Tax administration in developing Countries and their response to BEPS

1. Tax administration in developing Countries and their response to BEPS Prepared by Cate Rogers, A/g Chief Economist (Development) Presented Friday 28 October, 2016

2. Outline of presentation • How big is the problem? • How should it be prioritised? • If it is a priority then which action items are most relevant? • What next? Tax administration in developing countries and their response to BEPS

3. How big is the problem? • OECD estimates that BEPS costs between USD100-240 billion per year in lost revenues. • In 2014, the OECD examined the issue of BEPS and developing countries. • Found that developing countries are highly reliant on corporate income tax • Average share of corporate income tax in total tax revenue for OECD members is 8.5 per cent, vs 16 per cent among Low Income countries • But need to look beyond the averages. Tax administration in developing countries and their response to BEPS

4. The tax mix in developing countries Tax administration in developing countries and their response to BEPS Source: IMF GFS database

5. How should it be prioritised? • Consider how reliant the economy is on corporate income tax. • Within this, how much comes from MNEs? • Resource dependent developing countries need to be particularly aware given the dominant role of MNEs in mining and petroleum, and in our own region - fisheries and logging. • Consider institutional capabilities of the tax administration. • Are the basics of tax administration capability there? Tax administration in developing countries and their response to BEPS

6. PEFA scores on measures for taxpayer registration and assessment Source: Carnahan (2015) Tax administration in developing countries and their response to BEPS

7. If it is a priority which action items are most relevant? • Excessive or unwarranted payments to MNE affiliates, especially excessive interest payments and payments for services • Developing countries report difficulties in whether real value was received • OECD Recommendations on Action 4 on interest payments and Actions 8-10 on transfer pricing especially the simplification measures on low value adding intra group services (LVAIGS) help to address this issue Tax administration in developing countries and their response to BEPS

8. New models for doing business such as global value chains • Difficulties in challenging supply chain restructuring where functions, assets (particularly intellectual property) and risk are centralised at a global or regional level often in a low tax jurisdiction • Actions 8-10 clarify the Transfer Pricing rules and emphasise the economic substance of operations • The new Transfer Pricing documentation (CbC reports) recommended under Action 13 will supply information required to apply transfer pricing rules • Action 7 on permanent establishment (PE)will assist in ensuring that MNEs operating in source countries are taxed on their true economic activity in those countries Tax administration in developing countries and their response to BEPS

9. Developing countries need information to assess and address BEPS issues • Country by country reporting will help • Treaty abuse • Developing countries rely on relatively high withholding taxes from interest and royalties. MNEs can use techniques to route payments through affiliates to avoid the payment of withholding tax. • Minimum standard recommendations for Action 6 include limitation of benefits/principal purpose clauses that deny treaty benefits if there has been treaty shopping. Tax administration in developing countries and their response to BEPS

10. What next? • Inclusive framework, currently comprised of 86 members and associate jurisdictions, requires members to: • Commit to implement the BEPS minimum standards • Pay annual BEPS associate fee (may be reduced for developing countries with resource constraints) • Participate in policy development and decision making on equal footing. • Countries work jointly for the implementation of BEPS measures, through development of new standards and review and monitoring of the BEPS project. Tax administration in developing countries and their response to BEPS

11. What next? • Platform for collaboration on tax is developing toolkits to assist developing countries (IMF, OECD, UN and WBG). • Addis Tax Initiative, requires participating partner countries to commit to raise their domestic resource mobilisation, and improve the fairness, transparency, efficiency and effectiveness of their tax systems • Donors in turn, must double their tax related assistance by 2020, among other things. • OECD Forum of Tax Administration (FTA) has a number of collaboration projects on BEPS implementation Tax administration in developing countries and their response to BEPS