Key pillar of the Beps process is to align profit with value creation

OECD guidance needs to be clear otherwise the process could favour the bigger nations

The Beps process has consumed a huge amount of energy and resources. International corporate taxation is part of the public consciousness as never before; it’s a real barbecue stopper, as one Australian tax official put it.

The Beps process has consumed a huge amount of energy and resources. International corporate taxation is part of the public consciousness as never before; it’s a real barbecue stopper, as one Australian tax official put it.

 

In Paris last week, as Angela Merkel and Francois Hollande discussed events in Greece, the international tax system was being discussed in an underground meeting room at OECD headquarters. For almost two days tax authority delegates from more than 40 countries, including Ireland, met with more than 60 representatives from industry, advisors and NGOs.

The much-heralded G20 sponsored Base Erosion Profit Shifting, or Beps process, is due to conclude later this year. The purpose of the Paris meeting was to discuss the likely conclusions on transfer pricing. The final Beps reports are due to be released immediately prior to the G20 finance minister’s meeting in Turkey on October 8th.

Of course the Beps reports will address many taxation concerns. One such concern is transfer pricing and the Cash Box Company. After almost two years’ debate it seems that the days of the Cash Box Company are finally numbered.

The Cash Box Company is that entity that has attracted so much media and political ire in recent years; a capital rich entity, with no employees, very often tax resident in a sunny Caribbean island that doesn’t levy a tax on profits. However the Cash Box Company may be hugely profitable and very often its only function is the provision of funding to group companies.

A key pillar of the Beps process is to align profit with value creation. So it seems that the OECD have concluded that if the Cash Box Company is not exercising control over the financial risk that is connected with the provision of the funding, then the risk, and the related profit, should be allocated to the group entity that is actually performing the control functions. The Cash Box Company would get no more than a risk free rate of return for providing the funding itself.

Critically, it seems the OECD has concluded that profit may be aligned with value creation in accordance with the arm’s length standard. The arm’s length standard is the long standing rule requiring intra-group transactions to be priced in the same way as unrelated party transactions. Detailed guidance will be published in the Beps reports later this year and the guidance will include a framework to assist tax authorities in determining the proper allocation of profit.

So if the Cash Box Company is no more, where should the profit be allocated? And which country should be entitled to tax that profit? The simple answer of course is that profit should be aligned with the value creation.

Unfortunately it seems that every politician believes that the real value creation happens within their borders. While such position may be politically expedient in the short term, in the long term it will lead to double taxation, reduction in investment by multinationals and ultimately fewer jobs.

So from Ireland’s perspective we must hope that the guidance issued by the OECD will be clear and unambiguous. The rule of law is critical because ambiguity tends to favour the larger and more powerful nations. Furthermore we must hope that there is widespread agreement amongst countries to sign up to mandatory binding arbitration on international tax disputes. Independent arbitration is the best chance that smaller countries will get a fair result.

The Beps process has consumed a huge amount of energy and resources. International corporate taxation is part of the public consciousness as never before; it’s a real barbeque stopper, as one Australian tax official put it.

But as we move beyond Beps, from a European perspective at least, we must hope that our politicians can now put the same effort and political capital into economic growth and job creation strategies. Non-American governments trying to levy more tax on American companies is not a sustainable economic strategy.

Joe Duffy is a tax partner with Matheson

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.