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Is your company really ready for international tax compliance?

A discussion with Pascal Saint-Amans of the OECD

With the advent of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, greater compliance and accountability in taxation and commerce are coming to the forefront of international trade. The impact of the 15 Action Items for BEPS will have a profound influence on how companies conduct business in the years ahead.

Brian Peccarelli, president of Thomson Reuters Tax & Accounting business, sat down with Pascal Saint-Amans, director, Centre for Tax Policy and Administration for the Organisation for Economic Co-operation and Development (OECD), for a candid discussion about the state of all-things BEPS.

Brian Peccarelli: Pascal, thank you for joining me today. To jump right in, let me ask you which of the BEPS Actions will generate the most concern during the OECD’s ongoing monitoring phase?

Pascal Saint-Amans: We have four minimum standards, and the review will be on those standards. They are on harmful tax practices, on treaty shopping, on Country-by-Country Reporting(CbCR), and we have the minimum standards on mutual agreement procedures.

And beyond these four minimum standards we have all the rest of the BEPS measures, which are standards but where there will be monitoring, rather than a peer review process.

So where do I anticipate the greatest challenges? Harmful tax practices definitely because it is very diverse. You have a variety of standards, a large variety of countries and that’s not going to be easy but I don’t anticipate major problems there. The minimum standard on treaty shopping, I think, is pretty easy to check. I mean, you look at the treaties and you can see easily whether it meets the minimum standards or not.

Mutual agreement procedures is, I think, going to be the most important in terms of impact of the review. Finally, Country-by-Country Reporting is pretty clear: You check whether the party is complying or it is not – it’s not difficult. It’s a yes or no answer.

Regarding the mutual agreement procedure, what is at stake is not a yes or no answer; it’s more a behavioral impact: behavioral change in competent authorities and more broadly on tax administrations. We need to design the review in such a manner as to ensure we have these behavioral impacts, which means that it’s a delicate balance where you need to be tough on competent authorities in terms of your review so they really feel like they are reviewed, but you also need to do it in a way where they don’t reject what you are doing because otherwise they are in denial where you can’t really drive change.

I think that’s probably the one where the engineering of the review and the way we handle them will be the most sensitive. We will be reporting all that to the G20 and the goal, precisely, of Action 14 is to make sure that the competent authorities are under the scrutiny of finance ministers. The finance ministers are the only ones able to get the competent authorities to change, and that’s why you can see that the review is at the core of this mechanism for change.

Peccarelli: When do you anticipate the OECD will release toolkits for tax authorities in developing countries that may implement some or all of the BEPS recommendations?

Saint-Amans: We have a mandate together with the IMF, the World Bank and the UN to develop a series of toolkits. The development of these will have to be linked to the building of the new BEPS inclusive framework because then the jurisdictions participating in the inclusive framework will be on an equal footing.

There are eight toolkits, covering issues like tax incentives, transfer pricing documentation and negotiation of tax treaties. There are deadlines for the delivery of the toolkits (mainly 2017), and I think we’re on track there.

For developing countries, it’s not a matter of just the developed countries or the G20 countries telling them what to do or how best to use the toolkits. Rather, it’s about the developing countries taking ownership and if there are some standard- setting issues there, well, they will be on an equal footing in the Committee on Fiscal Affairs (CFA) to amend the standards as necessary to reflect their views. So I think that’s going to be ongoing work. It’s a priority, and the schedule is pretty tight in an environment where the CFA will be more inclusive. Therefore, the CFA will address the issues raised by a wider range of countries.

Peccarelli: Are you fairly confident at this point that even though there are challenges, the toolkits and framework will be ready in 2017?

Saint-Amans: Yes, of course. In fact, the first meeting of the inclusive framework will take place in June 2016. I have no big doubts there. The toolkits are an interactive process, and for sure there’ll be a number of intermediary outputs before the final outputs, but also taking care of the needs and perspectives of developing countries is not going to go away simply because we delivered a toolkit for them.

Peccarelli: In 2016, which BEPS Action, other than 14, do you expect to be implemented by the most countries?

Saint-Amans: That’s a good question. The dynamic is very positive and countries are moving forward. Where do we see changes happening? We can  see movement on Action 6 – Treaty Shopping, with the negotiation of the multilateral instrument to amend bilateral tax treaties. We currently have 96 countries around the table to negotiate that, and those 96 countries have about 2,000 tax treaties out of a global total of just over 3,000, so that is very significant and that is a massive implementation of the standard.

We can see changes happening in the UK, and I expect this will happen in many other countries on the interest deductibility together with, in some countries, the Controlled Foreign Company (CFC) legislation.

Action 7 on the Permanent Establishment (PE) will also be part of the multilateral convention. Maybe not as many countries will move there as we’ll have on Action 6, but a significant group of countries will change on Action 7. Obviously beyond the Transfer Pricing measures, we have hybrid mismatches, we have tax treaty matters and we have a convergence on the interest deductibility and on the CFC rules. As a minimum standard, the work on harmful tax practices will happen in countries which will amend their legislation; this is already happening. So it’s basically moving across the board.

Peccarelli: You mentioned Action 7. Were you surprised that the US did not address the
Action 7 recommendations on PE in its model tax preview released this year and if so, why?

Saint-Amans: I would be very naïve if I had been surprised. Action 7 is not a minimum standard. It’s to be incorporated in the Model Tax convention and there are always reservations in the Model convention. The fact that the US doesn’t put it in its model doesn’t mean that the US will not do it. It means that it’s not its starting point. We can understand that the US is not offering, without any form of negotiation, to everyone on earth a change on Action 7.

You know we have Action 6, which is a minimum standard; everybody will do those without negotiating, while on Action 7, it sets out what countries can do. This is the model; now they can negotiate it, for instance, in exchange for an arbitration provision. On Action 14 there’s a minimum standard on the mutual agreement procedure but it does not include arbitration.

So, was I surprised? The answer is no. Does it mean that the US is disregarding what has been negotiated? The answer is no. It is compatible with the status of Action 7.

Peccarelli: Which area of BEPS did you hope for more progress on than we’ve had to date, if any area?

Saint-Amans: I would say that the overall package actually went further than what we initially expected. When we launched it, the idea was to change the model as is the case in Action 7 to say well, these are the best practices; this is the aspirational standard, and actually we ended up with minimum standards. The CbC Reporting is probably the one where all the countries moved extremely fast and even faster than they initially agreed to do. When you see that, 2016 is now considered ‘the year’ where this must stop. When you read the agreement, when it was reached last summer, it was not that obvious, and it was best efforts. Now it is expected that everybody would do it in 2016.

So you can see that it went beyond what was initially agreed. It’s the same for interest deductibility. It’s not only that best practices are here but it is a common approach, not as good as a minimum standard, but we are moving in that direction.

The game changers, probably, are CbC Reporting, Action 6 (the minimum standard on Treaty Shopping) and the automatic exchange of tax rulings, which I think is a game changer in terms of tax cooperation.

The area where we can be a bit frustrated, even though I think it will have major impact in tax and finance, is the Transfer Pricing area, where you can say that the way we deal with the allocation of capital may not be fully satisfactory. If you have cashboxes, you still have a return to the cashbox to remunerate the capital, but when you look at the broad picture, in spite of a risk-free return (because it’s only a risk-free return), you actually kill the cashboxes if it works well.

The dynamic has been pretty strong and positive. I was in Shanghai for the G20 finance ministers meeting recently, and the political pressure is still extremely strong and even surprised me. Many of them said, “Well, it’s been agreed but now the work starts and we need to move fast.”

Q&A with Pascal Saint-Amans, director, Centre for Tax Policy and Administration for the Organisation for Economic Co-operation and Development (OECD)

Getting to know Pascal Saint-Amans

What books are you currently reading?
I just finished a biography of Woodrow Wilson, president of the US, by John M. Cooper. I read it to better understand the context around the creation of the League of Nations, which is where today’s international tax system finds its roots. Now I’ve started a play I’ve already read, but I always love: Shakespeare’s  Othello.

What did you dream of becoming as a child?
I do not dare confess it. [Laughter] It looks so fit for purpose, but I really dreamed about having an international job; something similar to what I’m doing now. The truth is, until I was 11, I wanted to be a TV journalist. Then I realized that they were always interviewing people. At some point I said, well, I don’t want to be the interviewer, I want to be the interviewee. Otherwise, my real dream job would have been to be an actor.

What was the last vacation or holiday that you took?
The last vacation was good; it was over Christmas and after BEPS. I went skiing for one week in the French Alps. The weather was great, so good that there was hardly any snow in the mountains, but as you know the French Alps are pretty high and so we could ski. Then, I went surfing for five days in Biarritz. I’ve been taking lessons for six years so now I am just starting to be a bit independent on my surfboard.

What are you passionate about?
Work takes a lot of my energy but what I’m passionate about is something very simple: reading storybooks  to my son every night and spending time with him. I don’t have much time at home. Also going surfing with my son, because we do it together and that’s great. I also really enjoy travelling. I like being in beautiful places.

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