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BEPS Action Plan: Could “Exile on Main St” have been written in a post-BEPS world?

Brian Peccarelli  Chief Operating Officer, Customer Markets

Brian Peccarelli  Chief Operating Officer, Customer Markets

The prospect of leaving a country to avoid a high tax rate is not something unique to rock stars. In times past, many companies have also pursued a similar course of action. However, with the advent of the OECD’s (Base Erosion and Profit Shifting) BEPS Action Plan, multinational enterprises (MNEs) must be much more transparent in reporting their global allocation of income and taxes, among other indicators of economic activity.

This summer marks 45 years since the Rolling Stones made a “Brexit” of their own, by fleeing the United Kingdom and its 90+% tax rate on high earners in favor of the French countryside. What then transpired became the stuff of rock and roll legend: staying one step ahead of British taxing authorities by seeking a haven in the south of France, the Stones settled in Nellcôte where they would record Exile on Main St, a double album considered by critics to be among the greatest rock records of all time.

In the Stones’ storied history, Nellcôte stands out for the abundance of misdeeds and miscreants. Besides creating an environment rich in personal delinquency and artistic liberation, it also allowed the expatriate Stones to protect a sizeable amount of income from seizure.

Since their migration in 1971, the Stones have been among the most noteworthy, though certainly not the only, celebrity tax dodgers. As reported last year in Fortune magazine, the Stones have paid a tax rate of just 1.5% (or $7.2 million) over a 20-year period on estimated earnings of $450 million, thanks to favorable tax laws in the Netherlands where they have established a financial entity.

A New York Times story in 2007 about the band’s finances disclosed that many Multinational Entities (MNEs) had set up holding companies to take advantage of tax shelters very similar to the one employed by the Rolling Stones, a practice that does catch the attention of taxing authorities. However, companies that might be tempted to follow the example set by the Stones need to be aware that the days of tumbling dice by seeking to move their taxable activities to low or no-tax jurisdictions are over. Simply put, while the Stones could get away with it, MNEs can’t afford to rock n’ roll with ever-changing international tax compliance.

Enter the BEPS Action Plan

With the advent of the OECD’s BEPS Action Plan, the global tax environment is undergoing a significant regulatory disruption. As I shared in an article about BEPS country-by-country reporting (CbCR), new regulations are evolving the taxation landscape across the globe such that we are seeing an unprecedented era of transparency and cross-border regulatory collaboration. BEPS Action 13, a cornerstone of the OECD’s BEPS Action Plan, requires MNEs to report financial and tax information related to where profits are generated, value is added and risk is assumed.

The image of the Stones as tax dodgers played to the band’s rock n’ roll outlaw brand in 1971. Plus, the Stones were taxed as individual British citizens and not as an enterprise; as such, they could avail themselves of the United Kingdom’s Foreign Earnings Deduction of that era which provided as follows:

“…where individuals who are resident and ordinarily resident in the United Kingdom perform the duties of their employment wholly or partly abroad, they are entitled to a 100 percent foreign earnings deduction for tax purposes, provided they are absent from the United Kingdom for a “qualifying period” of at least 365 days. This relief is given by allowing a deduction equal to the individual’s earnings so that in fact, no tax is due on those earnings.”

– Taken from When Tax Planning Rocks: How the Rolling Stones Went Dutch to Cut Taxes The Untold Story of a “World Famous Accountant” Named Mick Jagger, Practical European Tax Strategies, Volume 9, Number 4, April 2007, by Checkpoint contributors Joseph B. Darby III and Maya Chosé.

As global tax authorities pass laws and regulations to comply with the BEPS Action Plan, MNEs will be increasingly pressured to fall in line or face costly penalties. In the 2016 Global BEPS Readiness Survey conducted by Thomson Reuters and TP Week which elicited responses from 207 corporate executives and tax professionals around the globe, respondents listed audit exposure (41%) as their biggest issue resulting from BEPS Action 13 compliance. Conversely, only 18% of respondents said that their companies have provided more resources to help them cooperate with BEPS implementation, while 86% of respondents said that the BEPS Actions will cause their tax departments to dedicate more time to that area. Transfer pricing documentation looms large, with 83% of survey respondents citing it as the biggest change in their tax department resulting from BEPS.

Though it could be said that the Stones effectively relocated their business to France during the summer of 1971 (until they later established a tax haven in the Netherlands), what would it mean under BEPS if they had been treated as an enterprise? Would they have had to calculate tax rates in each domain where their goods were manufactured (say for instance, a global tour in dozens of nations employing local technicians) and then remit those taxes to the local taxing jurisdictions? And how could they track those rates, subject to constant regulatory change, without sophisticated software?

Despite the tax drama dogging the Stones at the time, they might have been insulated from BEPS compliance due to the amount of the band’s earnings and the CbCR Filing Threshold: among the BEPS Action 13 recommendations, MNEs are exempt from CbCR requirements if their annual group consolidated revenue is less than €750 million (or roughly £640 million) for the preceding fiscal year (adjusting for inflation, that would have been a little over £50 million in 1971).

Though the Stones are referred to as rock’s billion-dollar band, they have reportedly generated a total of just $1.5 billion in gross revenues for the combined years spanning 1989 to 2002 (and I recognize the irony of using the word “just” when referring to a billion dollars). That breaks down to an average of £89 million annually in a 13-year span. At an annual rate of earnings of just £89 million and adjusting for inflation, even if we treated the Stones as a single enterprise and not as a collection of individuals that earned the same amount of gross revenues in the relevant time span, they weren’t generating quite the annual income that a major MNE typically generates in a year and thus which would trigger CbCR requirements. So they had that going for them.

While the Stones of 1971 would likely been insulated from the effects of the BEPS Action Plan (had one existed then) due to their status as individuals rather than as an enterprise, as well as not meeting the revenue threshold required for reporting, today’s MNE can’t afford to go into its own exile in a bid to seek tax havens. Thanks to the BEPS Action Plan and technological advances, taxing authorities increasingly have the tools and the regulations to shine a light on corporate revenue generating activities wherever they may occur. MNEs themselves need to embrace technology and the changing regulatory landscape if they are going to stay in tune.

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