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.

OECD Taxation Working Papers N. 3- LOSS CARRYOVER PROVISIONS. MEASURING EFFECTS ON TAX SYMMETRY AND AUTOMATIC STABILISATION

OECD Taxation Working Papers N. 3- LOSS CARRYOVER PROVISIONS. MEASURING EFFECTS ON TAX SYMMETRY AND AUTOMATIC STABILISATION. This paper presents two tax policy indices capturing the effects of various carryover provisions on tax symmetry and stabilisation across a total of 34 OECD and non-OECD countries. The tax symmetry index captures the effectiveness of carryover provisions, including carry-forwards and carry-backs, relative to full symmetry, while the stabilisation index captures the proportion of an adverse revenue shock on loss-making firms which is absorbed by the corporate tax system. The indices incorporate country-level information on corporate tax carry-forwards and carry-backs including restrictions regarding the timing as well as the amount of tax losses which can be offset in a given fiscal period; it has been collected through a WP2 questionnaire in 2016. While group-level consolidation is not addressed, the focus of this study is intertemporal loss offsetting. The main results are as follows: · Ideally, unlimited carry-backs and carry-forwards should be provided and tax losses should be indexed to inflation to maintain their real value over time. In this case corporate taxation would be symmetric, removing tax-induced distortions towards less risky projects and increasing stabilisation effects of corporate taxation. · However, in our sample only 18 provide unlimited carry-forwards and most countries do not index tax losses to inflation; perfect tax symmetry is therefore not achieved by the majority of the included corporate tax systems. · 16 countries limit carry-forward periods to a certain amount of years; 8 countries limit the amount of tax losses which can be offset in any given year. Depending on the duration and intensity of the loss period these limitations can have different effects on the two tax indices. · Given that most countries do not index tax losses carried forward to inflation, carry-backs are an effective policy, which helps to increase tax symmetry and stabilisation. In the sample only 9 countries provide carry-backs. There can be important interactions between carryover provisions and accelerated depreciation. Since depreciation allowances are typically carried forward as part of tax losses, more acceleration implies an increase in the adverse effects of a given restriction. (Tibor Hanappi).

OECD – Consultation document – PREVENTING ABUSE OF RESIDENCE BY INVESTMENT SCHEMES TO CIRCUMVENT THE CRS

OECD – Consultation document – PREVENTING ABUSE OF RESIDENCE BY INVESTMENT SCHEMES TO CIRCUMVENT THE CRS (19 February 2018 – 19 March 2018). 1. More and more jurisdictions are offering “residence by investment” (RBI) or “citizenship by investment” (CBI) schemes. These are schemes that allow foreign individuals to obtain citizenship or temporary or permanent residence rights in exchange for local investments or against a flat fee. 2. Individuals may be interested in these schemes for a number of legitimate reasons, including greater mobility thanks to visa-free travel, better education and job opportunities for children, or the right to live in a country with political stability. 3. At the same time, they can also offer a backdoor to money-launderers and taxevaders. In this regard, information released in the market place and obtained through the OECD’s CRS public disclosure facility, highlights the abuse of RBI and CBI schemes to circumvent reporting under the Common Reporting Standard (CRS). 4. The OECD is looking into this matter as part of its CRS loophole strategy. This document (1) assesses how these schemes can be exploited in an attempt to circumvent the CRS; (2) identifies the types of schemes that present a high risk of abuse; (3) reminds stakeholders of the importance of correctly applying relevant CRS due diligence procedures in order to help prevent such abuse; and (4) explains next steps the OECD will undertake to further address the issue, assisted by public input. 5. Public input is sought both to obtain further evidence on the misuse of CBI/RBI schemes and on effective ways for preventing such abuse. Such input will be taken into account in determining the next steps that will be taken. Interested parties are invited to send their comments on this consultation draft by 19 March 2018 at the latest by email to CRS.Consultation@oecd.org in Word format (in order to facilitate their distribution to government officials). They should be addressed to the International Co-operation and Tax Administration Division, OECD/CTPA. Comments in excess of ten pages should attach an executive summary limited to two pages.

OECD – EFFECTIVE INTER-AGENCY CO-OPERATION IN FIGHTING TAX CRIMES AND OTHER FINANCIAL CRIMES THIRD EDITION. Part I: Analysis, Key Findings and Recommendations Part II: Country Information

OECD – EFFECTIVE INTER-AGENCY CO-OPERATION IN FIGHTING TAX CRIMES AND OTHER FINANCIAL CRIMES THIRD EDITION. Part I: Analysis, Key Findings and Recommendations Part II: Country Information. 1. Financial crimes are growing in sophistication and criminals accumulate significant sums of money through offences such as drug trafficking, investment fraud, extortion, corruption, embezzlement, tax evasion and tax fraud. The nature of financial crime means that the same activity may violate a number of different laws. Different government agencies may be involved at various stages of tackling financial crimes, including the prevention, detection, investigation and prosecution of offences and the recovery of the proceeds of crime. Tax offences are often intrinsically linked to other financial crimes as criminals fail to report their income from illicit activities for tax purposes. Conversely, criminals may over-report income in an attempt to launder the proceeds of crime. The Financial Action Task Force (“FATF”) has explicitly recognised the linkages between tax crimes and money laundering by adding tax crimes to the list of designated predicate offences for money laundering purposes in the 2012 update of its Recommendations.

OECD – BEPS ACTION 13. Guidance on the Implementation of Country-by-Country Reporting

OECD – BEPS ACTION 13. Guidance on the Implementation of Country-by-Country Reporting. All OECD and G20 countries have committed to implementing country by country (CbC) reporting, as set out in the Action 13 Report “Transfer Pricing Documentation and Country-by-Country Reporting”. Recognising the significant benefits that CbC reporting can offer a tax administration in undertaking high level risk assessment of transfer pricing and other BEPS related tax risks, a number of other jurisdictions have also committed to implementing CbC reporting (which with OECD members form the “Inclusive Framework”), including developing countries. Jurisdictions have agreed that implementing CbC reporting is a key priority in addressing BEPS risks, and the Action 13 Report recommended that reporting take place with respect to fiscal periods commencing from 1 January 2016. Swift progress has been made in order to meet this timeline, including the introduction of domestic legal frameworks and the entry into competent authority agreements for the international exchange of CbC reports. MNE Groups have likewise made preparations for CbC reporting, and dialogue between governments and business is a critical aspect of ensuring that CbC reporting is implemented consistently across the globe. Consistent implementation will not only ensure a level playing field, but also provide certainty for taxpayers and improve the ability of tax administrations to use CbC reports in their risk assessment work. The OECD will continue to support the consistent and swift implementation of CbC reporting. Where questions of interpretation have arisen and would be best addressed through common public guidance, the OECD will endeavour to make this available. The guidance in this document is intended to assist in this regard. Some questions and answers refer to articles of the Model Legislation related to Countryby-Country Reporting contained in the Action 13 Report (“Model Legislation”). Such references do not mean that countries’ domestic legislation should follow word-for-word the provisions in the Model Legislation. As indicated in paragraph 61 of the Action 13 Report “jurisdictions will be able to adapt this model legislation to their own legal systems, where changes to current legislation are required”. Countries’ domestic legal framework should however, be substantively consistent with the Model Legislation. Updated February 2018.  

OECD Environment Working Papers n° 88: COMPETITIVENESS IMPACTS OF THE GERMAN ELECTRICITY TAX

OECD Environment Working Papers n° 88: COMPETITIVENESS IMPACTS OF THE GERMAN ELECTRICITY TAX. Proposals to increase environmentally related taxes are often challenged on competitiveness grounds. The concern is that value creation in certain sectors might decline domestically if a country introduces environmentally related taxes unilaterally. Furthermore, environmental goals might not be reached if pollution shifts abroad. A competing view argues that properly implemented environmentally related taxes foster innovation, thereby boosting productivity and competitiveness. Empirical research is needed to gain insight into the strength of these various effects. This paper provides evidence on the short-term competitiveness impacts of the German electricity tax introduced unilaterally in 1999. Germany’s manufacturing sector uses significant amounts of electricity, and to counteract potential negative effects on competitiveness, relief was provided: firms using more electricity than specified thresholds benefitted from reduced electricity tax rates. The tax reduction amounted up to EUR 14.6 per megawatt hour, about 80% of the full tax rate. When measured as an effective rate on the carbon content in the average unit of electricity, the electricity tax translates into EUR 44.4 per tonne of carbon dioxide, indicating the magnitude of the tax. The econometric analysis – a regression discontinuity design – shows no robust effects in either direction of the reduced electricity tax rates on firms’ competitiveness. Firms subject to the full tax rates, but otherwise similar to firms facing reduced rates, did not perform worse in terms of turnover, exports, value added, investment and employment. The analysis questions the relevance of the tax reduction for competitiveness reasons and suggests that it could be gradually removed. The energy use threshold, above which a reduced tax rate applies, could be raised over time and competitiveness impacts monitored. (…) The German electricity tax was introduced in 1999 with the goal of improving energy efficiency and allowing a lowering of labour costs. The new electricity tax increased the price on electricity, thus providing incentives to reduce electricity-use. The revenues are utilised to lower social security contributions, and thereby overall labour costs. The electricity tax is levied on electricity-use as an ad-quantum excise duty. The current full rate is EUR 20.5 per MWh. Compared to the average yearly wholesale price for electricity, which ranged from about EUR 30 to EUR 65 per MWh between 2003 and 2010 (EEX, 2014), the tax rate is significant in size. It implies an effective tax on the carbon content in the average unit of electricity of EUR 44.4 per tonne of carbon dioxide (CO2). Although this calculation boldly assumes that the generation mix of electricity would not change, if the tax was levied on CO2 instead of on electricity, it gives an alternative indication of the significance of the electricity tax. The government, which was concerned that the electricity tax could harm the competitiveness of the most energy-intensive firms, took at least two measures. First, it introduced the electricity tax in several steps until the full rate was reached in 2003, giving firms time to adjust to higher electricity prices. Second, it provided relief to manufacturing sectors through reduced tax rates. The reduced tax rates apply from certain thresholds of electricity-use onwards. While every electricity-user has to pay the same tax rate for any use below the threshold, firms in the manufacturing sector are eligible for a reduced marginal tax rate for any use above the threshold. Table 1 provides an overview of the development of the full and reduced marginal tax rates, as well as the electricity-use thresholds for reduced marginal tax rates. The electricity tax is an indirect tax that is levied on the supply of electricity. Consequently, every firm pays the full tax rate when it settles the invoice of the electricity provider. The tax reduction scheme is implemented through reimbursement. Firms whose electricity-use exceeds the threshold may request reimbursement from the local tax and customs agency. Flues, F. and B. Lutz (2015).

OECD – INTERNATIONAL COMPLIANCE ASSURANCE PROGRAMME. PILOT HANDBOOK. WORKING DOCUMENT

OECD – INTERNATIONAL COMPLIANCE ASSURANCE PROGRAMME. PILOT HANDBOOK. WORKING DOCUMENT. 1. The International Compliance Assurance Programme (ICAP) is a programme for a multilateral cooperative risk assessment and assurance process. It is designed to be a swift and coordinated approach to providing multinational groups (MNE groups) willing to engage actively, openly and in a fully transparent manner with increased tax certainty with respect to certain of their activities and transactions, while identifying areas requiring further attention. ICAP does not provide an MNE group with legal certainty as may be achieved, for example, through an advance pricing agreement, but gives assurance where tax administrations participating in the programme consider a risk to be low. 2. This handbook contains information on a pilot for ICAP, which commences in January 2018 including tax administrations from eight jurisdictions (the participating tax administrations): Australia, Canada, Italy, Japan, the Netherlands, Spain, the United Kingdom and the United States. The information contained in this handbook will be revised based on experiences gained in the pilot, and will be used as the basis for an ICAP Operating Manual, which will describe in detail the process to be applied beyond the pilot. 3. The process of the pilot can be summarised as follows. • In advance of the pilot launch, a number of MNE groups have been identified, which have headquarters in the jurisdictions of one of the eight participating tax administrations. It has been agreed with the MNE group which jurisdictions of participating tax administrations will be covered by its ICAP risk assessment (i.e. these will be the covered tax administrations). All MNE groups and participating tax administrations will be invited to participate in a Participant Orientation Event, to be held in Washington DC in January 2018, hosted by the IRS. • Following the Participant Orientation Event, MNE groups participating in the pilot will be invited to provide a package of documentation, the content of which is set out in this handbook. Depending on the approach agreed between the MNE group and the tax administration in its headquarter jurisdiction (the lead tax administration), this package may be delivered by the MNE group (i) to each covered tax administration directly, or (ii) to the lead tax administration, which shares the package with other covered tax administrations through existing tax information exchange agreements. Approximately six weeks after the documentation package is provided, a kick-off meeting will be held between the MNE group and all covered tax administrations, to discuss the documentation package and ensure a common understanding of its content and the process to be followed. • The covered tax administrations then conduct an assessment of the transfer pricing risks and permanent establishment risks (the covered risks) posed by the MNE group, based on the information contained in the documentation package and other information held by the covered tax administrations. This will begin with a high level initial risk assessment (a Level 1 risk assessment) but may be extended to more in-depth risk assessment (a Level 2 risk assessment) if required. The covered tax administrations will seek to gain assurance that the MNE group poses no or low risk for each of the covered risks, within the timeframes described in this handbook. At the end of the risk assessment process, and subject to domestic requirements and processes, each covered tax administration will issue an outcome letter to the MNE group, which will set out each of the covered risks where the tax administration has been able to gain assurance, and any identified tax risks that remain. • The ICAP process and the pilot is based on a collaborative working relationship between the MNE group and covered tax administrations, built on transparency, cooperation and trust. Throughout this process, the lead tax administration will engage in regular and timely communication with the MNE group to ensure it is kept abreast of the status of its risk assessment and any issues as they arise. 2018