what form of full-inclusion gets enacted in each home country, the bilateral decision on how to share tax revenues shouldn't affect the overall benefits of the approach.

    As indicated in the cited pieces, I do think that some developing countries that offer tax holidays and other incentives might complain, but they are free to renegotiate with their treaty parties to include tax sparing provisions in their treaties where such provisions are not already there. Yes, the US won't agree to that, but some other home countries will. And developing countries generally will be much better off since with the lack of profit shifting motivation, MNCs will spend less time and effort moving profits out of the countries in which they operate or earn revenues.