What You Need to Know: The OECD’s New Tax Reforms

On Monday, the OECD unveiled new standards for international corporate taxation. The changes are the most expansive overhaul of international tax rules in decades.

The OECD stated that, “Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues.”

The new rules still have to be approved by finance ministers and G-20 leaders, but once approved some rules will take effect immediately. Below are some of the key changes proposed. You can read the full document here.

Key Changes:

The majority of the OECD’s changes are designed to create a system where company’s profits are closely tied to where revenue is generated.

    • More detailed reporting requirements – Multinational companies will be required to create a thorough summary of their global activities, broken down by country. This summary will be shared with tax regulators globally.
    • Crackdown on cross-border structures – Countries will introduce rules to prevent cross-border structures that exploit the discrepancy in tax codes between two countries.
    • Tougher requirements on permanent establishment – There will be more stringent rules on what constitutes taxable business within a country and how a company proves whether it is active or inactive within a country.
    • Increased transfer pricing curbs – The OECD continues its crusade against the manipulation of transfer pricing, with changes designed to “make sure that the outcomes are in line with value creation and substance,” according to OECD official Marlies de Ruiter. The new revisions focus on three areas: 1) contractual allocation of risk, 2) transactions involving intangibles, and 3) other high-risk areas (including “cash boxes”).
    • Stricter guidelines for digital multinationals – There will be tighter definitions to bar digital multinational companies from splitting closely aligned business activities into onshore and offshore components. Tax experts point to this as one area where OECD is directly challenging Google’s operating practices in Europe.

Some Caveats:

Not everyone is thrilled about the proposed changes. Several executives at (mostly U.S.-based) technology companies have voiced the concern that the new changes allow for too much interpretation by national tax authorities, which could result in companies being taxed multiple times on the same profit by different governments.

Conversely, others have expressed skepticism that all governments, particularly those of the U.S. and the U.K., will implement the proposed changes. Richard Murphy of Tax Research UK told the BBC, “Anyone who thinks that this will solve the problem with international tax is living in cloud cuckoo land.”

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