The plan provides a "global roadmap" giving governments the "domestic and international instruments to prevent corporations from paying little or no taxes", the OECD said.
The action plan was produced at the request of the G20 group of the world's 20 most industrialised nations and introduced at this week's G20 Finance Ministers’ meeting in Moscow. It follows an OECD report produced for the G20 Finance Ministers in February, warning that some large international businesses were paying as little as 5% in corporate taxes.
The report found that many double taxation agreements between different jurisdictions do not properly reflect the way that large companies are now doing business. By failing to properly take account of cross-border integration, the value of intellectual property or new communications technologies, the rules give large businesses an unfair competitive advantage over smaller businesses, the report said.
The tax affairs of multinational companies including Amazon, Starbucks and Google have come under scrutiny in recent months following accusations of 'profit shifting' or deliberately transferring profits from high tax jurisdictions to those with lower rates of tax. In June the Public Accounts committee (PAC) reported on its investigation into Tax avoidance and Google.
“This Action Plan, which we will roll out over the coming two years, marks a turning point in the history of international tax co-operation. It will allow countries to draw up the co-ordinated, comprehensive and transparent standards they need to prevent BEPS,” said OECD Secretary-General Angel Gurría. “International tax rules, many of them dating from the 1920s, ensure that businesses don’t pay taxes in two countries – double taxation. This is laudable, but unfortunately these rules are now being abused to permit double non-taxation. The Action Plan aims to remedy this, so multinationals also pay their fair share of taxes” he said.
The OECD's action plan recognises the importance of addressing the digital economy, looking at both direct and indirect tax. It says that a task force will be formed to identify the difficulties the digital economy poses for existing tax rules and to propose solutions. One particular issue to be considered is the ability of a company to have a significant digital presence in a jurisdiction but not to be subject to tax there.
The action plan will develop a new set of standards to prevent 'hybrid mismatches' - whereby a deduction is received in two jurisdictions or a deduction is received in one without a corresponding tax charge in another. The OECD says that country rules that allow taxpayers to choose the tax treatment of certain domestic and foreign entities could "facilitate hybrid mismatches". The US's 'check the box' rules are an example of this type of provision.
New double tax treaty provisions and changes in domestic laws, such as rules to prevent deductions if a payment is deductible also in another state, are proposed in the action plan.
In addition stronger rules on controlled foreign companies would allow countries to tax profits "stashed in offshore subsidiaries", the plan says.
Rules to prevent "excessive" interest deductions are also proposed. One area that the rules will focus on in particular is the use of finance from related companies in low tax jurisdictions.
The OECD said that changes should be made to double tax treaties and domestic provisions to prevent treaty abuse and to confirm that treaties cannot be used to generate "double non-taxation". Changes to the definition of permanent establishment are also proposed. These changes are aimed at the situation where contracts for the sale of goods of a foreign enterprise can be negotiated by a sales force employed by a local subsidiary of the foreign enterprise, without the bulk of the profits being taxable in that jurisdiction. Google was questioned by the PAC, earlier this year, in relation to this type of arrangement.
The action plan says it aims to "align tax with substance", by reforming the transfer pricing rules to ensure that taxable profits cannot be artificially shifted, through the transfer of intangibles, risks or capital, away from countries where the value is created.
It says that greater transparency and improved data are needed because of the "growing disconnect between the location where financial assets are created and investments take place and where MNEs [multinational enterprises] report profits for tax purposes". Requiring taxpayers to report their aggressive tax planning arrangements and new rules about transfer pricing documentation are also proposed.
Many of the proposals suggest changes to double tax treaties. The OECD recognises that negotiating amendments separately to each double tax treaty would take a very long time. It therefore suggests the development of a multilateral instrument, which for those jurisdictions that signed up, would amend bilateral double tax treaties.
Eloise Walker, a corporate tax expert at Pinsent Masons, the law firm behind Out-law.com said "anyone in the media or the public who thinks amending tax treaties, or signing up everyone to a multi-lateral instrument, is going to be a swift or comprehensive process, think again: inter-governmental co-operation always, without exception, gets mired in arguments about its scope and specifics – just look at the European Union financial transaction tax proposals."
The OECD also proposes changes to the 'mutual agreement' procedures, whereby states can resolve disputes about which one has the taxing rights over particular income or profits.
Jason Collins, a tax disputes expert at Pinsent Masons said: "it is interesting that the OECD intends to 'beef up' dispute resolution procedures as that is often the crux of it. There will often be a three way dispute between a multinational and two national tax authorities." He said "A global mediation system, using international mediation centres, like Qatar, would work well."
In its action plan the OECD says that "a bold move is needed by policy makers to prevent worsening problems". However, it emphasises that co-ordinated international action is required, stating that if its action plan fails there is a concern that some countries will take unilateral action "resulting in avoidable uncertainty and unrelieved double taxation".
"Every government wants to tackle tax avoidance, but every government also wants to offer tax incentives (like the UK’s dwindling corporate tax rate) to attract every other country’s key corporate businesses to them. Unless a truly global multi-lateral agreement is signed by every key jurisdiction, expect this to be scaled back to more modest domestic legislation tackling particular instances of double non-taxation” said Eloise Walker.
The plan confirms that the consensus among governments is that moving to a formulary system of apportionment of profits, sometimes referred to as 'unitary taxation' is "not a viable way forward". Unitary taxation is a method of allocating the profit earned by a corporate group amongst the tax jurisdictions in which the group operates. It is an alternative to the current system whereby a branch or subsidiary within the jurisdiction pays tax as a separate entity, with prices for transactions between group members calculated on an arm's length basis using transfer pricing methodologies.
Eloise Walker said "It is entirely unsurprising that the OECD has focused on particular examples of avoidance such as hybrid mis-matches rather than proposing a worldwide corporate tax base, which would be deeply unpopular with governments in the G20 and elsewhere."
The actions outlined in the plan will be delivered in the coming 18 to 24 months by the joint OECD/G20 BEPS Project. Not all G20 countries are members of the OECD (such as China and Russia). Interested G20 members who are not already members of the OECD will be able to participate in the project on an equal footing with OECD members.