US firms pan international tax proposal

The architects of a sweeping set of recommendations to battle offshore tax avoidance insist their project won’t allow foreign countries to simply grab cash from U.S. companies.

The business community isn’t convinced.

Senior officials at the Organization for Economic Co-operation and Development (OECD), a Paris-based research group sponsored by almost three dozen advanced economies, said the new tax recommendations released Monday would help restore trust in tax systems around the world, and give tax rules a long-overdue update for the digital age. 

Their effort to help governments take aim at tax avoidance comes as other countries have scrutinized the complicated tax maneuvers employed by a string of well-known U.S. corporations, including Apple and Starbucks. 

For that and other reasons, both GOP lawmakers and business lobbyists have openly worried that other countries will latch onto the OECD’s Base Erosion and Profit Shifting (BEPS) plan as a way to build up their own treasuries at the expense of U.S. multinationals.

But in rolling out their plan, OECD officials said both Congress and the U.S. business community have nothing to worry about on that front. 

Pascal Saint-Amans, the head of the OECD’s tax policy center, said the group would be working with member countries to set up a plan dealing with potential “rogue tax administrations.” Because of the two-year sprint to finish the BEPS recommendations, Saint-Amans said at a Friday briefing, the OECD hasn’t yet had the time to flesh out potential monitoring mechanisms.

Grace Perez-Navarro, the deputy director of the tax policy center, added that the OECD’s recommendations were meant to ensure that economic activity is taxed where it occurs and pushed back on “this perception that countries can now just grab any money that’s anywhere.”

She said that “we would expect all countries to follow” the new rules. And speaking directly about the concerns in the U.S., Perez-Navarro said: “While we’ve heard that comment, I think the reality will be otherwise.”

But business lobbyists say there’s still plenty of reason for worry, even as they say they’re relieved that the BEPS recommendations have improved from their perspective over time. 

Warren Payne of Mayer Brown noted the OECD recommendations state that governments are being deprived of as much as a quarter of a trillion dollars’ worth of revenue each year because of tax avoidance. “Thus, the OECD reports are drafted on the premise that countries should be able to get that additional tax revenue out of U.S. companies,” added Payne, who was a top aide to former House Ways and Means Committee Chairman Dave Camp (R-Mich.).

Senate Finance Committee Chairman Orrin Hatch (R-Utah) and Ways and Means Committee Chairman Paul Ryan (R-Wis.) also said Monday that they remain skeptical of the BEPS project, which the OECD will present to the G20 finance ministers in Peru this week, and said that overhauling the American tax code should be a bigger priority for lawmakers. 

The current GOP-dominated Congress is unlikely to enact the OECD recommendations, and a full-scale revamp of the tax code looks very unlikely before 2017. But the Treasury Department does have discretion to implement some BEPS recommendations on its own, and other countries have started to look at the proposals for guidance.

“The initiative can be expected to have a significant impact on U.S. multinationals with overseas operations in jurisdictions that are early adopters,” said Manal Corwin of KPMG, who worked on the BEPS project in its early days as a senior Treasury official under President Obama. 

Business groups have also pointed to the OECD recommendations on country-by-country reporting, which would force companies to detail their global business operations to their country’s revenue collector for a “master file” that will be available to other tax administrations. 

Hatch and Ryan have questioned whether the Treasury Department has the authority to implement the new reporting methods, and the corporate community has
some issues with giving more information to foreign
governments.

Other OECD recommendations include a proposal to combat the use of treaty shopping, in which international business transactions are often funneled into a third country to lower the tax impact, and another to restrict artificial methods that companies use to avoid having a permanent base in a country.

And the group calls for new limits on companies’ ability to lower their tax bills by shifting profits and assets through various subsidiaries and countries.

Cathy Schultz of the National Foreign Trade Council said that, taken as a whole, the recommendations would cause more tax disputes among various countries and companies, and make resolving those disputes more difficult.

Schultz was also skeptical that the OECD’s monitoring mechanisms would be able to stop foreign tax administrations from targeting U.S. companies. “Countries are tax sovereignties and will act in their own best interest first,” she said. 

But, if anything, groups on the left thought the recommendations didn’t go far enough to curb what they called the widespread problem of corporations skirting their duty to pay their fair share.

The Tax Justice Network, for instance, complained that the country-by-country reporting required of multinationals won’t be made public, something the group said could
actually harm developing economies.

“Tax avoidance is deeply embedded in the business models of most multinational companies, and while we recognize the BEPS process as an important step towards addressing this issue, progress to date will not be nearly sufficient to tackle the problem,” said John Christensen, the group’s director.