December 7, 2018 OECD publishes tax report to G20 leaders Executive summary On 30 November 2018, the Organisation for Economic Co-operation and Development (OECD) issued a report to the G20 Leaders (the report) at their summit in Buenos Aires, Argentina, updating them on progress in key areas of the G20/OECD's tax work. The report contains two parts. Part I provides an update to G20 Leaders on the developments in delivering on the G20's commitments to fight tax evasion and avoidance, advance the tax certainty agenda, and to ensure that developing countries are in a position to leverage the international standards to mobilize their own domestic resources. Part II reports on the activities and achievements of the Global Forum on Transparency and Exchange of Information for Tax Purposes, as well as the next steps to be taken to address the remaining and emerging challenges. At the conclusion of their summit, the G20 Leaders also issued a communiqué. The communiqué, while touching on the topic of digital on some five occasions, notes that "We will continue our work for a globally fair, sustainable, and modern international tax system based, in particular on tax treaties and transfer pricing rules" and that "We will continue to work together to seek a consensus-based solution to address the impacts of the digitalization of the economy on the international tax system with an update in 2019 and a final report by 2020." Both comments reflect language in the report, and are targeted at ongoing discussions on digital tax solutions being discussed at the European Commission. Detailed discussion The G20 Leaders held a summit in Buenos Aires, Argentina on 30 November and 1 December 2018 where the OECD Secretary-General presented a two-part report updating the G20 on the international tax agenda and the progress achieved by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Part I: the OECD's International Tax Agenda Part I of the report provides an overview and update of the activities and achievements in relation to the OECD's tax agenda and the actions required in the future, in particular through the OECD/G20 Inclusive Framework (IF) on BEPS. Part I is divided into four subtopics:
Part I also contains an annex with an update on the OECD criteria to identify jurisdictions that have not satisfactorily implemented the tax transparency standards. Implementing the BEPS project The report notes that great progress was made in the implementation of the measures delivered under the G20/OECD BEPS project. It acknowledges the role of the IF on BEPS and draws attention to the significant increase of its membership — currently numbering 124 jurisdictions in total,1 23 more than when the last Leaders' summit took place. The IF on BEPS continues to conduct peer reviews for the four BEPS minimum standards and the first results show strong implementation by the IF on BEPS members. In the context of Action 5 (Countering harmful tax practices), significant progress has been achieved, where 243 preferential tax regimes have been reviewed since the BEPS project, and more than 134 regimes have already been amended or abolished, or are in the process of being amended or abolished. Over 16,000 rulings have already been identified and information is now being exchanged among the relevant tax administrations. The report highlights that a key tool to implement the Action 6 minimum standard (treaty abuse) is the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI),2 which to date has been signed by 84 jurisdictions. With respect to Action 13 (Transfer pricing documentation and Country-by-Country Reporting), in June this year for the first time exchanges of Country-by-Country (CbC) reports took place. The first annual peer review report of Action 13,3 which was published in May 2018, provides for a comprehensive examination of the domestic legal and administrative frameworks of 95 jurisdictions, while a second annual peer review, covering all members of the IF on BEPS with respect to the practices for collecting and exchanging information, will be released in 2019. On BEPS Action 14, dealing with the improvement of Mutual Agreement Procedures (MAP), the 2017 MAP statistics are now available covering 85 jurisdictions and almost all MAP cases worldwide.4 Additionally, the report says that when the OECD/G20 BEPS project was started it was estimated that the cost of tax avoidance for governments was between US$100 billion to US$240 billion per year. A series of new data collection processes and analytical tools have been developed in the context of BEPS Action 11 (Measuring and Monitoring BEPS), and much of this analysis will be included in the new OECD's Corporate Tax Statistics database that will be released in January 2019, and further analysis will be released later in 2019 and 2020. Moreover, the report considers that the key issue for the international tax community in 2018 remains how to address the tax challenges arising from digitalization. In March 2018, the Interim Report was released, providing an economic analysis of the features of the highly digitalized business models.5 It was agreed that, in spite of divergences on the consequences to draw, countries would seek a consensus based solution. Since March, the 124 members of the IF on BEPS supported by G20 countries, have made significant progress to bridge the gaps in their position. The report notes that it is clear that the dynamic of the discussions has shifted, with the potential for an agreement in sight. The Task Force on the Digital Economy will meet in December and the IF on BEPS will meet in January to take these proposals further. The IF on BEPS will hold a second meeting in 2019 just before the next Leaders' Summit, where the report considers that the agreement on the "what and how" of a long-term solution to be delivered in 2020 will be concluded. This is the first time the OECD has explicitly acknowledged the possibility of a long-term, consensus-based solution on digital tax policy. Importantly, the United States is a key player in this consensus-building exercise, with alignment from Germany and France. The views of the United Kingdom on the role of user-created value are also noted. It is possible that the OECD messaging in the report is designed to head off the immediate adoption of a European Union (EU)-wide Digital Services Tax (DST) by ECOFIN on 4 December. Any such deferral would potentially move this from an indirect double tax on revenue for certain intended limited (ring-fenced) user value transactions to a much more complex and robust taxation of digital income (and potentially wider impacts) a multi-year project that will likely require treaty changes. Whether a deferral of the EU DST at the EU level will stop individual Member States (and non-EU jurisdictions) from implementing unilateral DST measures, however, remains to be seen. Tax transparency The report notes that significant work has taken place in recent months on tax transparency issues. It is estimated that by June 2018, jurisdictions around the globe have identified €93 billion in additional revenue (tax, interest, penalties) as a result of voluntary compliance mechanisms and other offshore investigations put in place since 2009. Automatic Exchange of Information (AEOI) is now happening in 83 jurisdictions that committed to exchange by 2018. Moreover, details on hundreds of billions of euros of accounts have been exchanged in 2017, the first year of operation of the OECD's Common Reporting Standard. Moreover, the report highlights that the OECD has delivered strengthened criteria to identify jurisdictions that were not implementing the tax transparency standards and they will apply at the time of next year's Summit. The updated criteria to identify jurisdictions that have not satisfactorily implemented the tax transparency standards are included as an annex in the report. Based on the updated criteria, 15 jurisdictions are at risk of being identified as not having satisfactorily implemented the tax transparency standards. A report on the progress made will be provided at the G20 Leaders' Summit in 2019, along with a list of any jurisdictions that have not made enough progress. Capacity building The OECD continues to provide capacity building support to developing countries through a variety of activities, and works together with the International Monetary Fund (IMF), the United Nations (UN) and the World Bank Group (WBG) to better coordinate support and services to developing countries through the Platform for Collaboration on Tax (PCT) established in 2016. The PCT is working on practical toolkits to address issues related to BEPS and beyond, identified as priorities by developing countries. According to the report, another toolkit is expected to be published in 2018, on Indirect Offshore Transfers of Interests, and a discussion draft on Implementing Effective Transfer Pricing Documentation will be released before the end of the year. In October 2018, a new work plan for 2019-2020 was agreed by the PCT partners to implement the conclusions of the first Global Conference on Tax and the Sustainable Development Goals that was held in February by the PCT in New York. This work plan focusses on increasing coordination of the capacity building work, producing high quality collaborative analytical work, and creating an outreach program to better communicate on the PCT's work and generate more feedback and participation from external stakeholders. Additionally, tackling tax crimes and other financial crimes is another important area where capacity building is increasing. The report mentions that discussions are ongoing to explore possibilities of establishing another OECD International Academy for Tax Crime Investigation in Asia in 2019. Update on tax certainty The report mentions that an update to the March 2017 report on tax certainty was released in July this year.6 The updated report on tax certainty presents approaches to improve certainty, which range from improving the clarity of legislation, increasing the predictability and consistency of tax administration practices, and driving more effective dispute prevention and resolution. With respect to the last point, the report acknowledges that one of the key tools to ensure tax certainty for international tax risks is the availability of MAP under BEPS Action 14, where jurisdictions disagree on the tax treatment of a particular transaction, leading to double taxation. The report recommends that countries need an integrated set of tools to implement a comprehensive program on dispute prevention and resolution, targeting the earliest intervention points, including through the promotion of Advance Pricing Agreements (APAs), more coordinated risk assessment and joint audits activities, as well as through the International Assurance Compliance Programme (ICAP).7 According to the report, an update on further developments related to tax certainty will be provided in 2019. Part II: Progress report by the Global Forum on Transparency and exchange of information for tax purposes Part II of the report provides an overview of the ongoing work of the Global Forum, the achievements reached so far and next steps to be taken to address the remaining and emerging challenges. The report highlights that the rapid transformation of the global tax transparency landscape continues. Since the last G20 Leaders' meeting in July 2017, the membership of the Global Forum has grown from 142 to 154 jurisdictions. The network of international relationships enabling exchanges also continues to grow. The number of jurisdictions participating in the multilateral Convention on Mutual Administrative Assistance in Tax Matters has now reached 126. On 20-22 November 2018, 220 delegates from 84 jurisdictions and 12 international organizations and regional groups came together in Punta del Este, Uruguay, for the 11th annual meeting of the Global Forum to take stock of the advancements in the global tax transparency agenda and formulate key priorities for 2019. The report notes that international tax transparency took a leap forward in 2018 with the widespread AEOI on financial accounts- over 80 governments have exchanged information on financial accounts held by nonresidents. Although a few jurisdictions are experiencing delays, mostly due to technical issues, many of these delays are expected to be remedied over the next few weeks and months, and exchanges for 2019 are expected to be more widespread. At the same time, the exchange of information on request (EOIR) continues to increase and to play a central role in the global tax transparency landscape. The Global Forum safeguards its effective implementation through the second round of peer reviews. Nearly 40 reports have already been published, providing evidence that jurisdictions are making great progress in addressing the gaps identified by their peers in the previous round of reviews. The G20 Leader's Communiqué As noted, Clause 26 of the G20 leader's communiqué addresses tax issues, noting that "We will continue our work for a globally fair, sustainable, and modern international tax system based, in particular on tax treaties and transfer pricing rules, and welcome international cooperation to advance pro-growth tax policies. Worldwide implementation of the OECD/G20 Base Erosion and Profit Shifting package remains essential. We will continue to work together to seek a consensus-based solution to address the impacts of the digitalization of the economy on the international tax system with an update in 2019 and a final report by 2020. We welcome the commencement of the automatic exchange of financial account information and acknowledge the strengthened criteria developed by the OECD to identify jurisdictions that have not satisfactorily implemented the tax transparency standards. Defensive measures will be considered against listed jurisdictions. All jurisdictions should sign and ratify the multilateral Convention on Mutual Administrative Assistance in Tax Matters. We continue to support enhanced tax certainty and tax capacity building in developing countries, including through the Platform for Collaboration on Tax." As noted, this language is likely targeted at ongoing discussions on digital tax solutions being discussed at the European Commission and may influence the outcome of such discussion in the December ECOFIN meeting. Here, we have seen significant changes to the course of the European Commission, including a lack of consensus on a DST compromise text containing the elements that the Austrian Presidency says have the most support from Member States, as well as the provision of a new joint declaration8 by the French and German delegations, in which they invite the European Commission and the Council to amend and refocus its draft directive for a DST to a tax base referring to the provision of advertisements only, on the basis of a 3% tax on turnover. The Franco-German declaration also notes that the OECD is expected to reach an agreement by 2020 on proposals aimed at tackling the challenges raised by the digitalization of the economy and tax avoidance, and note that both countries will discuss proposals relating to a minimum taxation model that have been suggested by the United States, France and Germany and which have been discussed recently at G7 and G20 levels. More information is included in a separate EY Global Tax Alert discussing the ECOFIN meeting.9 Implications The report provides a broad spectrum of updates into current and future G20/OECD work. The report highlights that this is a critical moment in many areas of activity, including in the area of the digital economy and the exchange of tax information around the world. Tax professionals are recommended to read the report, to understand how potential recommended changes may impact their own organizations and, importantly, decide what role they wish to have in terms of assisting governments with current discussions and recommendations into future practical tools and processes. ——————————————— 1 http://www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf. 2 See EY Global Tax Alert, 68 jurisdictions sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, dated 7 June 2017 and EY Global Tax Alert, Signing by 68 jurisdictions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS highlights impacts for business to consider, dated 14 June 2017. 3 See EY Global Tax Alert, OECD releases first annual peer review report (Phase 1) on Action 13, dated 25 May 2018. 4 See EY Global Tax Alert, OECD releases 2017 Mutual Agreement Procedure statistics, dated 23 October 2018. 5 See EY Global Tax Alert, OECD releases interim report on the tax challenges arising from digitalization, dated 16 March 2018 and EY Global Tax Alert, The OECD's interim report on tax challenges arising from digitalisation: An overview, dated 20 March 2018. 6 See EY Global Tax Alert, OECD Secretary-General sends G20 finance ministers an annual progress report of the Inclusive Framework on BEPS and update on IMF/OECD Report on Tax certainty, dated 25 July 2018. 7 See EY Global Tax Alert, OECD launches International Compliance Assurance Programme pilot, dated 26 January 2018. 8 https://www.consilium.europa.eu/media/37276/fr-de-joint-declaration-on-the-taxation-of-digital-companies-final.pdf. 9 See EY Global Tax Alert, ECOFIN agrees to extend discussions on Digital Services Tax, taking into account a new proposal from France and Germany, dated 4 December 2018. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young Belastingadviseurs LLP, Transfer Pricing, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP, Global Tax Desk Network, New York
Ernst & Young LLP, Washington, DC
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