This article appeared in Cayman Financial Review on November 1, 2016.
The Organization for Economic Cooperation and Development (OECD), operating at the behest of its high-tax member nations, has gradually carved for itself a central role in global tax matters over the last two decades. Today, its many initiatives impact and undermine global economic activity in a variety of ways. OECD Watch summarizes and analyzes the organization’s recent activities relating to international finance and tax matters.
Base erosion and profit shifting
The BEPS project continues to steam ahead. The OECD has recently released guidance and solicited feedback on several of the action items, including implementation of country-by-country reporting (Action 13), additional guidance on the attribution of profits to permanent establishments (Action 7), revised guidance on profit splits (Actions 8-10), and discussions of interest in the banking and insurance sectors (Action 4) and branch mismatch structures (Action 2).
Representatives from more than 80 countries met June 30-July 1 in Kyoto, Japan on a new “inclusive framework” for BEPS implementation. The “inclusive” part of the approach seeks to placate low-tax and non-OECD jurisdictions that might object to the effort as an attack on their fiscal sovereignty by making it seem as if their input matters. At the meeting, attendees began a process for “establishing terms of reference and methodologies for the peer review of the 4 BEPS minimum standards by their next plenary meeting in January, so that the review of progress on implementation can begin as quickly as possible.”
The OECD further reported progress in drafting the text for the BEPS Multilateral Instrument (MLI), with the expectation that it be ready for signatures before the end of the year. According to the OECD, “The MLI will allow countries to meet the BEPS minimum standard aiming to put an end to treaty shopping (Action 6),” and “address the issue of hybrid mismatches, the updated definition of the ‘permanent establishment’ concept, other forms of treaty abuses with specific treaty rules, as well as improving dispute resolution processes.”
Identifying non-cooperative jurisdictions
According to the July OECD Secretary-General Report to G20 Finance Ministers, the OECD has agreed on criteria by which it will be determined whether a jurisdiction is “cooperative with respect to international tax transparency.” Initially, it includes requirements for implementation of the Exchange of Information on Request standard, the Automatic Exchange of Information standard, and the joining of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
Benchmarks for at least two of the three criteria would need to be met for a jurisdiction to be considered cooperative. Though, it should be noted that extra language was included that is clearly designed to ensure that the United States (almost certainly now the world’s biggest tax haven) remains technically compliant. Specifically, the requirement to participate in the Multilateral Convention can be satisfied with another “sufficiently broad exchange network permitting both EOIR and AEOI,” for which FATCA – and likely FATCA alone – qualifies.
A multi-phase process is promised, which indicates that the goal-posts are sure to be moved in a manner similar to past OECD demands. In fact, the report admits that, “benchmarks would be adjusted over time according to an agreed plan as implementation of the standards progresses.”
And further harking back to the darkest days of blacklists and open intimidation of low-tax jurisdictions, the OECD offered that, “a list based on this approach could be established for the G20 Summit in July 2017.” The G20 replied, in a rather transparent euphemism for political and economic strong-arming of low-tax jurisdictions, that “defensive measures will be considered against listed jurisdictions.”
Still grading the on-request standard
Although the OECD quickly moved on to the more invasive automatic exchange standard, jurisdictions are still jumping through the hoops of the peer review process to meet requirements for the exchange of information on request. Ten new peer review reports were released in July, including Phase 2 ratings of “Largely Compliant” for six jurisdictions: Switzerland, Albania, Cameroon, Gabon, Pakistan and Senegal. The United Arab Emirates was rated “Partially Compliant.” Ukraine’s Phase 1 report found sufficient legal and regulatory framework to advance to Phase 2, while Liberia’s supplementary Phase 1 report determined it ready to move on to the next round as well. The supplementary Phase 2 report for Saint Lucia upgraded its rating from “Partially Compliant” to “Largely Compliant.”
To meet the exchange of information on request benchmark as one of the three criteria to avoid being labeled non-cooperative, a “Largely Compliant” rating is required. As of July, that leaves 12 “Partially Compliant” jurisdictions (Andorra, Anguilla, Antigua and Barbuda, Barbados, Costa Rica Curaçao, Indonesia, Israel, Samoa, Sint Maarten, Turkey, United Arab Emirates) and seven others currently blocked from proceeding to Phase 2 reviews (Federated States of Micronesia, Guatemala, Kazakhstan, Lebanon, Nauru, Trinidad and Tobago, Vanuatu), under the microscope. Several of these are undergoing supplementary review, but jurisdictions on these two lists are the most likely candidates to find themselves placed on a new blacklist as things currently stand.
Ideological advocacy
The OECD is staking out an even more explicitly political stance on tax than it has before. In July it published a working paper called “Tax Design for Inclusive Economic Growth.” The authors assert that tax policy recommendations should not simply be based on “the impact of taxes on economic growth from an efficiency perspective,” but on what they describe as “inclusive growth” – specifically, the “equity outcomes” of tax policy, and the degree to which domestic tax rules “go hand in hand with the implementation of international tax rules and mechanisms that prevent tax evasion and tax avoidance.”
The paper was also the focus of a July G20 tax symposium in China. According to the OECD, it focused on four broad tax policy design options, two of which included emphasis on “redistributive goals” and “enhancing progressivity of tax systems.” Cementing the organization’s role as a more left-leaning and ideologically driven body, OECD Secretary-General Angel Gurría said he hopes that this “inclusive growth” focus will “become part of a new tax policy contribution to the G20 agenda moving forward.”
Future expectations
Exchanges under the new automatic exchange of information are expected to begin in 2017. So now that BEPS, the Common Reporting Standard, and other efforts to rig global tax rules in favor of high-tax jurisdictions have been established, the OECD is placing additional emphasis on convincing nations, through any means possible, to adopt as many of the self-destructive policies as they can. We see this both in the effort to cajole non-OECD member states into the “inclusive framework,” and the establishment of new criteria for judging compliance with OECD dictates.
With a European bloc dominant among OECD membership, we can further look to the European Union’s increasingly hard-line stance on international tax as indication that the OECD will be under tremendous pressure to deliver results. Don’t be surprised if discussions over mechanisms for punishment begin before the ink is even dry on the forthcoming list of non-compliant jurisdictions.
