PROGRAM TO ADRESS BEPS IN MINING. LIMITING THE IMPACT OF EXCESSIVE INTEREST DEDUCTION ON MINING REVENUES. CONSULTATION DRAFT

This practice note has been prepared under a programme of cooperation between the Organisation for Economic Co-operation and Development (OECD) Centre for Tax Policy and Administration Secretariat and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), as part of a wider effort to address some of the challenges developing countries are facing in raising revenue from their mining sectors. It complements action by the Platform for Collaboration on Tax and others to produce toolkits on top priority tax issues facing developing countries. It reflects a broad consensus between the OECD and IGF, but should not be regarded as the officially endorsed view of either organization or of their member countries. The lead organisation for this practice note was the OECD. It is currently a consultation draft.

OECD – Public comments received on misuse of residence by investment schemes to circumvent the Common Reporting Standard

On 19 February 2018, interested parties were invited to provide comments on a consultation document on misuse of residence by investment schemes to circumvent the Common Reporting Standard. The consultation document assessed how these schemes are used in an attempt to circumvent the CRS; identified the types of schemes that present a high risk of abuse; reminded stakeholders of the importance of correctly applying relevant CRS due diligence procedures in order to help prevent such abuse; and explained next steps the OECD will undertake to further address the issue, assisted by public input.

OECD – Tax Policy Studies Taxation of Household Savings

Following the 2008 financial and economic crisis, there has been renewed interest in the taxation of household savings as a means of strengthening the efficiency and fairness of countries’ tax systems. Strong calls have come from civil society to increase capital taxation to address income and wealth inequality. Meanwhile, the recent move towards the automatic exchange of financial account information between tax administrations is likely to make it harder for taxpayers to evade tax by hiding income and wealth offshore. This report provides a detailed and timely review of the taxation of household savings in OECD and five key partner countries in light of these and other developments. The report finds that, while countries do not necessarily need to tax savings more, there is significant scope to improve the way they tax savings. Most significantly, there are opportunities for countries to increase the neutrality of taxation across assets and thereby improve both the efficiency and fairness of their tax systems. The lack of neutrality in the taxation of savings is illustrated by marginal effective tax rate (METR) modelling undertaken for 40 OECD and key partner countries across a range of potential savings options. METR modelling enables the impact of a wide range of taxes and tax design features to be incorporated into a single indicator. The results highlight significant variation in METRs across assets, with tax systems creating significant incentives to alter savings portfolio allocation away from that which would be optimal in the absence of taxation. Private pension funds tend to be the most tax-favoured form of saving, with owneroccupied residential property also significantly tax-favoured. In contrast to owner-occupied residential property, rental property is often subject to relatively high METRs due to the application of progressive marginal personal income tax rates, capital gains taxes and property taxes. Bank accounts and corporate bonds also tend to be relatively heavily taxed in many countries. Analysis of asset holding microdata shows that a move towards greater neutrality in the taxation of savings can often also improve the fairness of tax systems. Drawing on microdata for 18 European countries from the Eurosystem Household Finance and Consumption Survey (HFCS), the report finds that patterns of asset holdings vary significantly across both income and wealth distributions. Matching these asset holding patterns with METRs shows that current tax systems often favour the savings of households that are financially better-off. For example, poorer households tend to hold a significantly greater proportion of their wealth than richer households in bank accounts, which are typically highly-taxed, whereas richer households tend to hold a greater proportion of their wealth in investment funds, pension funds and shares, which are all often taxed relatively lightly While acknowledging the difficulty in achieving perfect neutrality across assets, the report discusses a number of ways in which countries can look to increase neutrality, such as through inflation indexation and consistent application of taxes across assets. A number of more fundamental reforms are also discussed, including exemption of the normal return on savings, imposition of an interest charge on deferred capital gains, and adoption of expenditure-based taxation.

OECD – Standard for Automatic Exchange of Financial Account Information in Tax Matters: Implementation Handbook. SECOND EDITION

 The purpose of the CRS Handbook is to assist government officials in the implementation of the Standard for the Automatic Exchange of Financial Account Information in Tax Matters (“Standard”) and to provide a practical overview of the Standard to both the financial sector and the public at-large. The Handbook provides a guide on the necessary steps to take in order to implement the Standard. Against that background, the Handbook is drafted in plain language, with a view of making the content of the Standard as accessible as possible to readers. The Handbook provides an overview of the legislative, technical and operational issues and a more detailed discussion of the key definitions and procedures contained in the Standard. This second edition of the Handbook is intended to be a living document and will be further updated and completed over time. Changes reflected in the second edition of the Handbook provide additional and more up-to-date guidance on certain areas related to the effective implementation of the Standard. This includes revisions to sections pertinent to the legal framework for implementation of the AEOI, data protection, IT and administrative infrastructures as well as compliance measures. More clarity has been provided in the trust section of the Handbook relation to the identification of Controlling Persons. The objective of the Handbook is to assist stakeholders in the understanding and implementation of the Standard and should not be seen as supplementing or expanding on the Standard itself. Cross references to the Standard and its Commentary are therefore included throughout the document. The page numbers refer to the pages in the consolidated second edition of the Standard. Background to the creation of the Standard for Automatic Exchange 1. In 2014, the OECD together with G20 countries and in close cooperation with the EU as well as other stakeholders developed the Standard for Automatic Exchange of Financial Account Information in Tax Matters, or the Standard. This was in response to the call of the G20 leaders on international community to facilitate cross-border tax transparency on financial accounts held abroad. The Standard intends to equip tax authorities with an effective tool to tackle offshore tax evasion by providing a greater level of information on their residents’ wealth held abroad. In order to maximise efficiency and minimise costs the Standard builds on the automated and standardised solutions that jurisdictions previously developed for the purposes of the intergovernmental operationalisation of the US laws commonly known as FATCA. 2. The Standard has now moved from the design to implementation and application phase with the first exchanges having taken place in September 2017. There are over 100 jurisdictions representing all the major international financial centres that have committed to commence automatic exchange of information in 2017 or 2018. Within that group there is a small group of jurisdictions that have yet to pass domestic legislation to impose reporting obligations on their financial institutions. Many jurisdictions have also made significant progress in adopting the necessary international legal frameworks enabling cross-border exchanges. 3. The commitment process is monitored by the Global Forum on Transparency and Exchange of Information for Tax Purposes (“Global Forum”) whose role is to ensure timely and effective implementation of the Standard based on a level playing field. In parallel, the OECD continues its work on the practicalities of the Standard by seeking stakeholder input and clarifying its application through the regular publication of Frequently Asked Questions (FAQs) on the AEOI Portal as well as updates to this Handbook.

OECD – TAXING ENERGY USE 2018. COMPANION TO THE TAXING ENERGY USE DATABASE

Many forms of energy use are associated with environmental and health damages and contribute to climate change, so the social cost of energy use frequently exceeds private cost. Taxes on energy use – carbon taxes and other specific taxes on energy use – can make energy users pay for the full costs of pollution and climate change, so reducing harmful emissions at minimal cost, while also raising revenue that can fund vital government services. These considerations may affect policy design to an extent, but this report clearly shows that energy taxes continue falling well short of their potential to improve environmental and climate outcomes. Based on OECD’s Taxing Energy Use database, a unique dataset to compare coverage and magnitude of specific taxes on energy use across 42 OECD and G20 economies, six sectors and five main fuel types, this report assesses the magnitude and coverage of taxes on energy use in 2015, and considers change between 2012 and 2015. Together, the 42 countries represent approximately 80% of global energy use and CO2 emissions associated with energy use. This uniquely detailed and comprehensive database is now available for 2012 and 2015. Permit prices in CO2 emissions trading system change the prices of energy use and carbon emissions in a way similar to the taxes included in Taxing Energy Use. These prices are not included here but in OECD’s Effective Carbon Rates. However, they do little to change the findings presented here. Taxing Energy Use data is a key input for Effective Carbon Rates, but remains unique in its in-depth account of tax rates, particularly the breakdown by fuels. The main findings are as follows: taxes are strongly heterogeneous, so are poorly described by country averages; almost all taxes are too low from an environmental point of view; taxes on coal often equal zero or nearly so; taxes in road transport are much higher than taxes in other sectors, but still are too low to cover external costs in nearly all cases; taxes tend to be higher where GDP per capita is higher but there are notable exceptions to this pattern; fuel taxes increased between 2012 and 2015 in some large countries, and first steps towards removing lower tax rates on diesel compared to gasoline are taken, but apart from that there are no signs that the polluter pays principle determines the energy tax landscape more strongly in 2015 than in 2012. The following paragraphs elaborate on these findings. Energy taxes differ strongly between countries, sectors and fuels. This is the result of a mix of policy objectives and political economy factors, and it implies that consideration of average tax rates across sectors and fuels on a country level can be very misleading. A bird’s eye view of effective tax rates per tonne of CO2 across all countries reveals that there is hardly any change in the tax rates on emissions outside the road transport sector. Taxes continue to be poorly aligned with environmental and climate costs of energy use, across all countries. In road transport, 97% of emissions are taxed.

Tax Challenges Arising from Digitalisation – Interim Report 2018. Inclusive Framework on BEPS

This interim report of the OECD/G20 Inclusive Framework on BEPS is a follow-up to the work delivered in 2015 under Action 1 of the BEPS Project on addressing the tax challenges of the digital economy. It sets out the Inclusive Framework’s agreed direction of work on digitalisation and the international tax rules through to 2020. It describes how digitalisation is also affecting other areas of the tax system, providing tax authorities with new tools that are translating into improvements in taxpayer services, improving the efficiency of tax collection and detecting tax evasion.

OECD – ADDITIONAL GUIDANCE ON THE ATTRIBUTION OF PROFITS TO PERMANENT ESTABLISHMENTS. BEPS ACTION 7. MARCH 2018

The integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules, which were designed more than a century ago. Weaknesses in the current rules create opportunities for base erosion and profit shifting (BEPS), requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created. Following the release of the report Addressing Base Erosion and Profit Shifting in February 2013, OECD and G20 countries adopted a 15-point Action Plan to address BEPS in September 2013. The Action Plan identified 15 actions along three key pillars: introducing coherence in the domestic rules that affect cross-border activities, reinforcing substance requirements in the existing international standards, and improving transparency as well as certainty. After two years of work, measures in response to the 15 actions were delivered to G20 Leaders in Antalya in November 2015. All the different outputs, including those delivered in an interim form in 2014, were consolidated into a comprehensive package. The BEPS package of measures represents the first substantial renovation of the international tax rules in almost a century. Once the new measures become applicable, it is expected that profits will be reported where the economic activities that generate them are carried out and where value is created. BEPS planning strategies that rely on outdated rules or on poorly co-ordinated domestic measures will be rendered ineffective. Implementation is now the focus of this work. The BEPS package is designed to be implemented via changes in domestic law and practices, and via treaty provisions. With the negotiation for a multilateral instrument (MLI) having been finalised in 2016 to facilitate the implementation of the treaty related measures, 67 countries signed the MLI on 7 June 2017, paving the way for swift implementation of the treaty related measures. OECD and G20 countries also agreed to continue to work together to ensure a consistent and co-ordinated implementation of the BEPS recommendations and to make the project more inclusive. Globalisation requires that global solutions and a global dialogue be established which go beyond OECD and G20 countries. A better understanding of how the BEPS recommendations are implemented in practice could reduce misunderstandings and disputes between governments.

OECD – INTERNATIONAL TAX PLANNING

OECD – INTERNATIONAL TAX PLANNING AND FIXED INVESTMENT ECONOMICS DEPARTMENTS WORKING PAPERS No. 1361: 1. Corporate income taxes affect business investment in several ways. By reducing the after-tax return on investment, high corporate taxes can lead firms to reject certain investment projects or reduce their scale, thus reducing the overall level of investment (OECD, 2009; Arnold et al., 2011). Corporate taxes also influence the allocation of investment across industries and countries (Fatica, 2013). All else equal, higher-tax rate countries attract less international investment than lower-tax rate countries, although corporate taxes are only one among many determinants of investment location (Skeie, 2016; Hajkova et al., 2006; Feld and Heckemeyer, 2011). 2. This paper explores whether the effect of corporate taxes on investment is influenced by international tax planning, which is also known as Base Erosion and Profit Shifting (BEPS) (OECD, 2013). The idea is that tax planning allows multinational enterprises (MNEs) to reduce their tax burden, for example by shifting profits to lower-tax rate or no-corporate-tax countries (Johansson et al., 2016a). As a result, the return on investment of an MNE entity in a high-tax rate country is only partially taxed (or not taxed at all) in this country. Reflecting this, tax-planning MNEs are expected to be less sensitive to corporate taxes in their investment decisions than non-tax-planning firms. Indeed, existing single-country studies focusing on US and German MNEs suggest that tax planning can affect the tax sensitivity of investment (Grubert, 2003; Overesch, 2009). The purpose of this paper is to assess this effect systematically across a wide range of countries. 3. This paper confirms that corporate taxes have a negative impact on investment and shows that this negative impact is smaller among tax-planning MNEs than other firms. The analysis is based on a large sample of industry and firm-level data for OECD and G20 countries. A 5 percentage point increase in the effective marginal corporate tax rate is found to be associated with a reduction in investment by about 5% in the long term on average across industries. This effect is lower in industries with a high concentration of MNE entities with profit-shifting incentives, i.e. entities facing a higher statutory corporate tax rate than the average in their MNE group. This definition of profit-shifting incentives is in line with the accompanying paper on the assessment of tax planning (Johansson et al., 2016a). For an industry with a strong presence of MNE entities with profit-shifting incentives (75th percentile of the distribution), the tax sensitivity of investment is nearly halved as compared to the median industry. Results obtained at the firm-level are consistent with these industry-level results. 4. The estimation results also suggest that strong anti-avoidance rules against tax planning (e.g. strict transfer pricing documentation requirements and interest deductibility rules, see Johansson et al., 2016b) increase the tax sensitivity of investment in industries with a strong concentration of profit-shifting MNEs. This confirms that tax planning affects the tax sensitivity of investment. Thus, tax planning opportunities may allow higher-tax rate countries to retain attractiveness as investment destinations for taxplanning MNEs, but this would come at the cost of tax distortions and losses in tax revenues. (By Stéphane Sorbe and Åsa Johansson).

Technology offers critical solutions to prevent, identify and tackle tax evasion and tax fraud, says OECD

Technological solutions offer a clear path for dramatically reducing tax evasion and tax fraud, which cost governments billions in lost revenue annually, according to a new OECD report.

Technology Tools to Tackle Tax Evasion and Tax Fraud demonstrates how technology is currently being used by tax administrations in countries worldwide to prevent, identify and tackle tax evasion and tax fraud. These solutions can offer a win-win: better detection of crime, higher revenue recovery, and synergies that can make tax compliance easier for business and tax administrations.

OECD – MODEL MANDATORY DISCLOSURE RULES FOR CRS AVOIDANCE ARRANGEMENTS AND OPAQUE OFFSHORE STRUCTURES

OECD – MODEL MANDATORY DISCLOSURE RULES FOR CRS AVOIDANCE ARRANGEMENTS AND OPAQUE OFFSHORE STRUCTURES. On 15 July 2014 the OECD published the Standard for Automatic Exchange of Financial Account Information in Tax Matters, also known as the Common Reporting Standard or CRS. Since then 102 jurisdictions have committed to its implementation in time to commence exchanges in 2017 or 2018. With exchanges under the CRS having now commenced amongst almost 50 jurisdictions there has been a major shift in international tax transparency and the ability of jurisdictions to tackle offshore tax evasion. At the same time, information from academic studies and media leaks, combined with more recent information collected through compliance activities of a number of tax administrations, as well as the results from the OECD’s disclosure initiative demonstrate that professional advisers and other intermediaries continue to design, market or assist in the implementation of offshore structures and arrangements that can be used by non-compliant taxpayers to circumvent the correct reporting of relevant information to the tax administration of their jurisdiction of residence, including under the CRS. It is against this background that the Bari Declaration, issued by the G7 Finance Ministers on 13 May 2017, called on the OECD to start “discussing possible ways to address arrangements designed to circumvent reporting under the Common Reporting Standard or aimed at providing beneficial owners with the shelter of non-transparent structures.” The Declaration states that these discussions should include consideration of “model mandatory disclosure rules inspired by the approach taken for avoidance arrangements outlined within the BEPS Action 12 Report.” The Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures contained in this report were approved by the Committee of Fiscal Affairs (CFA) on 8 March 2018. This approval does not entail endorsement as a minimum standard. The design of the model rules draws extensively on the best practice recommendations in the BEPS Action 12 Report while being specifically targeted at these types of arrangements and structures.