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OECD Releases New Base Erosion and Profit Shifting Report

The ability of multinationals to exploit differences in domestic tax rules and international standards to significantly reduce their tax liabilities continues to be a pressing and current issue for a number of jurisdictions.  This has lead the Organization for Economic Cooperation and Development (OECD) to release its first report on base erosion and profit shifting on 12 February 2013.  The report sets out the business case for further action from the OECD in relation to combatting base erosion and profit shifting.  This 91-page report will be presented at the meeting of the G-20 finance ministers and central bank governors in Moscow on 15 – 16 February 2013.

The report concludes that a global response from governments is required in addressing the problem, noting that it may be difficult for any single country acting on a standalone basis to fully address the issue.  This is because base erosion and profit shifting strategies capitalise on the interface between differing tax rules across jurisdictions. 

Revenue Minister Peter Dunne has endorsed the report, commenting that “the issue of large multinationals shifting their profits to countries in order to gain the most favourable tax result is of huge importance to OECD member states who are concerned about how this practice can distort and erode their respective tax bases”.

He goes on to say, “The OECD work will help New Zealand and other countries to identify weaknesses in their rules and to ensure that international tax frameworks keep pace with new business models.”

Highlighted in the report is the need for current international tax standards to catch up with changes in the global business climate, in particular with regard to intangible property and the development of the digital economy.  The report also recommends increased focus on improving the transparency of effective tax rates of multinationals.

If the report is successful in demonstrating to the G-20 that further work is needed in relation to base erosion and profit shifting, it is proposed that a comprehensive action plan be submitted to the Committee on Fiscal Affairs at its next meeting in June 2013.  The primary purpose of the plan is to provide countries with the tools to align the right to tax with real economic activity. 

Of note, the action plan will include a proposal to further develop improvements to transfer pricing rules that address specific areas where the current rules produce undesirable policy outcomes. The action plan also includes proposals in relation to the tax treatment of intangibles, intra-group financial transactions, and instruments that neutralise the effects of hybrid instruments which take advantage of asymmetries in domestic and international tax regimes.

The report can be accessed at http://www.oecd.org/ctp/BEPSENG.pdf.

For further information, please contact Diana Maitland on (04) 470 3630 or Bart de Gouw on (09) 303 0889

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