What are the key items on the global tax compliance agenda?

The OECD’s crackdown on multinational tax avoidance schemes has been successful, with international agreements driving stronger tax compliance around the world

Erosion of tax bases through profit shifting, cross-border remote working and taxation of cryptocurrency assets are among the key priorities on the global tax compliance agenda, according to David Bradbury, Deputy Director of the Centre for Tax Policy and Administration at the OECD.

Profit shifting to avoid tax compliance responsibilities has been a long-standing and common practice for some multinationals, much to the chagrin of many countries. At the same time, the digitalisation and globalisation of the economy has called for a rethink of how to allocate taxing rights among countries.

In responding to these concerns, the OECD’s two-pillar solution comprises a reallocation of taxing rights to market jurisdictions on the profits of some of the world’s largest and most profitable multinationals (Pillar One) as well as a new global minimum tax, which will ensure that all large companies are subject to a minimum effective tax rate of 15 per cent, regardless of where they operate and generate their profits (Pillar Two).

With 138 jurisdictions agreeing to this landmark two-pillar solution, the implementation of both pillars will be a key priority for the global tax community over the coming year, said Mr Bradbury, who was speaking at the 15th International Tax Administration Conference, held from 4-5 April 2023 at the Crowne Plaza Hotel, Coogee Beach.

“We have essentially put an end to the most egregious base erosion and profit shifting (BEPS) practices,” affirmed Mr Bradbury, a former corporate tax lawyer and Federal Minister who led the Australian government’s efforts to tackle multinational tax avoidance.

“The OECD BEPS Project was a real success. Old practices, like the locating of cash boxes in zero tax jurisdictions, that’s gone. Treaty shopping has effectively been eliminated. Hybrid mismatch arrangements and structures such as the Double Irish Dutch sandwich, they’re gone,” he said.

“If you think about harmful tax practices in the form of secret tax rulings and patent boxes, where there was no connection between the underlying substantive activities and the tax benefit that was being provided, those types of arrangements have been eliminated as well,” said Mr Bradbury, who detailed some of the recent successes of international tax cooperation led by the OECD.

The implementation of country-by-country reporting has also given tax administrations a much greater degree of visibility of the tax affairs of multinationals, particularly the “worldwide activities that occur beyond the curtain of the border, which were previously not visible to tax administrations”, he said. “So a lot has been achieved, but there’s still more to be done.”

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Targeting non-compliant tax jurisdictions

The OECD recently released the fourth edition of its Corporate Tax Statistics report, which found that jurisdictions with a corporate tax rate of zero (namely Anguilla, Bahamas, Bahrain, Belize, Bermuda, the British Virgin Islands, Cayman Islands, Guernsey, the Isle of Man, Jersey, Turks and Caicos Islands, and the United Arab Emirates) had a median revenue value of US$2 million per employee, compared to the global average of US$300,000 revenue per employee for all other jurisdictions.

Furthermore, in investment hubs, related party revenues account for 35 per cent of total revenues, whereas the average share of related party revenues in high-, middle- and low-income jurisdictions is around 15 per cent. “While these effects could reflect some commercial considerations”, Mr Bradbury said “they are also likely to indicate the existence of profit shifting and tax avoidance.”

“This underlines the importance of pressing ahead and swiftly implementing measures such as the global minimum tax of 15 per cent, guaranteed, regardless of where a company operates or where it’s generating its profit. Along with the measures implemented under the BEPS project, the global minimum tax will have a long-term impact on eliminating base erosion and profit shifting practices, and indeed, eliminating the incentives that firms have to engage in profit shifting across borders,” he said.

The tax challenges of remote working

With the advent of covid, many organisations adopted remote working policies and practices around the globe, and this significant change has had a knock-on effect for tax administration globally. “In the context of covid, we saw a huge number of people working in ways that they had not previously experienced, either working from home or working from abroad – but usually out of a bedroom or a study in a home or an apartment. As a result, they were able to work for a business that might be located anywhere around the globe,” he said.

Remote and hybrid working has now become the norm for many businesses, and he said this development has become a “significant challenge” from a taxation perspective. “Cross-border remote work is now an important area in which we are investing our time, as it has become increasingly clear that these arrangements are more common than they were before the pandemic,” said Mr Bradbury.

As such, policymakers and tax administrators need to work through the tax implications of these new arrangements for businesses, clarifying whether this type of work triggers a permanent establishment and the extent to which transfer pricing is applied to these arrangements. For individuals, he said they may be paying their personal income tax in a different jurisdiction to the one in which they live and work – which could also potentially impact their employer’s withholding obligations.

Mr Bradbury pointed to the Australian Tax Office (ATO) as one jurisdiction that had developed and provided “very sensible” guidance to help businesses and individuals navigate the tax implications of remote working arrangements during the pandemic. “As you can see, these are some really significant issues that we have on our plate,” he said.

Taxation of crypto assets

In October last year, the OECD delivered a new global tax transparency framework for crypto assets under a mandate from the G20. Crypto assets are being rapidly adopted around the world for a wide range of different investment and financial uses, according to Mr Bradbury, who said this poses some particular challenges for tax systems.

“Crypto assets can be transferred or held without the knowledge or intervention of any of our traditional financial intermediaries, such as banks or other institutions, and they generally don’t have a central administrator that has full visibility of all the transactions that have been carried out,” said Mr Bradbury.

In response, the crypto-assets reporting framework (CARF) was established, and Mr Bradbury said this will help ensure transparency in relation to crypto assets and associated transactions through the automatic exchange of information with the jurisdictions of resident taxpayers. He explained this will occur on a standardised basis, similar to the automatic exchange of information under the Common Reporting Standard.

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CARF contains model rules that can be implemented into domestic legislation by countries, and Mr Bradbury said this is a “significant step forward in bringing tax transparency into a space that is rapidly evolving, and one that has been largely unregulated without the sort of supervision that we think is appropriate,” he said. “So that’s another important step forward.”