Making Sense of Profit Shifting: Pascal Saint-Amans

Pascal Saint-Amans is Director of the OECD’s Centre for TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Policy and Administration (CPTA).

Under a mandate from the G20 leaders, Mr. Saint-Amans is directing one of the most significant transnational efforts in the history of international taxation, the OECD’s Base Erosion and Profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. (BEPS) project. Regardless of the final recommendations presented at the G20 meeting in October of this year in Lima, Peru, the BEPS initiative is transforming the landscape of international taxation, redefining the international tax arena for host countries, residence countries, and multinational firms, alike.

During his tenure at the CPTA, Mr. Saint-Amans has held several positions prior to assuming the role as Director, in 2012—among others, as Head of the International Cooperation and Tax Competition Division and Head of the Global Forum Division.

Previously, Mr. Saint-Amans served in the French Ministry of Finance in various capacities—including as supervisor of the EU work on direct taxA direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax. es, overseeing legislation and policy on wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. es and mergers and spin offs, as well as heading tax treaty negotiations and mutual agreement procedures—for nearly a decade.

Mr. Saint-Amans graduated from the National School of Administration (ENA) in Strasbourg, France, in 1996. He also holds a history degree and a degree from the Paris Institue of Political Science.

In this interview with the Tax Foundation, Mr. Saint-Amans discusses the evolving landscape of international taxation, tax planning, and multilateral cooperation. Specifically, Mr. Saint-Amans highlights areas such as the challenges in pinpointing the location of value added on a geographic basis, the future of the corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , and how he defines a successful outcome for the BEPS project. This interview is part of our 2015 Tax Foundation Forum series.

Tax Foundation: What are the unique factors or drivers underlying the profit shifting phenomenon?

Pascal Saint-Amans: The international common principles drawn from national experiences to share tax jurisdiction have not kept pace with the changing business environment. Tax rules are still grounded in an economic environment from 30 or more years ago. Today’s economic environment is characterized by a high degree of economic integration across borders (global value chains), major importance of intellectual property and other intangible assets as value drivers, and by major developments in information and communication technologies.

The current national tax rules are not coordinated, so there are gaps and frictions among different countries’ tax systems which are not dealt with by bilateral treaties or in the design of national tax rules. Sophisticated multinational enterprises (MNEs) can take advantage of these technically-legal tax asymmetries. They are often aided by some governments willing to engage in harmful tax practices, which can be addressed with greater transparency and economic substance requirements.

TF: How does profit shifting alter the behavior of firms?

Saint-Amans: BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation. It relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place. It is associated with practices that artificially segregate taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. from the activities that generate it. These are tax planning activities, not economic business activities.

Conducting innovative research and development in one country, then putting the patent into a cash-box in another country where no R&D is done, at an artificially low price, is one example of profit shifting. Shuffling paper around and creative valuations to shift reported profits are much easier than moving research scientists, production facilities, and management. There is tremendous talent being wasted on minimizing taxes based on artificial schemes. There are tremendous resources being misallocated because the tax rules aren’t grounded in today’s economic and business models.

Companies are investing in tax mining, rather than real mining. They are investing in devising tax schemes, rather than future business opportunities. These BEPS behaviors result in greater leverage due to excessive interest deductions, distortions in foreign direct investment, and unfair advantages in product competition due to the inappropriate tax savings.

The world would be better with firms competing for investments and people based on their innovative ideas rather than on their artificial tax schemes.

What specific challenges are there in determining where—in what jurisdiction—income from multinational corporations should be booked?

Measuring economic income is difficult in a domestic context, and manyfold more difficult in an international context. Establishing true arms’-length prices between related entities, especially for relatively unique intangibles and services, is a major challenge, but the BEPS Project is making significant progress. Transfer pricing between related entities involves valuations which by their nature are difficult and can be questioned by tax administrations. There are many other difficult issues, such as permanent establishments, hybrid mismatches, excessive interest and others which the BEPS project is tackling.

The BEPS project, while strengthening the transfer pricing rules and other international tax ruleInternational tax rules apply to income companies earn from their overseas operations and sales. Tax treaties between countries determine which country collects tax revenue, and anti-avoidance rules are put in place to limit gaps companies use to minimize their global tax burden. s, is also trying to make dispute resolution mechanisms more effective. It is important that multinational corporations are not caught between two countries trying to tax the same income.

The OECD has long been concerned about double or triple taxation of multinational corporations as they invest and grow globally, but we must also be focused on double non-taxation. It is important that multinational enterprises pay the single layer of corporate tax that domestic corporations pay or that other multinational corporations not undertaking aggressive tax planning pay.

There will be future debates about who has the jurisdiction to tax multinational corporations’ foreign income, whether source or residence countries. The BEPS project is trying to ensure that the international corporate tax rules are coordinated, rather than individual countries attempting to address their concerns in an uncoordinated fashion.

What is the future of the corporate tax base in an increasingly global, technology-driven, and knowledge-intensive economy, where determining the economic nexus of income may be growing in difficulty?

You have identified some of the key drivers to why the current uncoordinated national tax rules need fixing. I think the BEPS Project will go a long way in addressing the current major problem areas.

Whatever happens over the next 20-30 years, tax administrations and tax policymakers will need to closely monitor and periodically update the international tax rules to be in sync with how the future economy and business models work.

It is interesting that many commentators expressed concern about the digital economy and thought special rules were needed for the digital economy. However, after looking carefully at the issue, the BEPS project concluded that the digital economy is increasingly becoming the economy itself, so it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes. The digital economy exacerbates BEPS risks, but those risks are being addressed by the other Action Items such as transfer pricing and permanent establishment rules.

Some academics have talked about the possibility of corporate cash flow taxes or taxing corporate income at the shareholder level on an accrual basis. Those are worth studying as potential future reforms, but the G20 and OECD leaders want the current corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. to be fixed now.

Why and for whom is it important to address profit shifting?

The BEPS Action Plan notes that profit shifting harms many different groups. It undermines the integrity of the tax system, so taxpayers deem reported low corporate taxes as unfair, and could adversely affect voluntary compliance of other taxes. Public resources are short-changed and tax administrations have to make extra efforts to ensure compliance. In many developing countries, the lack of tax revenue leads to critical under-funding of public investment that could help promote economic growth. Misallocated resources can also hurt economic growth.

Individual taxpayers are harmed when they have to pay higher taxes to make up for the loss from profit shifting.

Businesses that operate only in domestic markets, including family-owned businesses and new innovative companies, are harmed when they have to compete with MNEs that have lower tax costs due to profit shifting. MNEs that are not aggressive in tax planning can be put at a competitive disadvantage. MNEs increasingly face significant reputational risks when their effective tax rate is viewed as being too low. Finally, MNEs face the threat of increased multiple taxation and burdensome uncoordinated rules and requirements, unless profit shifting is addressed in an internationally coordinated manner.

Finally, it is very important to address profit shifting for international tax rules to sustainably eliminate double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. . If we do not fix double non-taxation, there is a high risk that countries will walk away from consensus on existing rules, which would jeopardize the investment climate. Equally, fixing the rules will strengthen them and the involvement of G20 countries will also ensure the broadening of their territorial coverage.

How can the BEPS project help address profit shifting?

The G20/OECD BEPS Project has 15 specific Actions that will address the key issues of profit sharing. I’ve already mentioned many of the Actions, including neutralizing hybrids, strengthening CFC rules, limiting interest deductions, countering harmful tax practices, preventing treaty abuse, preventing artificial avoidance of permanent establishment, and aligning transfer pricing with value creation.

In addition, there is a need for greater transparency about BEPS. The Project has proposed improved transfer pricing documentation, including country-by-country reporting by large MNEs, and to require taxpayers to disclose their aggressive tax planning arrangements to tax administrators. It will also include an analysis of the scale and economic impact of BEPS and BEPS countermeasures and tools to monitor BEPS in the future.

Finally, it will make dispute resolution mechanisms more effective and expedite the implementation of these changes with a multilateral instrument, so the changes don’t have to be done on a treaty-by-treaty basis.

How do you define a successful outcome for the BEPS project, and what are the key steps in reaching that outcome?

There are many ways to define success. One will be the acceptance by the G20 Leaders of the BEPS Project in November, where the 15 Action Items will have been developed by consensus of over 50 different countries. Such internationally coordinated action will be a major accomplishment.

Another measure of success will be that BEPS is no longer headline-grabbing stories around the world. When businesses are competing fiercely in providing innovative new goods and services in new markets, rather than facing parliamentary scrutiny over their tax affairs, that will mean that the BEPS project has aligned tax with value creation, reduced the perception of unfairness, and improved economic efficiency.

Businesses should consider the BEPS project to be a success when they are not having to comply with 100 different disclosure requirements or 150 different anti-avoidance measures. They should appreciate the high compliance costs that will have been avoided.

So there are a lot of different measures of potential success. Any outcome requiring political consensus will not be perfect, and will require careful implementation, monitoring, and eventual recalibrations, but I’m looking forward to the approval of the BEPS Project by the G20 Leaders in October as a clear signal of success.

How should high-tax, low-tax, developed, and developing countries, respectively, respond to the BEPS initiative?

If they are not already involved, and 62 countries are actively involved, they should be ready to start implementing the BEPS Action Items later this year.

In the next 1-2 years, what major developments do you expect with respect to the BEPS project?

I’m looking forward to the G20 Leaders meeting in Lima in October of this year. Then, hopefully, we can all take a breather for a brief while, then focus on the implementation of the BEPS Action Plan by individual countries. The start of country-by-country reporting for the 2016 tax year will be an important development. Additional guidance on some of the Action Items will be forthcoming in 2016 and 2017, and the multilateral instrument will be moving forward.

There are a lot of other important tax issues in addition to the BEPS project, which we have continued to make progress on the past two years, and those projects will get more attention. There is exciting progress in the Automatic Exchange of Information, Tax Inspectors without Borders, and Value-Added Tax guidelines, among many others.

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