Emerging markets, transfer pricing and tax treaties on the agenda of annual event

How do key emerging markets fit into the global taxation system? How can the Organization for Economic Cooperation and Development (OECD), national governments and global business best foster simplicity, effective problem-solving and appropriate tax policy tools for countries at different stages of development?

These were among the questions tackled at USCIB’s annual tax conference, held June 4 and 5 in Washington, D.C. The sixth edition of this popular event, which sold out and achieved record attendance, focused on the work of the 34-nation OECD, a key global forum for discussion and coordination of national taxation policies.

The annual event provides a unique opportunity for American business to interact with top representatives of the OECD’s Center for Tax Policy and Administration (CTPA), as well as senior tax officials from the U.S. and other OECD countries.

“As emerging markets like China and India continue to attract significant inbound investment, increase their outbound investment, and grow their participation in global production and value chains, it is critical that their national tax policies work harmoniously with the evolving global body of tax treaties and related rules,” said Bill Sample, corporate vice president for worldwide taxation with Microsoft Corp. and chair of USCIB’s Taxation Committee. “This event provides an important opportunity for tax executives from multinational companies to benchmark the best approaches to tax and development, and to discuss related issues of transfer pricing and tax treaties, through direct discussion with experts from the OECD and national tax officials.”

Key questions addressed at the conference included: What are the latest international developments affecting permanent establishments? Are transfer pricing rules too complex? How should income from intangible property be determined? How are countries working together to improve tax compliance and cooperation?

Three priorities

In opening remarks, Pascal Saint-Amans, the CTPA’s new director, emphasized three priorities: engaging with non-OECD countries, transfer pricing and tax policy. Among the members the G20, he noted, eight are non-OECD countries, and the OECD, as the standard-setter in international taxation, needs to engage with these important emerging economies. He noted that China is potentially interested in joining the OECD, while Brazil is engaging with the organization on transfer pricing. Overall, Saint-Amans predicted that the next generation of emerging economies would not have precisely the same interests as the big emerging economies, so the organization would need to adapt to new circumstances.

On tax policy, one of the OECD’s most important roles is to provide good statistical analysis to inform the tax policy debate. The OECD will examine whether tax incentives are effective, and how best to design incentives to achieve stated policy objectives. In addition, Saint-Amans said the OECD plans a greater focus on value-added taxes, which are a significant source of revenue for many countries but have not received the attention they deserve. A first Global Forum on VAT will be held in November of this year.

In keynote remarks, Jose Fernandez, assistant secretary of state for economic and business affairs, said fair and effective tax administrations served to spur private investment, and are an important way to complement official development assistance. He said the State Department viewed tax reform as an important part of the overall process of political reform, including in countries of the Middle East and North Africa emerging from autocratic rule.

“The OECD has and continues to serve in a crucial role in advancing the interests of business,” Fernandez stated. “What businesses need to succeed is a stable, predictable environment marked by rule of law, which is to say: the rules are known up-front, no particular business is favored over another by government; and property and contracts are evenly enforced.”

Focus on transfer pricing

Among other speakers, Masatsugu Asakawa, vice minister withthe Japanese finance ministry and chair of the OECD Committee on Fiscal Affairs (CFA), laid out the CFA’s broad agenda on tax policy, including efforts to help countries compare best practices and design tax policies for maximum social and economic benefits. Joe Andrus, head of the OECD’s transfer pricing unit, discussed soon-to-be-released guidance on intangible goods, including patents and trademarks that are often challenging to value appropriately under transfer pricing rules. He said the guidance would address definitions of intangibles, identify which companies ought to be entitled to a return on intangibles, take steps to better define and characterize specific types of transactions, and address valuation.

“We don’t care about categories,” Andrus stated. “The analysis is the same.” Broadly stated, he said, an intangible is something that is not a physical or financial asset, and which is capable of being owned or controlled for use in commercial activities. By contrast, market conditions that cannot be owned or controlled by a single enterprise are not intangibles. Examples of these include market size, disposable income and similar market attributes.

Other speakers at the two-day conference included Manal Corwin, deputy assistant secretary of the Treasury for international affairs; Marlies de Ruiter, new head of OECD’s tax treaty, transfer pricing and financial transactions division; and Sam Maruca, the Internal Revenue Service’sdirector of transfer pricing operations.

“Informed, ongoing dialogue with the OECD secretariat and with OECD member states is crucial for global companies,” according to Carol Doran Klein, USCIB’s vice president and international tax counsel. “It’s a testament to how seriously companies view these issues that the event was sold out weeks in advance.”

The conference was co-organized by USCIB, the OECD and the Business and Industry Advisory Committee (BIAC) to the OECD, which officially represents the view of industry in the Paris-based body. Supporting organizations include the International Fiscal Association – USA Branch, the International Tax Policy Forum, the National Foreign Trade Council, the Organization for International Investment, the Tax Council Policy Institute, the Tax Executives Institute and the Tax Foundation. Details are available at www.uscibtax.org.

Staff contact: Carol Doran Klein

Photos from the conference on USCIB’s Facebook page

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Carol Doran Klein, USCIB’s vice president and international tax counsel, attended the third plenary meeting of the OECD Task Force on Tax and Development in Cape Town, South Africa on May 9 and 10. This was the first meeting of the task force, which seeks to facilitate cooperation and dialogue between OECD member economies and key emerging markets, since Pascal Saint-Amans became director of the OECD’s Center for Tax Policy Administration, and Klein reports that it is clear that Sain-Amans wants to take the task force in a new direction.

“The phrase ‘demand-driven’ was mentioned repeatedly throughout the two days of meetings,” said Klein. “There was also a focus on more concrete deliverables. Finally, there was a focus on the opportunity for the task force to become an effective channel of influence back into the OECD’s standard setting work.

In order to accomplish these goals and give improved focus to the operation of the task force, the OECD plans to have an “inner core” that includes the OECD secretariat, OECD member countries, and developing countries, an “outer core” that includes representatives of business and international organizations, and the broad group that includes all participants. They also plan to try to work more efficiently by having fewer meetings, doing more electronically, and trying to tie necessary meetings to other scheduled in person meetings. The next meeting will likely be in late 2013.

The outcome of the meeting was a summary of the anticipated deliverables by the end of 2013. These include:

• Tax Inspectors without Borders
• Outcomes from pilot testing of improved principles on donor coherence
• Outcomes of tax investment reviews and revised transparency principles
• Reports from the five transfer pricing focus countries (Colombia, Ghana, Kenya, Rwanda, and Vietnam); reports on the needs assessment tool; progress report on the development of relevant comparables
• Tax morale report leading to a taxpayer education toolkit
• The Task Force will be informed on progress made on Exchange of Information and measuring progress in tax administration.

Please see below for Klein’s additional notes on each of these projects. Taxation and development will be a major focus of USCIB’s annual tax conference, which takes place June 4 and 5 in Washington, D.C. Please visit www.uscibtax.org for additional information.

Separately, BIAC, the Business and Industry Advisory Committee, volunteered to begin putting together a paper concerning best practices for businesses in dealing with tax authorities. “This came out of the absence of a deliverable on enhanced engagements and the apparent lack of trust towards business among many of the developing countries,” said Klein. “The point of this paper is to give developing countries an idea of what good taxpayer behavior ought to look like.”

Tax Inspectors without Borders

The idea behind this is that this would be a method of providing the right experts at the right time in the right way. More particularly, countries with experience in international audits would provide auditors to developing countries wishing to develop experience. The auditor would be seconded to the developing country to participate in an international audit. The audit would be lead by the host country. There are a number of difficult issues involved in getting this up and running including the need for funding, legal issues on sharing tax return information, concern about countries using this as an opportunity to promote their views (particularly if those views are outside of international norms), the need to have the audit well planned before the expert is deployed to the developing country (this may be particularly difficult if the receiving country is very inexperienced), the willingness of developed countries to second these experts for lengthy periods, and the willing of the experts to travel for lengthy periods.

Improved Principles on Donor Coherence

A paper setting forth ten principles for international engagement in supporting developing countries in revenue matters was discussed. The business contribution to the discussion was that the principles ought to include reference to business experience. Generally the principles emphasized following the lead of the developing countries; fairness and equity; encouraging transparency; and strengthening the link between revenue and expenditure.

Tax Investment Reviews and Revised Transparency Principles

Representatives of the OECD said that many countries offer incentives in the hope of attracting investors and fostering economic growth. There is evidence that these incentives are ineffective in attracting investment because they erode the tax base and limit the funds available for investment in infrastructure, education and other factors important in determining the location of the investment. Tax incentives do not drive investment, but trying to get rid of them is naïve. In order to make tax incentives more effective in delivering investment for foregone revenue, the OECD proposed to provide on an as requested basis an analysis of tax incentive legislation.

The primary objective of the principles is to bring greater transparency to the granting of incentives. The proposed principles include administering incentives only through the tax law and eliminating the authority to grant or reject applications. That is, all investments that meet the identified criteria would be eligible for the benefit. This is intended to reduce the opportunity for corruption. The proposed principles also recommend consolidating all tax incentives under the authority of a single government body. This proposal meet with substantial objections because both national and sub-national authorities have investment incentives, so consolidation within a single governmental body is unlikely. Business expressed caution concerning the treatment of losses as a tax incentive. Business should be taxed on income over the life of an investment, so losses should be deductible and care needs to be taken that denial of losses does not result in double taxation.

Reports from the Five Transfer Pricing Focus Countries (Colombia, Ghana, Kenya, Rwanda, and Vietnam); Reports on the Needs Assessment Tool; Progress Report on the Development of Relevant Comparables

The OECD has projects with the five listed countries to help them with capacity development in the area of transfer pricing. The 2013 deliverable is a report from each of these countries on the progress they will have made by the next meeting. BIAC is in the process of setting up a pool of experts, so it may be appropriate for BIAC to contact the OECD with an offer of assistance targeted at these countries.

The OECD has produced a pilot version of a transfer pricing needs assessment and implementation tool. This tool serves three functions. First, it assists countries in assessing their need for transfer pricing rules. Second, it assists countries in identifying the pre-conditions necessary for adopting transfer pricing rules. Third, it assists countries with the steps necessary to implement. There was general support for the needs assessment tool, so Klein expects it will be adopted in some form. Business supported the use of the tool, in part to help define the scope of the transfer pricing problem. Effective use of the assessment tool could take some of the air out of some of the extreme claims of transfer “mispricing.” The OECD sees the use of the assessment tool as a preliminary step that countries can take before external help is available to them. (The OECD gets many more requests for assistance than it can meet, the assessment tool could provide some preliminary help.) USCIB submitted comments to the OECD on the needs assessment tool expressing general support but also identifying some concerns.

The discussion of the publication of statutory accounts and country-by-country reporting generally took place in the context of developing comparables. The developing countries expressed little support for country-by-country reporting. It seems that the point that business has been making that country-by-country reporting does not assist with the development of comparables has been generally accepted by the non-NGO participants in these discussions.

Business raised the absence of any reference to enhanced relationships in the list of 2013 deliverables. A developing country representative compared the enhanced relationship to asking the mice to guard the cheese. So clearly there is a lack of trust on the part of some developing countries with respect to the ability to trust taxpayers to disclose their tax positions in a way that makes enhanced relationships possible. Other developing countries were less negative on this and expressed an interest in using APAs as a form of enhanced relationship.

An in-depth study on the potential benefits from the public registration of statutory accounts of unlisted companies was carried out by a consultant on behalf of the task force. The study generally concluded that publicizing statutory accounts might help with developing comparables, but that cost benefit analysis is required and that other methods of (e.g. including requiring information in the tax return) should be considered further. The study was presented to the sub-group on transparency in reporting by MNEs at the March meeting of that sub-group (which Klein did not attend). At the sub-group meeting, it was agreed that the report was a useful tool that countries could make use of if they were considering whether to introduce public accounts filing obligations. One delegate pointed out that to the extent that these accounts are based on related party transactions their value for transfer pricing purposes is limited because the underlying transactions may not be at arm’s length and therefore would not provide reliable comparables. The only agreement reached was to make the report public for countries to use as appropriate.

Tax Morale Report Leading to a Taxpayer Education Toolkit

The OECD’s work on tax morale is nearing completion. The final report will look at regions, rather than particular countries. The OECD is some distance from reaching policy conclusions on this work. It will be finalized and made available over the summer. Some countries commented that tax evasion is culturally accepted. The issue of tax evasion is tied to the issue of corruption. There was a general discussion about the need to fight corruption. There was also discussion on educating the public concerning the benefits of paying taxes – schools, roads, and other infrastructure.

Progress made Exchange of Information and Measuring Progress in Tax Administration

There was discussion of the benefits for developing countries of participating in the Global Forum on Transparency. Essentially, the global forum provides access to information in other countries. Access to this information may aid countries in imposing taxes on their residents and with conducting transfer pricing audits.

ATAF discussed their work on a practical guide on exchange of information for developing countries. The problems that were identified by the working group were the insufficiency of the treaty network, the lack of understanding of the role of the competent authority, insufficient legislation in developing countries and lack of capacity. ATAF is assisting African countries in solving these problems. The ATAF council adopted a draft multi-lateral treaty on exchange of information amongst African countries. ATAF is also developing databases on both tax treaties and competent authorities.

Business said that with appropriate safeguards on the confidentiality of tax return information, business fully supports the exchange of information among countries. Legitimate business has no interest in hiding information.

Staff contact: Carol Doran Klein

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