The latest edition of the OECD Model Tax Convention has been released today, incorporating significant changes developed under the OECD/G20 project to address base erosion and profit (BEPS).
OECD – INCLUSIVE FRAMEWORK ON BEPS. PROGRESS REPORT JULY 2016-JUNE 2017. The OECD/G20 Project to address Base Erosion and Profit Shifting (“BEPS”) was launched following a request by G20 Leaders in June 2012 to identify the key issues that lead to BEPS. The OECD’s February 2013 report, Addressing BEPS, became the basis for the 15-point BEPS Action Plan which was endorsed by the OECD Council, as well as by G20 Leaders at their July 2013 Summit in Saint Petersburg. Organised around three pillars, the objectives of the Project were to (i) reinforce the coherence of corporate income tax rules at the international level, (ii) realign taxation with the substance of the economic activities, and (iii) improve transparency. As a result of an ambitious work programme that was completed in only two years, the BEPS package of 15 measures was delivered in October 2015. The package of measures was developed by 44 countries including all OECD and G20 Members participating on an equal footing, as well as through widespread consultations with more than 80 other jurisdictions in addition to input from stakeholders including business, academics and civil society. In parallel, based on a 2014 survey of the top priority BEPS-related issues facing low income countries, the OECD had begun work with other international organisations on a series of toolkits for low capacity countries to try to address these issues in a practical way. The Inclusive Framework on BEPS – In September 2015, the G20 Finance Ministers called on the OECD to build “a framework by early 2016 with the involvement of interested non-G20 countries and jurisdictions, particularly developing economies, on na equal footing”. The G20 Leaders reiterated this request in their November 2015 communiqué: To reach a globally fair and modern international tax system, we endorse the package of measures developed under the ambitious G20/OECD Base Erosion and Profit Shifting (BEPS) project. Widespread and consistent implementation will be critical in the effectiveness of the project, in particular as regards the exchange of information on cross-border tax rulings. We, therefore, strongly urge the timely implementation of the project and encourage all countries and jurisdictions, including developing ones, to participate. To monitor the implementation of the BEPS project globally, we call on the OECD to develop an inclusive framework by early 2016 with the involvement of interested non-G20 countries and jurisdictions which commit to implement the BEPS project, including developing economies, on an equal footing. In February 2016, the proposed architecture of the Inclusive Framework on BEPS (“the Inclusive Framework”) was endorsed by G20 Finance Ministers, and its inaugural meeting was held in Japan in June 2016. Today, 100 countries and jurisdictions have joined the Inclusive Framework, and, having all committed to implement the BEPS package, are now progressing the Inclusive Framework’s mandate, which is to: i. Review the implementation of the 4 BEPS minimum standards; ii. Gather data for the monitoring of the other aspects of implementation, including under BEPS Actions 1 (on the tax challenges of the digital economy) and 11 (on measuring and monitoring BEPS); iii. Finalise the remaining technical work to address BEPS challenges; and iv. Support jurisdictions in their implementation of the BEPS package, including by providing further guidance on the standards and by developing toolkits for low income countries. This report – This report by the Inclusive Framework on BEPS presents the current state of play in progressing its mandate, covering the period from July 2016 to June 2017. Part 1 of the report sets out the progress made in implementation of the BEPS package, including the four minimum standards, and also highlights the impact on BEPS activities that these measures are already having. Part 2 outlines the work of the Inclusive Framework in this 12-month period: the establishment of the peer review processes, the ongoing standard-setting work and delivery of guidance on implementation, as well as the assistance being delivered, often in partnership with other international organisations and regional bodies, to ensure all countries and jurisdictions are supported in the BEPS implementation process.
OECD – BACKGROUND BRIEF. Inclusive Framework on BEPS. The international tax landscape has changed dramatically in recent years as a result of economic challenges, and new standards have been developed to enable countries protect their revenue bases. With a conservatively estimated annual revenue loss of USD 100 to 240 billion due to base erosion and profit shifting (BEPS), the stakes are high for governments around the world. With the political support of the G20 Leaders, OECD and G20 countries have taken joint action to address the weaknesses within the international tax system that create opportunities for BEPS. Working with other countries, they have developed a comprehensive package of measures to tackle BEPS: the BEPS package. Countries and jurisdictions are now working together on implementing the BEPS package consistently on a global basis, and to develop further standards to address remaining BEPS issues. To these ends, the decision making body for the OECD’s tax work – the OECD Committee on Fiscal Affairs (CFA) – had been opened up to interested countries and jurisdictions in order to put in place an Inclusive Framework on BEPS. The Inclusive Framework on BEPS held its first meeting on 30 June – 1 July 2016 in Kyoto, Japan, and the second on 26 – 27 January 2017 in Paris, France. Members of the framework work on an equal footing to tackle tax avoidance, to improve the coherence of international tax rules, and to ensure a more transparent tax environment. In particular, the framework: – develops standards in respect of remaining BEPS issues; – will review the implementation of agreed minimum standards through an effective monitoring system; – monitors BEPS issues, including tax challenges raised by the digital economy; and – facilitates the implementation processes of the Members by providing further guidance and by supporting development of toolkits to support low-capacity developing countries. Joining the Inclusive Framework offers the opportunity to interested countries and jurisdictions to participate in the BEPS related work on an equal footing with other OECD and G20 countries. Being part of the Inclusive Framework on BEPS will facilitate the implementation, as well as the peer review processes of the Members, by providing them further guidance and support, including guidance covered by the Platform for Collaboration on Tax established among the IMF, the OECD, the UN and the World Bank Group.
OECD – 2017 UPDATE TO THE OECD MODEL TAX CONVENTION. This note includes the contents of the 2017 update to the OECD Model Tax Convention (the 2017 Update). The 2017 Update was approved by the Committee on Fiscal Affairs on 28 September 2017 and by the OECD Council on 21 November 2017. The 2017 Update primarily comprises changes to the OECD Model Tax Convention (the OECD Model) that were approved as part of the BEPS Package or were foreseen as part of the follow-up work on the treaty-related BEPS measures. These changes include the following: • Changes to the Title and Preamble of the OECD Model, as well as to its Introduction, and related Commentary changes contained in the Report on Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances). • The addition of new paragraph 2 to Article 1 (the transparent entity provision) and of related Commentary changes. These changes appear in Chapter 14 of the Report on Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements). • The addition of new paragraph 3 to Article 1 (the “saving clause”) and of related Commentary changes. These changes appear in the Report on Action 6. • Changes to the section of the Commentary on Article 1 on “Improper use of the Convention”, which include optional provisions to deny treaty benefits with respect to income benefiting from “special tax regimes” and in cases of certain subsequent changes to the domestic law of a treaty partner after the conclusion of a tax treaty. Draft proposals for these optional provisions were included in the Report on Action 6, which noted that the proposals would be reviewed in the light of similar proposals which had been released by the United States for public comment in September 2015. The optional provisions on “special tax regimes” and on subsequent changes to domestic law, as they appear in the 2017 Update, were finalised accordingly.
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 is being 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 are likewise making 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 November 2017.
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).
OECD Taxation Working Papers N. 32: Legal tax liability, legal remittance responsibility and tax incidence
Legal tax liability, legal remittance responsibility and tax incidence. THREE DIMENSIONS OF BUSINESS TAXATION.