OECD – Recent Developments – An Update

In this issue, we have covered major developments in the field of International Taxation in the Calendar year 2018 till date and work being done at OECD in various other related fields. It is in continuation of our endeavour to update the readers on major developments at OECD at regular intervals. Various news items included here are sourced from various OECD Newsletters as available on its website.

In this write-up, we have classified the developments into 6 major categories viz.:

1)   Tax Treaties

2)   BEPS Action Plans

3)   Transfer Pricing 

4)   Common Reporting Standard (CRS)

5)   Multilateral Convention on Mutual Administrative Assistance in Tax Matters

6)   Others

1) Tax Treaties

(i) Major step forward in international tax co-operation as additional countries sign landmark agreement to strengthen tax treaties

24/01/2018 – Ministers and high-level officials from Barbados, Jamaica, Malaysia, Panama and Tunisia have today signed the BEPS Multilateral Convention bringing the total number of signatories to 78.

In addition to those signing today, Algeria, Kazakhstan, Oman and Swaziland have expressed their intent to sign the Convention, and a number of other jurisdictions are actively working towards signature by June 2018. So far, four jurisdictions – Austria, the Isle of Man, Jersey and Poland – have ratified the Convention, which will enter into force three months after a fifth jurisdiction deposits its instrument of ratification.

The text of the Convention, the explanatory statement, background information, database, and position of each signatory are available at http://oe.cd/mli.

2)  BEPS Action Plans

(i) OECD releases decisions on 11 preferential regimes of BEPS Inclusive Framework Members

17/05/2018 – Governments are continuing to make swift progress in bringing their preferential tax regimes in compliance with the OECD/G20 BEPS standards to improve the international tax framework.

Today, the Inclusive Framework released the updates to the results for preferential regime reviews conducted by the Forum on Harmful Tax Practices (FHTP) in connection with BEPS Action 5:

–  Four new regimes were designed to comply with FHTP standards, meeting all aspects of transparency, exchange of information, ring fencing and substantial activities and are found to be not harmful (Lithuania, Luxembourg, Singapore, Slovak Republic).

– Four regimes were abolished or amended to remove harmful features (Chile, Malaysia, Turkey and Uruguay).

–  A further three regimes do not relate to geographically mobile income and/or are not concerned with business taxation, as such posing no BEPS Action 5 risks and have therefore been found to be out of scope (Kenya and two Viet Nam regimes).

Eleven new preferential regimes are identified since the last update, bringing the total to 175 regimes in over 50 jurisdictions considered by the FHTP since the creation of the Inclusive Framework. Of the 175, 31 regimes have been changed; 81 regimes require legislative changes which are in progress; 47 regimes have been determined to not pose a BEPS risk; 4 have harmful or potentially harmful features and 12 regimes are still under review.

This update shows the determination of the Inclusive Framework to comply with the international standards. For the updated table of regime results, see www.oecd.org/tax/beps/update-harmful-tax-practices-2017-progress-report-on-preferential-regimes.pdf.

(ii) The United Arab Emirates and Bahrain joins the Inclusive Framework on BEPS.

(iii) OECD releases additional guidance on the attribution of profits to a permanent establishment under BEPS Action 7

22/03/2018 – Today, the OECD released the report Additional Guidance on the Attribution of Profits to Permanent Establishments (BEPS Action 7).

In October 2015, as part of the final BEPS package, the OECD/G20 published the report on Preventing the Artificial Avoidance of Permanent Establishment Status. The Report recommended changes to the definition of permanent establishment (PE) in Article 5 of the OECD Model Tax Convention, which is crucial in determining whether a non-resident enterprise must pay income tax in another State. In particular, the Report recommended changes aimed at preventing the use of certain common tax avoidance strategies that have been used to circumvent the existing PE definition.

(iv) OECD and IGF invite comments on a draft practice note that will help developing countries address profit shifting from their mining sectors via excessive interest deductions

18/04/2018 – For many resource-rich developing countries, mineral resources present an unparalleled economic opportunity to increase government revenue. Tax base erosion and profit shifting (BEPS), combined with gaps in the capabilities of tax authorities in developing countries, threaten this prospect. One of the avenues for international profit shifting by multinational enterprises is the use of excessive interest deductions.

Building on BEPS Action 4, this practice note has been prepared by the OECD Centre for Tax Policy and Administration under a programme of co-operation with the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), to help guide tax officials on how to strengthen their defences against BEPS.

It is part of wider efforts to address some of the challenges developing countries are facing in raising revenue from their mining sectors. This work also complements action by the Platform for Collaboration on Tax and others to produce toolkits on top priority tax issues facing developing countries.

(v) OECD releases third round of peer reviews on implementation of BEPS minimum standards on improving tax dispute resolution mechanisms and calls for taxpayer input for the fifth round

12/03/2018 – As the BEPS Action 14 continues its efforts to make dispute resolution more timely, effective and efficient, eight more peer review reports have been released today. These eight reports highlight how well jurisdictions are implementing the Action 14 minimum standard as agreed to in the OECD/G20 BEPS Project.

The third round reports released today relate to implementation by the Czech Republic, Denmark, Finland, Korea, Norway, Poland, Singapore and Spain. A document addressing the implementation of best practices is also available on each jurisdiction that chose to opt to have such best practices assessed. These eight reports contain over 215 specific recommendations relating to the minimum standard. In stage 2 of the peer review process, each jurisdiction’s effort to address the recommendations identified in its stage 1 peer review report will be assessed.

3) Transfer Pricing 

(i)      OECD and Brazil launch project to examine differences in cross-border tax rules

 28/02/2018 – The OECD and Brazil today launched a joint project to examine the similarities and gaps between the Brazilian and OECD approaches to valuing cross-border transactions between associated firms for tax purposes. The project will also assess the potential for Brazil to move closer to the OECD’s transfer pricing rules, which are a critical benchmark for OECD member countries and followed by countries around the world.

(ii) OECD invites public comments on the scope of the future revision of Chapter IV (administrative approaches) and Chapter VII (intra-group services) of the Transfer Pricing Guidelines

09/05/2018 – The OECD is considering starting two new projects to revise the guidance in Chapter IV (administrative approaches) and Chapter VII (intra-group services) of the Transfer Pricing Guidelines.

Public comments are invited on:

– the future revision of Chapter IV, “Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes” of the Transfer Pricing Guidelines, and

– the future revision of Chapter VII, “Special Considerations for Intra-Group Services”, of the Transfer Pricing Guidelines.

(iii) OECD releases 14 additional country profiles containing key aspects of transfer pricing legislation

09/04/2018 – The OECD has published new transfer pricing country profiles for Australia, China (People’s Republic of), Estonia, France, Georgia, Hungary, India, Israel, Liechtenstein, Norway, Poland, Portugal, Sweden and Uruguay respectively. These new profiles reflect the current transfer pricing legislation and practices of each country. The profiles of Belgium and the Russian Federation have also been updated. The country profiles are now available for 45 countries.

4) Common Reporting Standard (CRS)

(i) OECD addresses the misuse of residence/citizenship by investment schemes

19/04/2018 – Today’s revelations from the “Daphne Project” on the Maltese residence and citizenship by investment schemes underline the crucial importance of the OECD’s work to ensure that the integrity of the OECD/G20 Common Reporting Standard (CRS) is preserved and that any circumvention is detected and addressed.

Over the last months, the OECD has been taking a set of actions to ensure that all taxpayers maintaining financial assets abroad are effectively reported under the CRS, including by:

–  issuing new model disclosure rules that require lawyers, accountants, financial advisors, banks and other service providers to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the CRS. The adoption of such model mandatory disclosure rules will have a deterrent effect on the promotion of CBI/RBI schemes for circumventing the CRS and provide tax authorities with intelligence on the misuse of such schemes as CRS avoidance arrangements. The EU Member States have already agreed to implement these rules as part of a wider directive on mandatory disclosures;

–  reaching out to individual jurisdictions, including Malta, to make them aware of the risk of abuse of their CBI/RBI schemes and offer assistance in adopting mitigating measures; and

–  establishing a list of high risk schemes in order to further raise awareness amongst stakeholders of the potential of such schemes to undermine the CRS due diligence and reporting requirements.

In addition, on 19^th February 2018, the OECD issued a consultation document, outlining potential situations where the misuse of CBI/RBI schemes poses a high risk to accurate CRS reporting and seeking public input both to obtain evidence on the misuse of CBI/RBI schemes and on effective ways for preventing such abuse.

The substantial amount of input received in response to the consultation further underlines the importance of the OECD’s actions in this field. It also contains a wide range of proposals for further addressing the misuse of RBI/CBI schemes, including: 1) comprehensive due diligence checks to be carried out as part of the RBI/CBI application process, 2) the spontaneous exchange of information about individuals that have obtained residence/citizenship through such a CBI/RBI scheme with their original jurisdiction(s) of tax residence; and 3) strengthened CRS due diligence procedures on financial institutions with respect to high risk accounts. 

(ii)     Global network for the automatic exchange of offshore account information continues to grow; OECD releases new edition of the CRS Implementation Handbook

05/04/2018 – Today, the OECD published a new set of bilateral exchange relationships established under the Common Reporting Standard Multilateral Competent Authority Agreement (CRS MCAA) which for the first time includes activations by Panama.

In total, there are now over 2700 bilateral relationships for the automatic exchange of offshore financial account information under the CRS in place across the globe. The full list of automatic exchange relationships that are currently in place under the CRS MCAA is available online.

The OECD today also released the second edition of the Common Reporting Standard Implementation Handbook.

The Handbook provides practical guidance to assist government officials and financial institutions in the implementation of the CRS and to provide a practical overview of the CRS to both the financial sector and the public at-large.

(iii)    Game over for CRS avoidance! OECD adopts tax disclosure rules for advisors

09/03/2018 – Responding to a request of the G7, today, the OECD has issued new model disclosure rules that require lawyers, accountants, financial advisors, banks and other service providers to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the OECD/G20 Common Reporting Standard (CRS) or prevent the identification of the beneficial owners of entities or trusts.

As the reporting and automatic exchange on offshore financial accounts pursuant to the CRS becomes a reality in over 100 jurisdictions this year, many taxpayers that held undeclared financial assets offshore have come clean to their tax authorities in recent years, which has already led to over 85 billion of additional tax revenue.

At the same time, there are still persons that, often with the help of advisors and financial intermediaries, continue to try hiding their offshore assets and fly under the radar of CRS reporting. The new rules released today target these persons and their advisers, by introducing an obligation on a wide range of intermediaries to disclose the schemes to circumvent CRS reporting to the tax authorities. The new rules also require the reporting of structures that hide beneficial owners of offshore assets, companies and trusts.

These model disclosure rules will be submitted to the G7 presidency and are part of a wider strategy of the OECD to monitor and act upon tendencies in the market that try to avoid CRS reporting and hide assets offshore. As part of this work the OECD is also addressing cases of abuse of golden visas and similar schemes to circumvent CRS reporting.

(iv) OECD releases consultation document on misuse of residence by investment schemes to circumvent the Common Reporting Standard

19/02/2018 – More and more jurisdictions are offering “residence by investment” (RBI) or “citizenship by investment” (CBI) schemes, which allow foreign individuals to obtain citizenship or temporary or permanent residence rights in exchange for local investments or against a flat fee. Individuals may be interested in these schemes for a number of legitimate reasons, including greater mobility thanks to visa-free travel, better education and job opportunities for children, or the right to live in a country with political stability. At the same time, information released in the market place and obtained through the OECD’s CRS public disclosure facility, highlights the misuse of RBI and CBI schemes to circumvent reporting under the Common Reporting Standard (CRS).

 As part of its CRS loophole strategy, the OECD is releasing a consultation document that (1) assesses how these schemes are used in an attempt to circumvent the CRS; (2) identifies the types of schemes that present a high risk of abuse; (3) reminds stakeholders of the importance of correctly applying relevant CRS due diligence procedures in order to help prevent such abuse; and (4) explains next steps the OECD will undertake to further address the issue, assisted by public input.

(v) Panama joins international tax co-operation efforts to end bank secrecy

15/01/2018 – Today, at the OECD Headquarters in Paris, the Director-General of Revenue and the delegated Competent Authority of Panama, Publio Ricardo Cortés, has signed the CRS Multilateral Competent Authority Agreement? (CRS MCAA), in presence of OECD Deputy Secretary-General Masamichi Kono. Panama is the 98^th jurisdiction to join the CRS MCAA, which is the prime international agreement for implementing the automatic exchange of financial account information under the Multilateral Convention on Mutual Administrative Assistance. 

5) Convention on Mutual Administrative Assistance in Tax Matters

The Convention on Mutual Administrative Assistance in Tax Matters (“the Convention”) was developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010. The Convention is the most comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion and avoidance, a top priority for all countries.

The Convention was amended to respond to the call of the G20 at its 2009 London Summit to align it to the international standard on exchange of information on request and to open it to all countries, in particular to ensure that developing countries could benefit from the new more transparent environment. The amended Convention was opened for signature on 1^st June 2011.

122 jurisdictions currently participate in the Convention, including 17 jurisdictions covered by territorial extension*. This represents a wide range of countries including all G20 countries, all BRIICS, all OECD countries, major financial centres and an increasing number of developing countries.

* In May 2018, the People’s Republic of China extended the territorial scope of the Convention to the Hong Kong and Macau Special Administrative Regions pursuant to Article 29. As such, The Convention will enter into force for   both   Hong Kong (China)   and   Macau  (China)  on 1^st September 2018.

6) Others

(i) Global Forum issues tax transparency compliance ratings for nine jurisdictions as membership rises to 150

04/04/2018 – The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) published today nine peer review reports assessing compliance with international standards on tax transparency.

Eight of these reports assess countries against the updated standards which incorporate beneficial ownership information of all legal entities and arrangements, in line with the Financial Action Task Force international definition.

Four jurisdictions – Estonia, France, Monaco and New Zealand – received an overall rating of “Compliant.” Three others – The Bahamas, Belgium and Hungary were rated “Largely Compliant.” Ghana was rated “Partially Compliant.”

Progress for Jamaica were recognised through a Supplementary Report which attributes a “Largely Compliant” rating.

The Global Forum now includes 150 members on an equal footing as Montenegro has just joined the international fight against tax evasion. Members of the Global Forum already include all G20 and OECD countries, all international financial centres and many developing countries.

The Global Forum also runs an extensive technical assistance programme to provide support to its members in implementing the standards and helping tax authorities to make the best use of cross-border information sharing channels.

(ii) Governments should make better use of energy taxation to address climate change

14/02/2018 – Taxing Energy Use 2018 describes patterns of energy taxation in 42 OECD and G20 countries (representing approximately 80% of global energy use), by fuels and sectors over the 2012-2015 period.

New data shows that energy taxes remain poorly aligned with the negative side effects of energy use. Taxes provide only limited incentives to reduce energy use, improve energy efficiency and drive a shift towards less harmful forms of energy. Emissions trading systems, which are not discussed in this publication, but are included in the OECD’s Effective Carbon Rates, are having little impact on this broad picture.

Meaningful tax rate increases have largely been limited to the road sector. Fuel tax reforms in some large low-to-middle income economies have increased the share of emissions taxed above climate costs from 46% in 2012 to 50% in 2015. Encouragingly, some countries are removing lower tax rates on diesel compared to gasoline. However, fuel tax rates remain well below the levels needed to cover non-climate external costs in nearly all countries.

Coal, characterised by high levels of harmful emissions and accounting for almost half of carbon emissions from energy use in the 42 countries, is taxed at the lowest rates or fully untaxed in almost all countries.

While the intense debate on carbon taxation has sparked action in some countries, actual carbon tax rates remain low. Carbon tax coverage increased from 1% to 6% in 2015, but carbon taxes reflect climate costs for just 0.3% of emissions. Excise taxes dominate overall tax rates by far.

Note: The reader may visit the OECD website and download various reports referred to in this article for his further studies.