This report focuses on aggressive tax planning (ATP) schemes based on after-tax hedging. In general terms, after-tax hedging consists of taking opposite positions for an amount which takes into account the tax treatment of the results from those positions (gains or losses) so that, on an after-tax basis, the risk associated with one position is neutralised by the results from the opposite position. While after-tax hedging is not, of itself, aggressive – being generally a straightforward risk management technique – the report recognises that it can also be used as a feature of ATP schemes. ATP schemes based on after-tax hedging pose a threat to countries’ revenue base: empirical evidence suggests that hundreds of millions of USD are at stake, with a number of multi-billion USD transactions identified by certain countries. ATP schemes based on after-tax hedging originated in the banking sector, but experience shows that they are also used in other industries and, in some instances, also by medium-sized enterprises, thus generating an even bigger threat to tax revenue. It is therefore important that governments are aware of arrangements that use hedging for ATP purposes. The Report follows on from the 2011 OECD Report Corporate Loss Utilisation through Aggressive Tax Planning which recommends countries analyse the policy and compliance implications of after-tax hedges in order to evaluate the appropriate options available to address them. It was prepared by the ATP Steering Group of Working Party No. 10 on Exchange of Information and Tax Compliance of the Committee on Fiscal Affairs (CFA). The report builds on a number of country submissions to the OECD Directory on Aggressive Tax Planning where several ATP schemes based on after-tax hedging have been posted. After having discussed in general terms the notion of hedging as a risk management tool and the effect of taxation on hedging transactions, the report describes the features of ATP schemes based on after-tax hedging that have been encountered by a number of countries. In those schemes, taxpayers use after-tax hedging to earn a premium return, without actually bearing the associated risks, which is in effect passed on to the government. In all of these schemes there is generally no pre-existing exposure to hedge against but rather the exposure is created as part of the relevant scheme. ATP schemes based on after-tax hedging exploit the disparate tax treatment between the results (gain or loss) from the hedged transaction/risk on the one hand, and the results (gain or loss) from the hedging instrument on the other. In some of these schemes, the tax treatment of gains and losses arising from each transaction is symmetrical, while in others the tax treatment is asymmetrical. Other schemes rely on similar building blocks and are often structured around asymmetric swaps or other derivatives. ATP schemes based on after-tax hedging can exploit differences in tax treatment within one tax system and are in that sense mostly a domestic law issue. Any country that taxes the results of a hedging instrument differently from the results of the hedged transaction/risk is potentially exposed. The issue of after-tax hedging also arises in a cross-border context with groups of companies operating across different tax systems, which gives rise to additional challenges for tax administrations. The report describes the strategies used to detect and respond to these ATP schemes. Detection strategies used include advance ruling applications, audits, the ordinary dialogue between the tax administration and large businesses, and mandatory disclosure rules.
OECD Taxation Working Papers No. 33: PERMIT ALLOCATION RULES AND INVESTMENT INCENTIVES IN EMISSIONS TRADING SYSTEMS
OECD Taxation Working Papers No. 33: PERMIT ALLOCATION RULES AND INVESTMENT INCENTIVES IN EMISSIONS TRADING SYSTEMS. Free allocation of emission permits can help gain support from industry for carbon pricing – a core policy for reducing emissions. Policy makers often envisage moving from free allocation to auctioning of permits over time. Gradually phasing out free allocation and increasing the share of auctioned permits allows raising valuable public revenue at relatively low social costs. However, evidence from the EU Emissions Trading System (ETS) and the California Cap and Trade (CTP) program shows that it remains challenging to increase the share of auctioned permits. A significant share of emitters participating in emissions trading will continue to receive free permits in the foreseeable future. The paper offers a fresh perspective on the effects of permit allocation rules on low-carbon investment and the long-term impacts of permit allocation rules. The analysis adopts the point of view of an investor that chooses between a low-carbon (clean) and a high-carbon (dirty) technology to produce economically similar outputs, based on total profits. Emissions from production are subject to an emissions trading system. The investor chooses the most profitable technology in an imperfectly competitive market, so there are economic rents. The main result is that free allocation of tradable emission permits under current allocation rules has the potential to weaken incentives for firms to choose low-carbon technologies, compared to the situation where permits would be auctioned or a uniform tax were levied. The reason is, in general, that the permit allocation rules affect economic rents and, in practice, that existing rules do so in a way that tends to favour more carbon-intensive technologies. Investors value carbon-intensive technologies higher than in the absence of free allocation, as free allocation increases profits, and this risks changing the ranking of technologies in terms of profitablity. In other words, current allocation rules are often an impediment to decarbonisation. Free allocation can affect technology choice Recent empirical evidence for the EU ETS shows a negative correlation between free allocation and emission abatement. While the negative correlation could result from emitters with high abatement costs receiving more free allowances, interviews with managers from industrial emitters instead reveal lower perceived incentives for abatement and less low-carbon innovation for firms with more free allocation. The paper provides a plausible economic rationale for this behaviour. Section 2 of the paper conceptually analyses the impact of allocations on emissions. It considers a stylised example in which an investor can choose between a clean and a dirty technology to meet a given demand (e.g. wind or fossil fuels to generate a given supply of electricity). Investors choose between projects on the basis of total expected profits. Free allocation of permits affects expected profits in ways that potentially differ between technologies. The average permit price captures the effect of free allocation on total expected profits. If average carbon prices equalled marginal carbon prices, then permit allocation would not affect project rankings, so would be technology-neutral. The same could hold if average carbon prices were equal across technologies and if also carbon-free technologies received permits for free. Current allocation rules lead to weak incentives for low-carbon investment Section 3 of the paper looks at permit allocation rules in two of the world’s most prominent greenhouse gas emissions trading systems, namely the EU ETS and the California CTP. It identifies three ways in which allocation rules can affect technology choices, other than through the price signal at the margin: first, the benchmarks by which allocations are decided are not always technology-neutral; second, sticking to older and more carbon-intensive technologies can be of strategic interest; third, producing more with older and more carbon-intensive technologies can be of strategic interest. Benchmarks turn out to be a key factor that, through their effect on expected profits, can alter project rankings. They generally favour carbon-intensive technologies if they are not technology-neutral. Benchmarks are defined for categories of products, implying that product varieties within each category are considered as interchangeable – perfect substitutes. Substitute products can differ in technological properties as long as they satisfy a similar economic need. For substitute products within a benchmark category the allocation is the same, and this guarantees technology-neutrality in the sense that permit allocations do not affect technology choices. However, when products under different benchmarks are in fact substitutes satisfying similar needs, there is an incentive to opt for high-carbon technologies as these generally come with more permits. A comprehensive analysis of the impacts of non-neutral benchmarks considers both short- and long-run impacts. In the short-run it is costly, yet possible, to become informed on which products are close substitutes. While benchmarks might thus be able to approximate technology-neutrality in the short-run, our analysis suggests that there is ample room for improvement. In the long-run one cannot know about the substitutability of goods, implying that benchmarks cannot be technology-neutral over longer time horizons. Technology-neutrality of a carbon pricing mechanism requires that the treatment of a technology under that mechanism only depends on the carbon emissions generated, and nothing else. Different benchmarks for close substitutes and low ex-post average carbon rates in the EU ETS and the California CTP imply weak signals for favouring low-carbon investment projects over high-carbon projects. This results in more carbon-intensive investment compared to the case where all permits would be auctioned or a linear carbon tax would be set. (Florens Flues, Kurt van Dender).
This paper considers the influence of taxes on the financial incentive to invest in human capital and explores the tax treatment of private investment by individuals and employers in post-compulsory education and lifelong learning in 31 OECD countries, India and South Africa. The paper describes targeted personal, corporate and value added tax measures related to education and training and analyses them in terms of their impacts on the incentive to acquire skills and their distributional effects. The desirability of different forms of tax relief for skills formation is examined from the point of view of efficiency, equity and administrative simplicity within the broader context of fiscal policy and the role of government in skills formation beyond compulsory education. This paper was prepared for the OECD Skills Strategy (www.skills.oecd.org). It draws on information provided by Delegates to Working Party No. 2 on Tax Policy Analysis and Tax Statistics of the Committee on Fiscal Affairs of the OECD. The author thanks these Delegates as well as Delegates of the OECD Skills Strategy Advisory Group for their helpful comments on earlier drafts. The arguments employed and opinions expressed in this paper do not necessarily reflect the official views of the Organisation or of the governments of its member countries. The author is also grateful for comments provided by Bert Brys, Stephen Matthews, Alastair Thomas and Steve Clark, all from the OECD Centre for Tax Policy and Administration. The author is responsible for any remaining errors. This document and any map included in it are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. (Carolina Torres).
OECD – REVISED GUIDANCE ON THE APPLICATION OF THE TRANSACTIONAL PROFIT SPLIT METHOD INCLUSIVE FRAMEWORK ON BEPS: ACTIONS 10
OECD – REVISED GUIDANCE ON THE APPLICATION OF THE TRANSACTIONAL PROFIT SPLIT METHOD INCLUSIVE FRAMEWORK ON BEPS: ACTIONS 10. The guidance set out in this report responds to the mandate under Action 10 of the BEPS Action Plan, which required the development of: “… rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: … (ii) clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains;…” The OECD Transfer Pricing Guidelines have included guidance on the transactional profit split method since their first iteration in 1995. Since the revision to the Guidelines in 2010, the transactional profit split method has been applicable where it is found to be the most appropriate method to the case at hand. This basic premise is unchanged. However, this revised guidance, while not being prescriptive, clarifies and significantly expands the guidance on when a profit split method may be the most appropriate method. It describes presence of one or more of the following indicators as being relevant: Each party makes unique and valuable contributions; The business operations are highly integrated such that the contributions of the parties cannot be reliably evaluated in isolation from each other; The parties share the assumption of economically significant risks, or separately assume closely related risks. The guidance makes clear that while a lack of comparables is, by itself, insufficient to warrant the use of the profit split method, if, conversely, reliable comparables are available it is unlikely that the method will be the most appropriate. The revised text also expands the guidance on how the profit split method should be applied, including determining the relevant profits to be split, and appropriate profit splitting factors. Sixteen examples are included in the revised guidance to illustrate the principles discussed in the text, and demonstrate how the method might be applied in practice. These will be included in Annex II to Chapter II of the Guidelines.
OECD – GUIDANCE FOR TAX ADMINISTRATIONS ON THE APPLICATION OF THE APPROACH TO HARD-TO-VALUE INTANGIBLES
OECD – GUIDANCE FOR TAX ADMINISTRATIONS ON THE APPLICATION OF THE APPROACH TO HARD-TO-VALUE INTANGIBLES. INCLUSIVE FRAMEWORK ON BEPS: ACTION 8. Action 8 of the Action Plan on Base Erosion and Profit Shifting mandated the development of transfer pricing rules or special measures for transfers of hard-to-value intangibles (HTVI) aimed at preventing base erosion and profit shifting by moving intangibles among group members. The outcome of that work is the approach to hard-to-value intangibles, which is found in the 2015 Final Report for Actions 8-10, “Aligning Transfer Pricing Outcomes with Value Creation” (BEPS TP Report) and it was formally incorporated into the Transfer Pricing Guidelines, as Section D.4 of Chapter VI. The HTVI approach protects tax administrations from the negative effects of information asymmetry by ensuring that tax administrations can consider ex post outcomes as presumptive evidence about the appropriateness of the ex-ante pricing arrangements. At the same time, the taxpayer has the possibility to rebut such presumptive evidence by demonstrating the reliability of the information supporting the pricing methodology adopted at the time the controlled transaction took place. The BEPS TP Report also mandated the development of guidance for tax administrations on the application of the HTVI approach. Under this mandate, the Committee on Fiscal Affairs issued a public discussion draft in May 2017, inviting interested parties to submit comments on the proposed guidance for tax administration on the application of the HTVI approach. The guidance contained in this report aims at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the HTVI approach. This guidance should improve consistency and reduce the risk of economic double taxation. In particular, the new guidance: · Presents the principles that should underlie the application of the HTVI approach by tax administrations; · Provides a number of examples clarifying the application of the HTVI approach in different scenarios; and · Addresses the interaction between the HTVI approach and the access to the mutual agreement procedure under the applicable tax treaty. The guidance for tax administration on the application of the HTVI approach contained in this document has been incorporated into the Transfer Pricing Guidelines as an annex to Chapter VI.
OECD Taxation Working Papers N. 3 – Making Fundamental Tax Reform Happen. This paper discusses the objectives of tax reform and explores the most important environmental factors that influence the reform process, focusing on the circumstances that explain when these objectives and environmental factors may become an obstacle to the design and implementation of tax policies. The second part of this paper discusses strategies that might help policy makers to successfully implement fundamental tax reforms. Countries often succeed in implementing fundamental tax reforms. Sometimes, however, tax reform proposals never leave the drawing boards of studies departments or ministries of finance. In other cases, the tax reforms that are implemented have been revised to such an extent during the reform process that they no longer – or only partially – serve the original tax reform objectives. It also happens that the initial reform objectives are scaled down “pre-emptively”, as policy makers anticipate the obstacles that will have to be overcome and conclude that the cost would be too high or the prospects for success too uncertain to justify risking their political capital. In order to make fundamental tax reforms happen, policy makers have to be aware of the major challenges they are likely to face during the tax reform process. Fundamental tax reforms go beyond small changes in tax rates and provisions. They can be confined to one tax, as for instance a value-added tax (VAT) or personal income tax (PIT) base-broadening reform that finances a cut in the statutory rate of the tax, or they can involve a more complex package of tax increases and reductions. Fundamental tax reforms can be designed to be revenue neutral – either in the first year after implementation or in the following years – or to increase or decrease tax revenues. They can be systemic, involving fundamental changes in tax rules and structures, or they can be limited parametric changes in existing taxes. Examples of systemic reforms are the dual income tax reforms in the Scandinavian countries; the 2006 reform introducing an allowance for shareholder equity in Norway; the 2001 presumptive capital income tax reform in the Netherlands; the 2004 flat tax reform in the Slovak Republic; and the introduction of the alternative minimum corporate tax (IETU) in Mexico in 2008. An example of a parametric reform is the VAT rate increase in Germany in 2007, which financed a decrease in social security contributions. Policy makers have been successful in implementing tax reforms, as can be observed indirectly from changes in the tax mix over time (OECD, 2009a). Despite some significant differences in the distribution of the tax burden between tax instruments across countries, most OECD governments continue to extract the bulk of their revenue from three main sources: income taxes; taxes on goods and services; and social security contributions. On average, there has been a reduction in the share of tax revenue accounted for by personal income tax partly because of the introduction of “make-work-pay” policies targeted mainly at lower income workers and reductions in the top PIT rates in many countries in order to stimulate human capital formation, entrepreneurship and risk taking. Another recent trend in the taxation of personal income is that some OECD countries, particularly in Scandinavia, have introduced dual tax systems, which tax personal capital income at low and proportional rates, while labour income continues to be taxed at high and progressive rates. Several other countries have moved towards “semi-dual” personal income taxes. There has also been a continuously growing share of social security contributions, which are often levied at flat rates. Corporate income tax (CIT) rates have been reduced in many countries since the beginning of the 1980s. The share of the CIT in total tax revenues, however, has increased in the majority of the OECD countries, thanks largely to base-broadening measures, increased firm profitability as a result of globalisation (at least prior to the crisis) and greater incentives for businesses to incorporate – implying that the revenue effects of lower CIT rates will partly show up in lower PIT revenues (OECD, 2007). The increasing share of the financial sector in the value added of the business sector has also played a role, although this trend may now have come to an end. A growing feature of corporate tax systems is the use of tax credits or special deductions for research and development (R&D) expenditures.
OECD Taxation Working Papers, N. 36 – Domestic Revenue Mobilisation: A new database on tax levels and structures in 80 countries
OECD Taxation Working Papers, N. 36- Domestic resource mobilisation is critical to fund government services and to support development. Taxes are a critical domestic revenue source that can also impact other social or economic outcomes. Understanding differences in the level and structure of tax revenues is therefore foundational to discussions of domestic resource mobilisation and of tax reform. This paper presents evidence on the level and structure of tax revenues in 80 countries, drawing on the new Global Revenue Statistics Database. It compares tax-to-GDP ratios and tax structures across countries, regions and over time. Links between tax-to-GDP ratios, GDP per capita and tax structures are assessed in a correlation analysis. The new database provides invaluable insights for researchers and fiscal policy analysts and offers a high level of comparability and reliability.
The work of the Centre for Tax Policy and Administration (CTPA) has changed dramatically in recent years, including in relation to the role of development and developing countries in our work. I am proud that an increasing number of developing countries are now integrated into our work, as equal members of the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) and the OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework), with a voice on the creation and implementation of new international tax standards. This has been an evolving process. As globalisation increased, the challenges of cross-border taxation have extended beyond the OECD membership, and the CTPA accelerated our dialogue with developing countries accordingly. This started with our Global Relations Programme (GRP) in the early 90’s which has provided training and capacity building for over 25 000 tax officials from the developing world. Since then, we have created a Task Force on Tax and Development, we have expanded our Global Revenue Statistics database to cover more than 90 countries by the end of 2018, we have established audit programmes through our Tax Inspectors Without Borders (TIWB) initiative and we have set up tax crime investigation academies throughout the world. Of greatest significance however has been the establishment of the Global Forum and the Inclusive Framework, which have brought dozens of developing countries into the heart of the work of the CTPA. This has fundamentally changed the nature of how we operate, ensuring development is an integral concern across all of our work. It has also raised expectations as the CTPA is now seen as a key actor in the Domestic Resource Mobilisation (DRM) agenda. This process has been inspired by the wider development landscape, most recently with the Addis Ababa Action Agenda (AAAA) and the Sustainable Development Goals (SDGs). These agreements provide both a framework and a vision for how we can continue to develop international co-operaton in taxation to benefit development. The CTPA has been, and will continue to be, inspired by that vision that sees development as a universal agenda, and we will continue to mainstream development across all of our work. This booklet sets out how we have been doing this, and how we intend to do more in the future. (2018-19).
OECD – PUBLIC CONSULTATION DOCUMENT. GLOBAL ANTI-BASE EROSION PROPOSAL (“GLOBE”) – PILLAR TWO. 8 November 2019 – 2 December 2019. Tax Challenges Arising from the Digitalisation of the Economy. Background In May 2019 the Inclusive Framework agreed a Programme of Work for Addressing the Tax Challenges of the Digitalisation of the Economy. The Programme of Work is divided into two pillars: Pillar One addresses the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules; Pillar Two (also referred to as the “Global Anti -Base Erosion” or “GloBE” proposal) calls for the development of a co-ordinated set of rules to address ongoing risks from structures that allow MNEs to shift profit to jurisdictions where they are subject to no or very low taxation. The Secretariat has prepared a proposed “Unified Approach” under Pillar One that is based on the significant commonalities between the various profit allocation and nexus proposals. The Secretariat released a public consultation document on this unified approach on 9 October 2019.
OECD – PUBLIC CONSULTATION DOCUMENT. SECRETARIAT PROPOSAL FOR A “UNIFIED APPROACH” UNDER PILLAR ONE. 9 October 2019 – 12 November 2019 Background The Programme of Work (PoW) adopted by the Inclusive Framework on BEPS at its meeting of 28-29 May 2019, and approved by the G20 Finance Ministers and Leaders at their respective meetings in Japan in June 2019, provides for two pillars to be developed, on a without prejudice basis, with a consensus solution to be agreed by the end of 2020. For Pillar One, the PoW allocates work to explore the three proposals articulated so far, but recognises that for a solution to be delivered in 2020, the outlines of a unified approach would need to be agreed by January 2020. This outline will have to reduce the number of options available and bridge the remaining gaps to facilitate the task of arriving at a consensus on a unified approach to Pillar One in 2020. Consistent with that objective and to help expedite progress towards reaching a consensus solution to Pillar One issues, the Secretariat prepared a proposed “Unified Approach”. It is built on the significant commonalities identified in the PoW, takes account of the views expressed during the March Public Consultation in Paris, and seeks to consider the diferente positions of the members of the Inclusive Framework. This proposal was discussed by the Task Force on the Digital Economy (TFDE) at its meeting on 1 October 2019 and is now released to the public for comments. Public Consultation The public consultation meeting on the proposed “Unified Approach” to deal with Pillar One issues will be held on 21 and 22 November 2019 at the OECD Conference Centre in Paris, France. The objective is to provide external stakeholders an opportunity to provide input in to the ongoing work. Another separate public consultation meeting on Pillar Two issues will be organised in December 2019, and the related public consultation document is expected to be released in early November 2019.