International tax avoidance: Noise and nuance
For so many months, international tax avoidance seemed to be the big issue that was going to dominate the G20 summit in Brisbane. Given that growth targets and climate change disagreements ended up leading the headlines does this mean tax has slipped from the agenda?
Far from it. Although it only made one paragraph (no 13, since you ask) of 21 in the final communique, tax still played an important part in the summit, at two levels – you could categorise them as Noise and Nuance.
On the Noise front the statements by the Prime Minister and Treasurer on tax avoidance demonstrated a strong political will in the Australian government to grapple with the OECD-G20 tax agenda. KPMG supports the OECD process but it is no easy task. Changing international tax rules is a complex job, not only to get everyone on the same page, but to work out what that page should say. The danger here is to ensure that we don’t end up with unintended consequences and even undermine our tax base in Australia, because, for instance, China and India might argue that our big miners have a taxable presence in those countries and seek to tax a share of their profits.
On the Nuance front, the communique specifically mentions the recent progress made on patent boxes, which emanates from an early compromise agreement between the UK and Germany. This has been an area of some controversy as currently the UK has a regime whereby a tax concession is provided on income from Intellectual Property registered in the UK even though it was developed overseas. Germany and other countries have been concerned that they provide concessions for the R&D activity carried out, even where the benefit of the R&D is transferred to another country. Now it has been agreed that a new regime, commencing in 2016 will require a nexus between the R&D and the tax concession. This is welcome, and its appearance in the G20 Communique will mean it is likely to be accepted by other countries.
Another important point in the Communique is the commitment to involve developing countries in the Action Plan. This is again welcome and certainly something Australia as host of the G20 has been pushing. We need buy-in from all countries so as not to open ourselves up from a future accusation that a particular developing country did not have a say in formulating the rules and so shouldn’t need to follow them.
As well as those two specific points, the G20 Communique also endorses the activity undertaken to date by the OECD in its Action Plan which kicked off in July 2013. This included the Common Reporting Standard (CRS), under which signatory nations’ financial institutions would agree to automatically exchange tax information with each other’s tax authorities. This is a crucial part of the Action Plan and would represent a major step towards global transparency in tax affairs. Its difficult – implementation of the multilateral competent authority agreement, which will facilitate the CRS, will impose complex new due diligence and automatic reporting requirements on financial institutions doing business in the signatory jurisdictions, while governments have just over a year to enact legislation or regulations.
The pace of the OECD process is unprecedented for such a complex multilateral undertaking and there are many pitfalls still ahead. Given the whole process is slated to end in December 2015, we are only just over half-way through it. There is much still to do, and the next 14 months will be frenetic but at this stage it has to go down as a great success. The fact that the 44 countries involved are still there, and another 10 have just joined the process is in itself something to salute. And the G20 leaders were right to do so.