It’s been a long hot summer. Now it seems we are in for a warm winter taxwise, thanks to the OECD. Western governments asked the OECD to recommend ways of preventing offshore tax evasion committed by corporations and individuals. Over the last year the OECD has duly issued a string of reports addressing BEPS – base erosion and profit shifting.
Now the OECD has just issued four new reports to help governments around the world – not only OECD members – implement it all. Israel joined the OECD in 2010 and is committed to all the OECD tax initiatives.
Country-by Country Reports by Multinationals:
First the OECD issued on June 8, 2015, a so-called “Country-by-Country Reporting Implementation Package“. The aim is to facilitate a consistent and swift implementation of new transfer pricing reporting standards developed under Action 13 of the BEPS Action Plan.
This requires three items for periods commencing January 2016 from multinational enterprises (MNEs) with annual consolidated group revenues of 750 million Euros, namely: a group-wide master file, a local file and a Country-by-Country (CbC) report.
The CbC report is expected to expose a lot of hidden tax practices of MNEs. It will them to provide aggregate information annually, in a spreadsheet, relating to the global split of income and taxes paid and various other indicators of their substance; as well as information about which entities do business in a particular jurisdiction and the business activities they engage in.
The new implementation package contains draft model legislation requiring the ultimate parent entity of an MNE group to file the country-by-country report in its jurisdiction of residence, The filing should be done in the country where the ultimate parent entity is located for dissemination among the tax authorities in the other countries. If that does not happen for any reason in the ultimate parent entity’s country, a “Surrogate Parent Entity” in a particular country may be required to file the CbC report in that country unless another surrogate does so in another country.
The package also contains three Model Competent Authority Agreements to facilitate the exchange of country-by-country reports among tax administration. The model agreements are based on the Multilateral Convention on Administrative Assistance in Tax Matters, bilateral tax conventions and Tax Information Exchange Agreements (TIEAs).
A principal concern of CbC is that tax authorities around the world might ignore the master file and local files, and issue multiple CbC-based tax assessments. The above draft package states clearly that tax authorities can only use the CBR report for initial risk assessment, not for transfer pricing adjustments. Multiple taxation may apparently be avoided by appealing to the competent authorities of the countries concerned having regard to the above principles. That’s the theory, the practice remains to be seen.
Common Reporting Standard Copies FATCA:
Second , the OECD issued on August 7 the “Common Reporting Standard Implementation Handbook” (the CRS Handbook).
The CRS follows on the heels of FATCA (Foreign Accounts Tax Compliance Act) of the United States. The US wants information on financial accounts of US persons. To this end, the US signed a series of intergovernmental FATCA agreements with other countries including Israel to receive this information.
The CRS of the OECD means that similar information will now pass from the banks in most countries to the tax authorities in over 90 other countries that have signed up to the CRS.
The CRS handbook explains how this will work. Basically, a bank in Country A with a client from Country B will pass the account information on electronically to the Country A tax authority which will forward the information to the Country B tax authority. The CRS Handbook sets out the necessary steps for implementation.
The aim is to help financial institutions and governments implement the CRS efficiently by promoting the consistent use of optional provisions, identifying areas for alignment with FATCA and addressing the operational and transitional challenges resulting from the staggered implementation of the Standard.
It also contains answers to frequently asked questions (FAQs) received from business and governments, with a view to furthering the effective implementation of the Standard. The Handbook is intended to be a “living” document and will be updated on a regular basis.
Many countries will implement the CRS in 2017. Many more, including Israel, are scheduled to do so in 2018. We will return to the CRS in a future article.
Better Tax Amnesties?
Third, the OECD published on August 7 an updated edition of its 2010 report on “Offshore Voluntary Disclosure Programmes“, also known as VDPs or amnesty programs. This latest edition contains a wealth of practical experience from 47 countries in relation to their voluntary disclosure programmes. The limited time left until the automatic exchange of information under the Standard becomes a reality will in many instances be the last window of opportunity for non-compliant taxpayers to voluntarily come clean.
The aim is to encourage fuller tax disclosure and tax payments. The challenge is not to let such reluctant taxpayers get an unfair tax discount now nor let them think they’ll get a discount in the future by waiting for another amnesty to be announced. This might be done by not discounting the tax at all, just increasing the penalties in later amnesties. Israel has several voluntary disclosure programs in play at present, but is not one of the 47 countries surveyed in the OECD report. We will review how Israel compares in a later article.
Israel Amnesty Deadline September 6:
Israeli residents should note the deadline is September 6 for applying to the Israeli Tax Authority for an amnesty on an anonymous basis, or on the fast track procedure. After that, a regular amnesty on a named-upfront basis is available until the end of 2016.
Tax Information Exchange Agreements:
Fourth, the OECD published on August 7 a “Model Protocol to the Tax Information Exchange Agreements” (TIEAs): this report provides the basis for jurisdictions wishing to extend the scope of their existing TIEAs to also cover the automatic and/or spontaneous exchange of tax information.
To Sum Up:
The OECD implementation packages will affect a good many multinational corporations and multinational families. And in practice, tax authorities in the US, UK, South Africa, Australia and Israel, to name a few, are already taking BEPS on board. We should too.
Will more tax need to be paid? Probably not if MNE’s take a few precautionary steps. In particular they should review where and how they generate value….
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.