WORK OF THE OECD
IN THE TAX AREA
Martin Jareš
Tax Policy and Statistics Division
OECD Centre for Tax Policy and Administration
martin.jares@oecd.org
Overview
• 1. Introduction
• 2. Work of the OECD in the Tax Area
– Tax Conventions
– Transfer Pricing
– Harmful Tax Practices
– Tax Administration
– Consumption Taxes
• 3. Tax Statistics and Tax Policy Analysis
– Revenue Statistics
– Taxing Wages
– Tax Database
– Tax Policy Studies
• 4. Base Erosion and Profit Shifting
1. INTRODUCTION
Introduction
• Since the 20th century, the economy is more and more
globalised.
• Tax systems are national.
• This could lead to double taxation, i.e. two countries
taxing the same income.
• This would in turn cause economic distortions which
would create disincentives to invest abroad.
• This has been traditionally addressed through bilateral
double-taxation treaties.
Introduction
• It was realised that international co-operation would be
beneficial.
• First attempts were undertaken by the League of Nations
in 1920‘s.
• Since 1950‘s, OECD (or its predecessor, the OEEC)
assumed a leading role in this area.
• The mandate was gradually broadened.
Introduction
• OECD works through the committees which consist of
delegates from all OECD member countries.
• Committee on Fiscal Affairs (CFA) is responsible for
taxation.
• Within the OECD, Centre for Tax Policy and
Administration serves as the Secretariat to the CFA.
• Committees create subsidiary bodies (working parties,
working group) to conduct the actual work.
Introduction
• The core work of the OECD consists in setting standards.
• They are not binding, OECD does not have any
legislative power to enforce them.
• However, they are in general highly regarded and also
many non-OECD countries follow recommendations
formulated by the OECD.
• There is no voting, the aim is to find unanimous support.
Introduction
• Recently, OECD has tried to engage not only members
but also non-members through establishing Global Fora
which include also non-members on equal footing.
• There are Global Fora on
– Tax Treaties and Transfer Pricing,
– Transparency and Exchange of Information for Tax Purposes,
– VAT.
2. WORK OF THE OECD IN
THE TAX AREA
Tax Conventions
• As it was mentioned in the beginning, double-taxation
treaties are the traditional domain of the OECD.
• The main outcome of the work is the Model Tax
Convention on Income and on Capital.
– Model Tax Convention is a model for bilateral double-taxation
treaty.
– It sets general principles and allocation of taxing rights of the
two contracting countries.
– Used by all OECD countries and some non-OECD countries as a
basis for negotiation with other countries.
– Model Tax Convention is regularly updated.
– The full version has more than 2,000 pages.
Transfer Pricing
• National tax system operating in the globalised world
require that multinational corporations allocate its profit
to particular jurisdictions where they operate.
• Companies must produce separate accounts for all its
members and record intra-group transactions according
to the “arm‘s length principle”.
• Otherwise they could easily shift profit from high-tax
countries to low-tax countries by overpricing exports
from low-tax countries and underpricing imports to lowtax countries.
Transfer Pricing
• The main outcome of OECD‘s work on transfer pricing is
the Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations.
• The Guidelines
– provide guidance on the application of the arm's length principle for
the valuation, for tax purposes, of cross-border transactions
between associated enterprises,
– are used by all OECD countries as a basis for their legislation.
– The full version has almost 400 pages.
Harmful Tax Practices
• In the last decades, countries have been decreasing
corporate income tax rates in order to attract more
investment.
• This is called tax competition.
• There are instances of tax competition which is regarded
as harmful.
– For example, a country might introduce tax incentives only for
new, foreign-owned companies.
• There are instances of tax competition which is regarded
as harmful.
Harmful Tax Practices
• OECD produced a report Harmful Tax Competition: An
Emerging Global Issue in 1998.
– Subsequent progress reports.
• Ineffective exchange of information was identified as one
of the obstacles to eliminate harmful tax practices.
• As an outcome, Model Agreement on Exchange of
Information on Tax Matters was worked out.
– Since its release in 2002, more than 500 bilateral TIEAs were
signed.
– It was used as a basis to update the Multilateral Convention on
Mutual Administrative Assistance in Tax Matters signed by 60
countries.
Tax Administration
• Work of the OECD in the area of tax administration
consist mainly of sharing best practices and experiences.
• Main areas of concern are
– compliance,
– taxpayer services (e-services),
• Two work streams:
– taxpayers with global interests (multinational companies, high
net worth individuals),
– small and medium enterprises.
• One of the outcomes is the biennial report Tax
Administration: Comparative Information.
Consumption Taxes
• Traditionally, OECD worked only in the are of direct taxation.
• With the rising importance of indirect (consumption)
taxation, it was found that these taxes could also cause
double-taxation and other obstacles to the free trade if
countries do not follow similar principles.
– One of the reasons for harmonisation of VAT and excises in the EU.
• That is why OECD started to work also in this area.
• Work on the OECD International VAT/GST Guidelines.
– “the development of the VAT/GST Guidelines is without any doubt
the most prestigious indirect tax project in the world” (prof. Walter
Hellerstein)
3. TAX STATISTICS AND
TAX POLICY ANALYSIS
Overview
• Work on tax policy analyis and tax statistics is carried on
by
– Working Party No. 2 on tax policy analyis and tax statistics
– Joint Meeting of Tax and Environment Experts
• Regular statistical products
– Revenue Statistics
– Taxing Wages
– Tax Database
– Environmental Tax Database
• Analysis of tax policy
– Tax policy studies and Working papers
Revenue Statistics
• The Interpretative Guide defines what is tax.
– In the OECD classification the term “taxes” is confined to
compulsory unrequited payments to general government.
• Data on tax revenues of all member states from 1965
• Data on accrual basis.
– Tax revenue is recorded at the time that the tax liability was
created.
• Breakdown by type of tax and level of government.
Revenue Statistics
• Classification of taxes
– 1000 Taxes on income, profits and capital gains
• 1100 Taxes on income, profits and capital gains of individuals
• 1200 Corporate taxes on income, profits and capital gains
– 2000 Social security contributions
– 3000 Taxes on payroll and workforce
– 4000 Taxes on property
– 5000 Taxes on goods and services
• 5100 Taxes on production, sale, transfer, leasing and delivery of goods and
rendering of services
–
5110 General taxes (5111 Value added taxes)
–
5120 Taxes on specific goods and services (5121 Excises)
• 5200 Taxes on use of goods, or on permission to use goods or perform activities
–
5210 Recurrent taxes (5211, 5212 Paid in respect of motor vehicles)
Revenue Statistics
• Attribution of tax revenues to levels of government
• In general, a tax is attributed to the government unit that
– exercises the authority to impose the tax (either as a principal or
through the delegated authority of the principal),
– has final discretion to set and vary the rate of the tax, and
– also final discretion over the use of the tax proceeds.
• Link: http://www.oecd.org/tax/tax-policy/revenuestatistics.htm.
Revenue Statistics & Czech Republic
• Total tax burden in the Czech Republic has been slightly
above the average of the OECD countries.
Revenue Statistics & Czech Republic
• Czech Republic has higher share of social security
contributions and lower share of personal income tax
and property taxes..
Taxing Wages
• Provides comparative information of tax burden on
labour income of OECD countries.
• Contains information on
– income tax paid by workers
– social security contributions levied on employees and their
employers
– family benefits paid as cash transfers.
Taxing Wages
• Average and marginal effective tax rates are calculated.
• Not based on actual data but on a model.
• Results are presented for different household types
which differ by
– income level (in percentage of average wage)
– household composition (one- and two-earner families, different
number of children)
• Link: http://www.oecd.org/ctp/tax-policy/taxingwages.htm.
Taxing Wages & Czech Republic
• Czech Republic has higher tax burden of single persons
without children but lower tax burden of persons with
children than the OECD average.
Taxing Wages & Czech Republic
• Even with the single tax rate of personal income tax,
Czech tax system (blue) is progressive in basically the
same way as tax systems of OECD countries on average
(purple).
Tax Database
• Comparative information on a range of tax statistics on
– personal income taxes,
– social security contributions
– non-tax compulsory payments,
– corporate and capital income taxes
– taxes on consumption.
– (data from Revenue Statistics and Taxing Wages also included
here.)
Tax Database
• Comparative information on a range of tax statistics on
– personal taxes,
– corporate and capital income taxes
– taxes on consumption.
– data from Revenue Statistics and Taxing Wages also included
here.
Tax Database
• Personal taxes,
– personal income taxes,
– social security contributions paid by
• employees,
• employers,
• self-employed.
Tax Database
• Personal taxes,
– non-tax compulsory payments
• compulsory payments made to organizations outside the government sector
or because they are not unrequited,
– measures of tax burden
• average rate,
• marginal rate,
• tax wedge (income tax, employer and employee social security contributions
and pay roll tax as a percentage of labour costs).
Tax Database
• Corporate and capital income taxes
– basic (non-targeted) rates,
– small business tax rates,
– Corporate income taxes relating to sub-central governments.
Tax Database
• Taxes on consumption
– value added tax
• Rates of VAT
• registration threshholds
– excise duties on
• beer,
• wine,
• alcoholic beverages,
• mineral oils,
• tobacco .
• Link: http://www.oecd.org/ctp/tax-policy/taxdatabase.htm
Tax Policy Studies
• Since 1999, 21 studies published.
• Studies deal with specific tax policy topics, e.g.
– Corporate Tax Incentives for Foreign Direct Investment,
– Tax Effects on Foreign Direct Investment: Recent Evidence and
Policy Analysis,
– Taxation of SMEs: Key Issues and Policy Considerations,
– Choosing a Broad Base – Low Rate Approach to Taxation,
– Tax Policy Reform and Economic Growth,
– Taxation and Employment.
• Link: http://www.oecd.org/ctp/tax-policy/tax-policystudies.htm
3. BASE EROSION AND
PROFIT SHIFTING
Introduction
• International tax avoidance is as old as international
trade.
• Both individuals and corporations use tax havens and
inconsistencies between national tax legislations to avoid
taxes.
• After the recent crisis, governments started to increase
taxes and cut expenditures.
• Suddenly, the issue that the large, usually very profitable
MNE were able to avoid taxes while small companies or
ordinary people faced higher tax burden, started to
matter.
Introduction
• International tax avoidance started to be a real political
problem.
• OECD emerged as the natural discussion forum on these
issues during 2012 and the “Base Erosion and Profit
Shifting” project was defined.
• In February 2013, CFA approved “Addressing Base
Erosion and Profit Shifting” report.
Introduction
• In July 2013, “Action Plan on Base Erosion and Profit
Shifting” was approved by the CFA.
• It was endorsed also by all G20 countries (8 G20
countries are non-OECD countries).
– “We welcome the establishment of the G20/OECD BEPS project
and we encourage all interested countries to participate” - G20
Leaders, September 2013, Saint Petersburg Summit
• The Action Plan defines 15 Actions to tackle BEPS. Most
actions aim at changing rules of international taxation
system.
• Outcomes should be delivered by September 2015.
What is BEPS
• Action Plan describes BEPS as:
– “BEPS relates chiefly to instances where the interaction of
different tax rules leads to double non-taxation or less than
single taxation. It also relates to arrangements that achieve no or
low taxation by shifting profits away from the jurisdictions
where the activities creating those profits take place. No or low
taxation is not per se a cause of concern, but it becomes so when
it is associated with practices that artificially segregate taxable
income from the activities that generate it.”
• BEPS project deals only with corporate income tax
avoidance, not with personal income taxes.
What is BEPS
• Typical strategies used by companies to shift profits
– transfer pricing (use of non-arm‘s length prices),
– intra-group
• payments of interest,
• royalties,
• transfer of risk,
– use of hybrid instrument (deductible in one country, exempt in
another country),
– allocation of third-pary interest payments to high-tax country,
– Allocation of sales to low-tax countries,
– treaty shopping.
What is BEPS
• Example of tax avoidance arrangement:
– subsidiary located in Ireland with place of effective management
in a tax haven (e.g. Bermuda), i.e. not conisdered as an Irish tax
resident by Ireland,
– this subsidiary co-develops software with its headquarters in the
US and it owns the patents resulting from to joint R&D,
– this subsidiary owns another Irish subsidiary which makes sales
in all European countries,
– the second subsidiary pays royalties for the use of intellectual
property to the first subsidiary,
– profit are “invested indefinitely abroad” to avoid US tax.
Impacts of BEPS
• Decrease of CIT revenues which means that (especially
in times of crisis and low economic growth) other taxes
must be increased even more.
• Impacts on production efficiency and competition
– incentives to invest abroad instead in the home country,
– might actually increase attractiveness of high tax countries
(“taxes do not matter anymore”),
– purely domestic companies face higher tax burden than MNEs
because they do not have so many tax avoidance possibilities,
• Impacts on equity : upper income classes invest more in
shares (and derive non-taxed income) than lower income
classes.
Impacts of BEPS
• Spillover effects
– tax policy of one country can influence other countries and may
erode their tax bases,
– the affected countries might react and trigger tax competition
(“race to the bottom”).
Solutions?
Thank you for your attention.