- The underlying drivers of corporate tax base erosion are international in nature, and beyond the scope of any one country, acting alone, to resolve. Addressing the threat posed to the corporate tax bases of countries from base erosion and profit shifting will inevitably require effective multilateral action.
- An effective strategy of international engagement on BEPS will be critical to achieving an improved international tax framework and avoiding outcomes that are inconsistent with Australia's national interest. In this context, a critical issue for Australia to consider is how to engage internationally in order to encourage and build momentum for effective multilateral action.
- This includes what forums we seek to progress this work through, how much and how we engage in order to have the greatest impact, and how international action is structured and monitored to keep up momentum over the medium to longer term.
- The successful implementation of major tax reform within a country requires the disparate and at times conflicting interests of different groups within the community to be managed. In particular, the implementation and durability of reforms can be critically affected by how national governments engage with those made worse off as a result — even where the reforms are generally agreed to result in national net benefits (Brys, 2010).
- These challenges are even greater when dealing with multilateral reforms, as the costs and benefits of reform are unevenly distributed between, as well as within, countries (De Serres, et al., 2011).
- In the context of multilateral tax reforms, different countries will have different interests. The perspective of a large, capital exporting developed economy will differ from that of a small capital importing emerging economy. In practice, however, classification of a country's national interest is rarely this straight forward, as it reflects the net result of a range of interests. For example, Australia is an example of a country that is a net capital importer that also exports a significant amount of capital. Moreover, as countries develop their interests can change significantly over time.
- This highlights the difficulty in achieving significant multilateral reform on an issue as central to national sovereignty as taxation. That said, the progress made in recent years by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) demonstrates that achieving multilateral reform is indeed possible. While efforts to improve international co-operation and information sharing on tax matters had been in place for some time prior to the global financial crisis, progress had been relatively modest. The political support of G20 Leaders in the aftermath of the global financial crisis, including the threat of sanctions, crystallised the implementation of previous commitments, and ensured all major offshore financial centres were members of the Global Forum. While the process is far from complete, this has started to change international practice, as member countries and jurisdictions respond to the recommendations of peer review reports and more than 800 agreements that provide for the exchange of information in tax matters have been signed by various jurisdictions.
- It is also important to note that the alternative to multilateral tax reform is not necessarily the maintenance of the status quo. As the OECD has highlighted, in the absence of a credible plan for multilateral reform, it is likely that at least some countries will take unilateral action to protect (or expand) their tax bases, potentially resulting in double taxation and/or increased disputes between national governments, adversely affecting cross-border trade and investment.
- Like other countries, Australia's approach to multilateral reform initiatives is ultimately grounded in its national interest. However, Australia has long recognised the limits of its ability to protect its interests by asserting its power based on economic weight.
- As a middle power, Australia has the opportunity to have its views listened to in international forums. Australia is traditionally most influential in multilateral forums when it presents views within a principled framework, advocating rules-based approaches. This reflects a view that Australia's interests are usually best served by using its influence to advance initiatives that result in a net global benefit.
- In practice, this means that Australia has an active interest in the effective functioning of multilateral institutions. The mix and nature of Australia's relationships means that we are well placed to provide technical and political leadership on multilateral tax reform. Australia is a modern, sophisticated knowledge economy with a high level of commodity exports that is both a significant importer and exporter of foreign direct investment and one of the largest fund management sectors in the world.
- A key issue for progressing multilateral tax reform is the role that different international forums, such as the OECD and G20, can play that best reflects their relative strengths.
- The OECD is widely acknowledged as the pre-eminent multilateral institution on tax technical matters. As an organisation that operates on a consensus basis, with well-established links for consulting with business, the tax profession and civil society, it has a track record of achieving outcomes with broad agreement. However, seeking consensus can take a long period to be concluded and can limit the scope and ambition of reform.
- The OECD Action Plan proposes a joint OECD/G20 project on Base Erosion and Profit Shifting. The OECD's acknowledged technical expertise makes it the logical forum for the development and implementation of technical improvements to the international tax framework. The G20 brings together senior decision makers from a broadly representative group of countries, giving it an important role to play in ensuring broad political ownership of the technical work of the OECD.
- Under this approach, non-OECD G20 countries would participate in all discussions within the OECD on Action Items on an equal footing. In addition, non-OECD G20 countries will be represented on the 'CFA Bureau Plus',28 the group that will oversee the overall base erosion and profit shifting project.
- As G20 chair in 2014, Australia can play a prominent role in determining and driving the base erosion and profit shifting reform agenda.
- As a member of the OECD, Australia is represented in all of the OECD working groups and committees involved in progressing the OECD/G20 BEPS project. This representation is usually through Australian government officials (usually from the Treasury, ATO or Department of Foreign Affairs and Trade).
- Australian officials involved in the BEPS project will also consult with stakeholders throughout the project. In addition, both the OECD and G20 have established liaison groups to bring business, academic and civil society contributions into policy considerations.
- Australia can also encourage and enable countries in the region to actively participate in these discussions, including through capacity building initiatives.
- The political imperative for action to address base erosion and profit shifting, along with the history of very long timeframes for multilateral tax reform efforts, has resulted in t
he OECD Action Plan having a focus on concrete actions to be delivered by clear deadlines.
- The time frame for achieving these outcomes is ambitious, with the Action Items scheduled to be completed by the end of 2015. Taking action quickly to improve the integrity of international and national tax systems would send a clear signal to the community that concerns were being addressed. Too long a delay in taking action runs the risk that momentum for multilateral action will stall and individual countries will feel the need to take action unilaterally that would risk imposing double taxation and adversely affect cross-border trade and investment.
- On the other hand, a concern with this ambitious timeframe is that it could result in the scope of action items being reduced in order to meet a deadline that is artificially tight. That is, excessive time pressure could detract from results. That is particularly the case for the proposed taskforce on the tax challenges of the digital economy which will require consideration of fundamental design features of the tax architecture, which would require a longer timeframe. Those parts of the OECD Action Plan primarily focused on reforms within the existing international tax architecture should raise less timing issues.
28 That is, the standard CFA Bureau plus the chairs of all the Working Parties.