2009 OECD’s CURRENT TAX AGENDA · contributions to the work of the OECD It also shares expertise...

OrganisatiOn fOr ecOnOmic cOOperatiOn and develOpment

OECD’s CURRENT TAX AGENDA

OECD Paris June 2009

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Table of contents

The OECD: What is it? ��3

The Committee on Fiscal Affairs ��5

The Centre for Tax Policy and Administration ��9

HOT TOPICS �� 11

The Financial Crisis: Tax Responses �� 13

Tackling Tax Evasion �� 15

Building Transparent Tax Compliance by Banks �� 18

Taxation and SME Creation, Growth

and Compliance Costs �� 21

Business Restructurings ��29

Collective Investment Vehicles �� 31

Tax and Development ��34

CORE ISSUES ��37

Tax Policy Analysis and Statistics ��39

Tax Conventions and Related Questions ��45

Taxation of Multinational Enterprises ��50

Tax Administration ��53

Consumption Taxes ��59

International Tax Co-operation �� 61

Taxation in the Global Context: Engaging with Non-OECD Economies ��68

International Tax Dialogue �� 71

CTPA Management Team ��73

The OECD: what is it?

© OECD 2009 3

“Tax is one of the big success stories of the OECD. Our engagement with our members and key non-OECD economies has enabled us to maintain our lead role in setting the rules of the game for international taxation. Our analytical work provides governments with unparalleled information on the design and implementation of our tax systems.

In my role as Secretary-General of the OECD, I look forward to developing further the Organisation’s work in the tax area.”

OECD Secretary-GeneralMr. Angel Gurría

The OECD traces its roots to the Marshall Plan� It groups 30 member countries committed to democratic government and

the market economy and provides a forum where governments can compare and exchange policy experiences, identify good practices and promote decisions and recommendations� Dialogue, consensus, peer review and pressure are at the very heart of the OECD�

The Organisation’s mission is essentially to help governments and society reap the full benefits of globalisation, while tackling the economic, social and governance challenges that can accompany it� It places a high priority on deciphering emerging issues and identifying policies that work in order to help policy makers�

In addition to the analysis and advice it provides on a vast range of economic issues, the OECD is one of the world’s largest and most reliable sources of comparable statistical, economic and social data� OECD databases span areas as diverse as national accounts, economic indicators, trade, employment, migration, education, energy and health�

The OECD produces internationally agreed instruments, decisions and recommendations to promote rules of the game in many areas such as combating bribery in international business transactions, information and communications policy, taxation and the environment� Non-members are invited to subscribe to these agreements and treaties�

Helping ensure development beyond the OECD’s membership has been part of the Organisation’s mission from the start� The Organisation maintains active relationships with business, labour, civil society and parliamentarians� These stakeholders benefit from and make valuable contributions to the work of the OECD� It also shares expertise and exchanges views with more than 100 other economies�

Chile, Estonia, Israel, Russia and Slovenia are currently holding membership talks with the Organisation� In addition, Enhanced Engagement programmes have been launched for Brazil, the People’s Republic of China, India, Indonesia and South Africa� Enhanced Engagement is a fundamental proposal by the OECD member countries to forge a more structured and coherent partnership, based on mutual interest, with these five major economies which may lead to full membership� ■

The OECD: What is it?

FAST facts

Established: 1961 Secretariat staff: 2500

Location: Paris, France Secretary-General: Angel Gurría

Membership: 30 countries Publications: 250 new titles/year

Budget: EUR 303 million (2009) Official languages: English/French

OECD’s Current Tax Agenda 2009

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OECD Members

Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission also takes part in the work of the OECD.

■ Did you know… Chile, Estonia, Israel, Russia and Slovenia are currently holding membership talks with the Organisation?

■ Did you know… Enhanced Engagement programmes have been launched for Brazil, the People’s Republic of China, India, Indonesia and South Africa?

How is the OECD organised? Council and Committees

The secretariat carries out research and analysis at the request of the OECD’s 30 member countries� The members meet and exchange information in committees devoted to key issues, with decision-making power vested in the OECD Council�

The Council is composed of all the members under the chairmanship of the Secretary-General, meeting regularly at the level of Permanent Representatives�

The Council meets once a year at ministerial level� In 2008, the economic impact of climate change, rising food prices and a broad range of other trade, growth and development issues were discussed� France, represented by Christine Lagarde, Minister for the Economy, Industry and Employment, chaired the meeting, with Mexico and Switzerland as Vice-Chairs�

There are about 200 committees, working groups and expert groups in all� Some 40 000 senior officials from national administrations come to OECD committee meetings each year to request, review and contribute to work undertaken by the OECD secretariat�

OECD SecretariatA mix of economists, scientists, lawyers and other professional staff work in Paris servicing the Committees, including the Committee on Fiscal Affairs� Support for the Committee on Fiscal Affairs is provided by the Centre for Tax Policy and Administration (CTPA)�

Financing

The funding of the OECD’s work comes from its member countries� Each country’s annual contribution is based on the weight of its economy� Countries also choose to make voluntary contributions to support the work of the Organisation� ■

© OECD 2009 5

The Committee on Fiscal Affairs

“My priorities during my chairmanship of the Committee on Fiscal Affairs are to get a quicker implementation of the principles of transparency and effective exchange of information, to extend our work on consumption taxes and to develop and achieve a more consistent application of OECD international tax instruments such as the Model Tax Convention and the 1995 Transfer Pricing Guidelines.”

Chair of the Committee on Fiscal AffairsMr. Paolo Ciocca


The OECD’s work in the taxation area, as carried out by the Committee on Fiscal Affairs, has always been an important part of the OECD’s overall activities� Through its work, it contributes to setting standards in the international tax world� The OECD’s Model Tax Convention has, for example, long been recognised as the basis for the global network of tax treaties, and the OECD’s 1995 Transfer Pricing Guidelines are used as the basis for legislation in OECD countries and an increasing number of non-OECD economies (NOEs)�

The Committee brings together senior tax officials from all OECD member countries� The Committee sets the OECD’s work programme in the tax area and provides a forum for exchanging views on tax policy and administrative issues�

Over the last five years, the Committee on Fiscal Affairs and the Centre for Tax Policy and Administration has extended its dialogue with non-OECD economies� Argentina, Chile, China, India, Russia and South Africa are now participants in the Committee� The Committee’s consultative groups on specific international tax issues (e.g. the application of VAT to cross border services), also include representatives from NOEs� This partnership programme has led to a regular dialogue with more than 70 other countries, and the OECD’s worldwide network of tax centres reinforces this co-operation�

The Committee on Fiscal Affairs’ work programme is carried out by groups of experts drawn from member and observer countries as well as other non-member economies in certain cases� The Committee lays down the work programme of these groups and oversees their implementation:

■ Working Party 1 on Tax Conventions and Related Questions covers tax treaty issues�

■ Working Party 2 is responsible for tax policy analysis and for statistical work�


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■ Working Party 6 covers the taxation of multinational enterprises�

■ Working Party 8 investigates how member governments can co-operate to minimise the extent of tax evasion and avoidance�

■ Working Party 9 examines consumption taxes�

■ The Forum on Harmful Tax Practices takes forward the OECD’s work on harmful tax practices�

■ The Forum on Tax Administration provides a forum to improve taxpayer service and compliance�

A number of Working Parties (on company taxes, on the taxation of international bond issues and the issue and negotiation of securities, and the taxation of energy (3, 4, 5 and 7) were wound up when their tasks were completed�

In addition to these Working Parties, a number of ad hoc groups have undertaken detailed work on specific issues� Recent examples include a joint group of fiscal and environmental experts to consider the issue of eco-taxes and meetings with financial-market specialists to investigate the tax treatment of new kinds of financial transactions�

While most of the Committee’s work is undertaken by government officials and the OECD Secretariat, there is frequent consultation with representatives of business and trade unions, primarily through the Business and Industry and Trade Union Advisory Committees to the OECD (BIAC and TUAC)� Also, in a number of areas, the Committee works through groups and round-tables which bring together business and government officials on a regular basis�

We also seek the input of business through the publication of consultation drafts on our website� Tax news alerts are sent out regularly on the latest tax public consultation documents, reports, press releases and studies� Registration is free on the OECD website: www.oecd.org/tax�

The Committee co-operates with other international organisations: the International Monetary Fund, the World Bank, the World Trade Organisation and the Financial Action Task Force, as well as regional tax organisations (e.g.CATA, CIAT, CREDAF, IADB, IOTA)� Occasional inter-disciplinary meetings are held, involving political figures and academics�

Currently, the Committee is chaired by Mr� Paolo Ciocca from Italy, with Mr� Robin Oliver (New Zealand) as Deputy Chair and Ms� Marie-Christine Lepetit (France), and Mr� Thorbjørn Gjølstad as Vice Chairs� They are assisted by an Advisory Board made up of Mr� John Harrington (United States), Mr� Michael Rawstron (Australia), Mr� Mike Williams (United Kingdom), Mr� Miguel Ferre (Spain), Mr� Florian Scheurle (Germany), and Mr� Takuji Tanaka (Japan)� ■

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Objectives

The overarching objective of the Committee on Fiscal Affairs (hereinafter called “The Committee”) is to contribute to the shaping of globalisation for the benefit of all through the promotion and development of effective and sound tax policies and guidance that will foster growth and allow governments to provide better services to their citizens. Its work is intended to enable OECD and non-OECD governments to improve the design and operation of their national tax systems, to promote co-operation and co-ordination among them in the area of taxation and to reduce tax barriers to international trade and investment.

In light of this objective, the Committee shall:

• facilitatethenegotiationofbilateraltaxtreatiesandthedesignandadministrationofrelateddomestic legislation,

• promote communication between countries and the adoption of appropriate policies toprevent international double taxation and to counteract tax avoidance and evasion,

• encouragetheeliminationoftaxmeasureswhichdistortinternationaltradeandinvestmentflows;

• promoteaclimate thatencouragesmutual assistancebetweencountriesandestablishprocedures whereby potentially conflicting tax policies and administrative practices can be discussed and resolved;

• support domestic tax policy design through the development of high quality economicanalysis of tax policy issues, comparative statistics and comparisons of country experiences in the design of tax systems;

• improvetheefficiencyandeffectivenessoftaxadministrations,bothintermsoftaxpayerservices and enforcement.

• support the integration of non-OECD economies into the international economy bystrengthening policy dialogue with them to increase their awareness of and contribution to the Committee’s standards, guidelines and best practices.

Methods

In order to achieve these objectives, the Committee will focus its work on delivering outputs of high quality and with high policy impacts and shall regularly assess whether these targets are being met. In particular, the Committee shall:

• developstandards,guidelinesandbestpracticesinareaswhereinternationalco-ordinationis desirable and monitor the practical implementation of them and other recommendations;

• provideaforumfordiscussionsbyseniorpolicymakersandtaxadministrators,andwhereappropriate the business community and other parts of civil society, of international and domestic tax policy and administration issues and emerging issues in a global economy which require a response from senior tax policy makers;

• supplyOECDcountrieswithinternationallycomparabletaxstatisticsandcomparisonsofthemajor taxes used throughout the OECD area, and provide strategic analysis of important tax policy and administration issues for use in publications, briefs, and the like.

MANDATE OF THE COMMITTEE ON FISCAL AFFAIRSApproved by the Council in November 2008


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Co-operation

The Committee shall strengthen policy dialogue with non-OECD economies in order to increase their awareness and use of the Committee’s standards, guidelines and to explore together the identification of good practices.

The Committee shall monitor and contribute to relevant activities carried out in other international bodies. In particular, it will continue to participate in the UN Committee of Experts on International Cooperation in Tax Matters and will continue its co-operation with the Financial Action Task Force on issues of mutual interest.

It will promote and develop strategic partnerships with regional tax and other international organisations and will continue to develop the International Tax Dialogue. The Committee will monitor and co-ordinate work undertaken by the Organisation in related fields and shall co-operate with relevant OECD bodies. In particular, it will continue to work jointly with other committees carrying out projects having tax policy aspects, in particular with the Economic and Development Review Committee, Economics; in the Environment Policy Committee; in the Employment, Labour and Social Affairs Committee; in the Development Assistance Committee; and in the Working Group on Bribery.

The Committee shall continue to co-operate closely with BIAC and other major stakeholders.

The mandate of the Committee shall remain in force until 31 December 2013 unless the Council decides otherwise.

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The Centre for Tax Policy and Administration

“Tax is at the centre of the political debate in most countries, particularly given the current economic crisis. What impact do tax levels and structures have on the long-term growth potential of our economies? How can taxes be used to achieve a fair sharing of the costs and benefits of globalisation? How can revenue administration respond to the increasing demands being placed upon them to provide a better service to taxpayers but at the same time to maintain their enforcement activities? Can we provide tax authorities with good access to information, including bank information, that is needed to fairly and efficiently implement the tax rules voted for by national parliaments? Are the existing international tax arrangements appropriate to today’s global economy, an economy increasingly focusing on services and intangibles? What can be done to minimise cross border tax disputes and to resolve them more efficiently when they do occur? What input should tax have to the upcoming Copenhagen summit on climate change? These are some of the policy issues that are currently being examined by the CTPA.”

Director of the Centre for Tax Policy and Administration.Jeffrey Owens

The Centre for Tax Policy and Administration

The OECD’s Centre for Tax Policy and Administration (CTPA) is the focal point for the Organisation’s work on taxation� The Centre provides technical expertise and support to the Committee on Fiscal Affairs and examines all aspects of taxation other than macro-fiscal policy, which is dealt with by the Economic Policy Committee� Its work covers international and domestic tax issues, direct and indirect taxes, tax policy and tax administration� The Centre’s statistical publications provide annual comparisons of tax levels and tax structures in member countries and the Centre is also responsible for the OECD Tax Database, which has a description of the main parameters of each member country’s tax system�

The Centre contributes to the work of other committees of the OECD in projects which have a strong tax component� Recent examples include input into work on the use of tax instruments to achieve environmental policy objectives, analysis of the impact of taxation on the functioning of labour markets and an examination of the link between taxation and growth�

Intergovernmental co-operation on tax issues represents one of the undisputed successes of the Organisation and the OECD is at the forefront of setting tax standards for the global economy� Member economies now regularly ask the CTPA to help resolve emerging tax issues� Recent examples include: the application of tax treaties to collective investment vehicles and tax issues raised by business restructuring�


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Working with Business and Civil Society

The OECD recognizes the value of input from business representatives and civil society, and the tax area is no exception�

Working with business to update the OECD’s tax instruments, such as the OECD Model Tax Convention and the Transfer Pricing Guidelines ensures that they continue to reflect the realities of today’s complex global business environment and contributes to the effective elimination of double taxation� Similarly, getting their views on tax administration issues facilitates the development of practical solutions and greater understanding of the issues faced by taxpayers� The CFA and the Secretariat engage in a dialogue with external stakeholders in a variety of ways:

■ Through technical advisory groups or informal consultative groups made up of business and government officials to further the work�

■ Round table discussions on emerging issues�

■ Public consultation meetings on discussion drafts or particular issues�

■ Release for public comment of discussion drafts through the OECD website�

■ Participation in tax seminars, conferences and meetings�

■ Regular participation in meetings of the Tax Committee of the Business and Industry Advisory Council (BIAC) and the Trade Union Advisory Committee to the OECD (TUAC)�

■ Solicitation of stakeholder views on particular issues (e�g� accession country practices)�

■ An ongoing dialogue on how developing countries can benefit from today’s more transparent and cooperative tax environment�

■ Organisation of government/business Global Forum meetings on tax treaty and transfer pricing issues� ■

The April 23th meeting of the BIAC tax committee. Left to right: Ms� Lynda K� Walker, Vice President and International Tax Council, U�S� Council for International Business, Mr� Patrick Ellingsworth, Chair, and Ms� Mary Bennett, Head of the Tax Treaty, Transfer Pricing and Financial Transactions Division, CTPA�

HOT TOPICS

HOT TOPICS

The Financial Crisis: Tax Responses

© OECD 2009 13

HOT TOPICS

Following the financial crisis, the global economy is going through the deepest recession for more than half a century� The immediate tax policy discussions have focused on what tax measures could cushion the fall in consumption and investment demand� Looking ahead, the rise in public debt caused by the recession will put the focus on how sound public finances can be restored without hampering the recovery� Aside from expenditure reforms, old lessons about the virtues of broadening tax bases might gain fresh attention� Finally, a question remains open: how did taxes interact with the adverse developments in the financial sector leading to the crisis?

Short-Run Tax Measures to Cushion the Recession

Countries have responded to the global recession in different ways� Many have cut taxes in an attempt to stimulate demand and speed recovery� Finding the best measures is a challenge because the short-term focus is on demand stimulus while long-term economic growth requires policies that expand supply� So a pro-growth tax policy during the crisis requires tax changes that stimulate both short-term demand and long-term supply� At the same time, it is essential that the tax measures protect the living standards of the most vulnerable sections of the community� The precise tax measures that would be appropriate vary across countries, depending on their particular economic and political circumstances and existing tax levels and structures�

Corporate income taxes can be adjusted via temporary investment tax credits, but general cuts are unlikely to quickly increase investment during a recession where earnings are weak or even negative� Allowing tax payments to be deferred could help small businesses, as this may remove the need for them to lay off staff to reduce costs�

The level of personal income taxes and social contributions are important for growth in the long run� Cuts for high-income individuals, however, will not stimulate demand as much as for low-income households, who have less flexible access to credit� Cuts in consumption taxes are quick to deliver, as long as the cuts are passed on to consumers� A temporary reduction may stimulate consumption initially, and spending may also increase in anticipation of any future increase�

The Financial Crisis: Tax Responses


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Using housing tax cuts for short-term stimulus can be delicate, as inflated house prices before the crisis have contributed to the seriousness of the current economic situation� Meanwhile, reductions in taxes on housing transactions could ease the strain on depressed housing markets without adverse long-term effects�

The worst impact of an economic recession is on the poor, who are at the most risk of unemployment� Tax cuts for those on modest incomes can improve living standards by increasing disposable income and giving them a greater incentive to work� The very poor, those without taxable income, can be helped through cash benefits or benefits in kind�

Looking Ahead: Growth-Focused Tax Reforms Can Strengthen the Recovery

As economies emerge from recession, it is likely to be necessary to raise additional revenues� It will not be sufficient to restore them to pre-crisis levels unless expenditures are cut permanently�

In this context it can prove vital that governments are ready to re-structure tax systems to promote long run economic growth� Thus, the focus after the crisis could be a shift towards taxes that have been shown to be least harmful to growth, such as recurrent taxes on immovable property and general consumption taxes but at the same time widening the tax base to achieve fairer sharing of the tax burden� OECD countries vary widely in their use of recurrent taxes on immovable property� For some countries, there is considerable scope for raising more revenue�

Increases in general consumption taxes are likely to be necessary in order to generate revenues of the scale required� In particular, many countries apply exemptions and lower VAT rates on a wide range of goods and services� Substantial revenues could be obtained by scaling back these special provisions� Some of these VAT reductions are designed to reduce the apparent regressivity of the tax� However, from a distribution as well as an efficiency point of view, it is better to have a uniform VAT on a broad base and use some of the additional revenues to assist low-income households� Such reforms could still substantially improve public finances�

An Open Question: The Role of Taxes for Financial Stability

Taxes were not the cause of the financial crisis� But mismatches between tax measures and regulations and easier access to tax havens may in various ways have left room for proliferation of tax planning based on debt, exploiting the tax deductibility of interest expenses in corporate income taxes�

Well-designed policy reforms to curb potential incentives to leverage and excessive risk taking might help prevent a repetition of the financial crisis and make economies more resilient in the future� The crisis may provide the opportunity to review some fundamental features of current tax systems, such as the tax treatment of debt versus equity� A move towards more transparent and cooperative tax systems should be seen as part of the broad strategy of governments to ensure the integrity and sustainability of financial systems� ■

Tackling tax evasion

© OECD 2009 15

HOT TOPICS

The global economic crisis and recent cross-border tax evasion scandals have heightened the political drive to ensure rapid implementation of the OECD’s transparency and information exchange standards in the tax area� At a time when governments around the world need all legally due tax revenues to address the global economic crisis, it is crucial to assure honest taxpayers that tax burdens are being fairly shared� In today’s globalised environment, exchange of information between tax authorities, including banking information, is needed for the effective and fair application of each country’s tax laws�

The OECD, working with non-member economies, has developed standards of transparency and exchange of information that have been endorsed by governments and international organisations throughout the world, and serve as a model for the vast majority of the more than 3000 bilateral tax conventions entered into by OECD and non OECD countries�

The internationally agreed tax standard on exchange of information requires:

■ Exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of the treaty partner�

■ No restrictions on exchange caused by bank secrecy or domestic tax interest requirements�

■ Respect for taxpayers’ rights�

■ Strict confidentiality of information exchanged�

This standard is set out in the 2002 Model Agreement on Information Exchange on Tax Matters, Article 26 of the OECD Model Tax Convention and the recently revised Article 26 of the UN Model Tax Convention�

The standard can be implemented through bilateral Tax Treaties or Tax Information Exchange Agreements (TIEAs); by multilateral agreements (e.g. the OECD/Council of Europe Convention on Administrative Assistance in Tax Matters); or by domestic legislation allowing for the provision of information on a unilateral basis�

Tackling Tax Evasion

G20 Communiqué: The Global Plan for Recovery and Reform

2 April 2009, London, United Kingdom

“[W]e agree: to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over.”


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The promotion of information sharing to ensure compliance with the tax laws featured prominently in the November 2008 and April 2009 G20 Summits on the Financial Crisis� On the occasion of the 2nd of April G20 Summit, the OECD Secretariat issued a progress report describing which jurisdictions were making substantial progress in implementing the standards�

The increased interest by governments in developed and developing countries over the last few months has led to significant progress towards achieving a level playing field in the financial sector:

■ All OECD countries now accept Article 26 (Exchange of Information) of the OECD Model Tax Convention, as updated in 2005, as reflected in the withdrawal by Austria, Belgium, Luxembourg and Switzerland of their reservations to Article 26� Following on from Belgium’s signing of a treaty with the United States in 2006, Belgium has now written to 48 treaty partners to conclude protocols to update the Article 26 provisions of its current treaties�

■ Chile, which is a candidate for accession to the OECD, is in the process of modifying its tax laws so as to meet the standard�

■ Costa Rica, Guatemala, Hong Kong (China), Macau (China), Malaysia, the Philippines and Singapore have announced that they will also put forward legislative amendments in 2009 to implement the OECD standard�

Statement of G7 Finance Ministers and Central Bank Governors

24 April 2009, Washington DC, United States

“[W]e urge the OECD […] to intensify [its] work in conducting objective peer reviews of countries’ efforts to strengthen international standards in taxation, […] and to identify non-cooperative jurisdictions and develop a toolbox of effective countermeasures. We look forward to regular reports on progress on these issues.”

■ Andorra, Liechtenstein and Monaco – identified by the OECD in 2002 as un-cooperative tax havens – have now endorsed the OECD standards and indicated their willingness to change their domestic legislation and to enter into agreements for the exchange of information� Liechtenstein already signed a Tax Information Exchange Agreement (TIEA) with the United States in December 2008 and has commenced negotiations with the United Kingdom�

■ The Cayman Islands, which has signed 8 TIEAs, has also enacted legislation that allows it to exchange information in tax matters on a unilateral basis and has identified 12 countries with which it is prepared to do so� St� Kitts and Nevis has enacted similar legislation and identified 16 countries with which it is prepared to exchange information unilaterally� The OECD Forum on Harmful Tax Practices is reviewing this approach�

■ Over 20 new TIEAs were signed during 2008, and more than 25 have already been signed in 2009�

Overall, progress has been remarkable� In particular, recent moves by major financial centres – both OECD and non-OECD countries – mark a significant step forward in international tax cooperation and a welcome result of more than 12 years of OECD work�

Tackling tax evasion

© OECD 2009 17

Next Steps

Tackling tax evasion is not, however, simply a matter of signing agreements� The Global Forum, which is now the pre-eminent forum for dialogue on this issue, and which brings together OECD and non-OECD economies, undertakes an annual assessment of the legal and administrative framework for transparency and exchange of information in over 80 jurisdictions� Last years’ report, Tax Co-operation – Towards a Level Playing Field: The 2008 Assessment by the Global Forum will be updated soon� ■

For more information on the OECD’s tax evasion work, see “International Tax Cooperation�”

Key Publications

■ Tax Co-operation 2008: Towards a Level Playing Field: Assessment by the Global Forum on Taxation, August 2008, ISBN: 978-92-64-03919-3

Tax Evasion on the Web

■ www.oecd.org/tax/evasion■ Exchange of Information: www.oecd.org/ctp/eoi ■ Harmful Tax Practices: www.oecd.org/ctp/htp

The Size of the Offshore Financial Industry

It is difficult to quantify the size of the offshore financial industry, since reliable, timely information is not widely available in respect of all jurisdictions and all asset classes� Experts’ estimates of the value of assets held offshore range from USD 1�7 trillion to USD 11�5 trillion�

Source Amount (USD) Scope of estimate Citation

Tax Justice Network

11.5 trillion (2005) Assets held offshore by individuals

The Price of Offshore, Tax Justice Network, 2005

Oliver Wyman Group

8 trillion (2008) Wealth held offshore by High Net Worth Individuals (HNWIs)

The Future of Private Banking, March 2008, Oliver Wyman Group

Boston Consulting Group

7.3 trillion (2007) Wealth held offshore Global Wealth 2008, Boston Consulting Group

Oxfam 6-7 trillion (2000) Money held in offshore centers

Tax havens: Releasing the Hidden Billions for Poverty Eradication, 2000

Merrill Lynch/Cap Gemini

5.8 trillion (1997) Offshore wealth of HNWIs World Wealth Report 1998, Merrill Lynch/Cap Gemini

IMF 1.7 trillion (2000) Portfolio investment channeled through offshore centers

IMF Publishing Global Portfolio Investment Survey, 2000

■ Did you know… that some non-governmental organisations estimate that for every dollar of aid that flows into less developed countries, another dollar of capital is lost to tax havens?


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HOT TOPICS

Aggressive tax planning is one of the major risks that all countries participating in the OECD Forum on Tax Administration need to manage, though it is more prevalent in some countries than others� Banks play a vital role in the global economy, and also in the smooth functioning of the tax system in many countries� But when they use and promote aggressive tax planning schemes, they also pose a significant risk to tax systems�

As a result, a follow up to the “Study into the Role of Tax Intermediaries” published by the OECD in January 2008 has been undertaken by the Forum on Tax Administration (FTA)� This study was intended to deepen understanding of banks’ involvement (direct or indirect) in aggressive tax planning, and to identify what benefits revenue bodies and banks could offer each other from which a mutually beneficial enhanced relationship could be constructed� The study was developed in consultation with banks and banking associations in a number of countries�

The financial crisis developed during the course of the study� Neither tax policies nor tax administration appear to have been major influences on the events or behaviours which led to the crisis� Nevertheless, in looking forward, revenue bodies have an opportunity to work with other regulators to improve transparency, governance and tax compliance�

The complexity of some transactions undertaken by banks or the financial products developed by banks for their customers, often makes it difficult for revenue bodies to differentiate aggressive tax planning transactions from transactions that are merely complex but do not contain significant tax uncertainty� The report examines complex structured finance transactions (CSFTs): how they are developed by banks; what controls are in place as they are developed; and how they are then used by both banks and their clients� Revenue bodies need to understand these transactions and their commercial drivers to better differentiate those that have a tax risk from those that do not�

Revenue bodies need information at an early stage in order to respond to emerging risks, and to help with risk management, ensuring their resources are applied effectively and that compliance costs for banks are minimised� Banks are encouraged by revenue bodies to provide a degree of transparency above what may be the minimum legal requirement to enable tax authorities to

Building Transparent Tax Compliance by Banks

Building Transparent Tax Compliance by Banks

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fully appreciate the commercial context and complex details of CSFTs� Banks and other large corporate taxpayers operate on a global level� Many of their transactions, or transactions facilitated for their clients, have tax impacts in more than one country, making it difficult to understand the overall context of a transaction and causing delay in arriving at a decision on the correct tax outcome�

In relation to their own tax affairs, banks can engage in an enhanced relationship with the revenue body in the same way as other large corporate taxpayers� When acting as promoters of aggressive tax planning for clients, the information a bank can disclose to a revenue body may be limited by client confidentiality� However, there are ways for some revenue bodies to obtain the relevant information and for banks to obtain an early view from the revenue body of their tax outcome� These include rules requiring disclosure, and the availability of rulings or clearances on actual or proposed transactions� There is also potential for greater dialogue between the bank and revenue body at the pre-marketing stage, and for raising the importance of the revenue body’s likely interpretation of the law to such transactions as part of the bank’s transaction approval process�

Revenue bodies need a broad range of specialist skills to respond to aggressive tax planning risks and need to improve their banking industry and commercial understanding so as to be better able to differentiate between commercial arrangements and aggressive tax planning, so as to be able to more quickly assist with the former, where possible, or more quickly respond to the latter� The best source of this is the industry itself, and revenue bodies can improve their capabilities by engaging with banks and their representatives in a range of initiatives� Banks benefit as a better commercial understanding allows revenue bodies to focus on significant tax issues, provide more timely advice and engage in a more co-operative dialogue�

Revenue bodies can also improve the effectiveness of international co-operation to allow them to respond more rapidly to emerging aggressive tax planning issues� Banks should also benefit from better international co-operation by revenue bodies by reducing the time taken to achieve certainty on transactions involving multiple jurisdictions�

Transparency in relation to all tax-related activities of banks is important to revenue bodies� There is a wide spectrum of issues and behaviours which can generate concern, and at one extreme are banks that are deliberately or inadvertently caught up in tax evasion committed by their clients� Whilst the focus of this study is aggressive tax planning, during the course of the study some instances of banks or their employees actively assisting their clients to evade tax have emerged�

The report recommendations present an opportunity to improve the capability of revenue bodies to address significant tax risk and at the same time provide greater certainty for banks as taxpayers and as tax intermediaries� They have the potential to improve transparency of aggressive tax planning transactions, provide better alignment between the quality of banks’ internal governance and revenue body risk assessment, and improve the effectiveness of international


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co-operation� Banks can potentially benefit from reduced compliance costs as a result of better risk management by revenue bodies, quicker advice based on a better understanding of the commercial context, and more certainty�

The study was led by the tax administrations of the United Kingdom and Australia and the OECD Secretariat assisted by a focus group consisting of 12 other FTA countries: Canada, Ireland, France, Germany, Japan, Mexico, the Netherlands, Singapore, Spain, South Africa, Switzerland, and the United States of America� The study will be published shortly� ■

The Fourth Meeting of the Forum on Tax Administration in Cape Town, South Africa.

Tax Effects on SME Creation, Growth and Compliance

© OECD 2009 21

HOT TOPICS

The taxation of small and medium-size enterprises (SMEs) is an important topic for policy makers, given the predominance of SMEs, making up the vast majority of businesses and typically accounting for the bulk of employment in OECD countries� The Working Party (No� 2) on Tax Policy Analysis and Tax Statistics of the OECD Committee on Fiscal Affairs, and the Working Party on SMEs and Entrepreneurship of the OECD Committee on Industry, Innovation and Entrepreneurship jointly carried out a recent study on the taxation of SMEs� The report, to be published shortly, covers a broad range of SME tax issues, including: the tax treatment of unincorporated and incorporated SMEs; the possible influence of taxation on the creation and growth of SMEs; arguments for and against tax incentives for SMEs, with country examples; and measures to address a relatively high tax compliance burden on SMEs, including country examples�

Key Characteristics of SMEs

A simple but striking fact is that most firms are SMEs (whether looking at industrial, manufacturing or service sectors), with the smallest of firms (micro-firms) generally the most common� SMEs typically also account for the bulk of employment� Figure 1 illustrates this for the manufacturing sector� The predominance of SMEs serves to heighten interest in ensuring that tax rules do not place SMEs at a competitive disadvantage with regard to the tax burden on large firms, taking into account not only taxes paid to government (tax liabilities), but also resources involved with the “compliance burden” of preparing, documenting and filing tax returns�

Taxation and SME Creation, Growth and Compliance Costs


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Figure 1� SMEs and employment in SMEs in Manufacturing ActivitiesAs a percentage of total firms and total employment in the manufacturing sector

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Another important fact, from an SME growth perspective, is that incorporation is increasingly common the larger the firm size� In particular, for small firms that begin as unincorporated businesses, growth to a significant size (e.g. 10-50 employees, and up) is likely to involve incorporation� Figure 2 shows the predominance of incorporation amongst large firms� One possible reason is that SMEs may need to issue equity shares to raise sufficient capital to grow, with investors possibly attracted by the continuity of business life that incorporation can provide� Another possible reason is that incorporation may provide investors with more limited liability than an unincorporated business�

Figure 2� Percentage of large firms incorporated

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© OECD 2009 23

Tax Distortions to SME Creation and Business Structure

The study examines the income taxation of unincorporated and incorporated SMEs� It then compares, for all OECD countries, average statutory income tax rates (ASTRs) faced by unincorporated and incorporated businesses to investigate possible tax distortions to business structure (unincorporated vs� incorporated form) decisions, in the context of a single owner/worker of an SME who is subject to the top personal income tax (PIT) rate� Four country case studies are then provided to extend this analysis to include social security contributions (SSC), calculating “all-in” ASTRs (income tax plus SSC) to investigate possible tax distortions to both SME creation (dependent employment vs� SME creation) and business structure decisions, again in the context of a single owner/worker of an SME� The calculations are carried out at various business income levels, and varying labour versus capital income proportions, and under different distribution policies�

Given the links between incorporation and firm size, it follows that where governments aim to avoid policy-related impediments to growth, tax rules should aim on balance to not discourage (or encourage) incorporation� However, even where growth does not involve incorporation, policy concern generally arises where the tax system treats differently, and thereby potentially, distorts the choice over business form, given possible non-tax advantages that one form may present over another to a given taxpayer�

Income Taxation

Unincorporated business income generally involves one level of income taxation, with business profits subject to progressive personal income tax rates� Incorporated business income, on the other hand, generally involves taxation at both the corporate level and at the personal level upon distribution to shareholders� Taxation at the corporate level may involve the use of graduated (tiered) corporate tax rate structures, as is the case in 11 OECD countries (see Figure 3), or a single (basic) corporate tax rate as in the other 19 countries� Taxation at the personal level generally depends on dividend distribution policy, with retention of corporate profits generally resulting in a lower overall tax burden than distribution where some degree of double taxation of corporate profits may occur�

The report provides average statutory tax rate calculations for two polar distribution policies: indefinite retention of all corporate profits; and immediate distribution of all corporate profits� Firms with these policies are characterised as “high-growth” (where profits are retained and reinvested in the business) or “mature firm” cases (where profits are immediately distributed)� Comparisons of ASTRs for unincorporated versus incorporated businesses, under these alternative distribution cases, reveals greatly varying results with biases present both for and against incorporation�


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Looking first at the 19 countries with a flat CIT rate structure, for mature firms ASTR differences are shown (of varying magnitudes) favouring incorporation in eight countries, discouraging incorporation in seven, with four countries found to be neutral (three due to full imputation systems, one through exempting dividend income and aligning corporate and top PIT rates)� For high-growth firms, ASTR differences favour incorporation in 16 of 19 countries, discourage incorporation in one country, and are neutral in two� Turning to the 11 countries with tiered CIT rate structures, illustrative ASTRs are provided for corporate profits equal to four-times average earnings in the respective country� In the mature firm case, incorporation provides a lower ASTR in five countries, and a higher ASTR discouraging incorporation in five (although the concessionary small business tax rates are generally found to reduce the bias against incorporation), with neutrality found in one country (with a dividend tax credit fully offsetting corporate tax)� For high-growth firms, an ASTR difference favouring incorporation is found in all 11 countries�

These results for polar cases may be generalised� In particular, where earnings are initially retained but later distributed, implying that shareholder taxation is deferred but not indefinitely, the present value of future net dividend taxes factors into statutory tax rates for the incorporated business case, with values falling between the polar cases, tending to the indefinite retention case the longer the growth (reinvestment) period�

As a general result, incorporation may involve a higher income tax burden, owing to some degree of double taxation of profit (with this difference pronounced in certain countries, and not in others with imputation/integration systems)� For firms reinvesting their earnings (generally a cheaper source of finance than new equity), the taxation of corporate profits at a low rate, compared with a top PIT rate on personal business income, combined with the ability to defer shareholder taxation of profits, tends to increase the relative attractiveness to profitable SMEs of incorporation as a choice of business form, at least for a top personal tax rate investor, and in particular where small business tax rates apply�

Case Studies

The four case studies (New Zealand, Norway, Sweden and the United Kingdom), supplement the above analysis by factoring in social security contributions (SSC), where contribution rates, base and thresholds may differ by business form� ASTRs are also calculated for a “dependent employee” case in order to investigate possible tax distortions to the decision to move from dependent employment (with savings invested in bonds), to establishing a business with labour and capital invested in a business structured in unincorporated or incorporated form� Unlike the above analysis that considers a top PIT rate investor, the taxpayer considered in the case studies is assumed to have no other sources of taxable income, so the entire personal tax rate schedule is applicable in determining ASTRs (this requires fixed income levels to be specified in the analysis – the base case being income equal to two-times average earnings)� Additionally, ASTRs are calculated for differing capital income proportions to investigate how capital/labour intensity may impact on business decisions�


© OECD 2009 25

Figure 3� Basic CIT rate, SB CIT rate and threshold (USD), 2007

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While the case studies are both country specific and based on a number of assumptions, the illustrative results demonstrate the potential for ASTRs to influence both decisions over whether to create an SME, and how to structure one, and also how these decisions depend on capital versus labour intensity� In two of the four case studies (Sweden and the United Kingdom) an ASTR distortion is found towards formation of an SME (unincorporated and unincorporated SMEs being tax favoured relative to dependent employment) at most capital income proportions, irrespective of dividend distribution policy� For the other two (New Zealand and Norway), the potential distortion to the business creation decision varies with both distribution policy and capital intensity� However, a tax incentive to form an incorporated SME is found in both countries where a significant fraction of corporate profits is retained, and where the business is not highly capital intensive�


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As regards the SME business structure decision, the case studies show a general ASTR bias towards incorporation with full retention of profits (as with the general trend in the broader income tax analysis)� This is largely because incorporation tends to reduce SSC, and avoids possible additional taxation of capital income on distribution� Figure 4 emphasises this point for the United Kingdom� As the capital income proportion increases, and so labour income decreases, incorporated business (and dependent employee) ASTRs fall due (predominantly) to falling SSC (which are only levied on labour income)� Meanwhile, the “incorporated: full distribution” and “incorporated: half distribution” ASTRs are lower than the “incorporated: full distribution” ASTR, illustrating the tax benefits from retention of corporate profits� Even with some distribution of profits, the incorporated form is still generally ASTR favoured in the United Kingdom and Norway� Sweden is the clear exception, where the ability to both retain unincorporated business income within the business, as well as have distributed income split into both capital and labour components, make the unincorporated form attractive from an ASTR perspective�

The case studies also show that the capital income proportion can substantially influence the ASTR faced by an SME� In general, for the United Kingdom, Sweden and Norway, ASTRs fall as the capital income proportion increases, while in New Zealand there is a range of labour income over which the ASTR is minimised� This raises two policy considerations in addition to the possible distortions to business creation and structure decisions: First, taxpayers may have an incentive to artificially recharacterise their true capital income proportions to minimise tax liability� This could be achieved by, for example, the owner/worker paying him/herself a below/above-market wage for their labour input� Audit activity would be expected to prevent gross recharacterisation away from true ratios, but may not detect small alterations� Second, where taxpayers are unable (or unwilling) to recharacterise income, they may have an incentive to shift production structures (e.g. capital/labour mix) towards factor combinations that are tax-favoured but possibly not production efficient�

Figure 4� All-in ASTRs for the United Kingdom at two-time average wage earnings, 2007

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© OECD 2009 27

Tax Incentives for SMEs

The study also considers the use of tax incentives to encourage investment in SMEs, reviewing arguments for and against their use; main categories of income tax incentives; and country examples of tax incentives for SMEs� Advocates of special tax incentives for SMEs often rely on “market failure” arguments� These may be based on assumptions of positive spillover benefits to society of SME investment not taken into account by private investors (leading to under-investment), or asymmetric information, leading to various forms of capital market imperfection (involving adverse selection or moral hazard) creating difficulties in raising finance or other impediments to SME investment�

However, even accepting these arguments, consideration of how to design and implement a tax incentive in practice to correct market failure has many unsolvable questions� It is not clear, for example, how to measure the degree of market failure and thus assess the level of under-investment relative to some socially optimal level� Also required is some estimate of the sensitivity of the relevant activity (e.g. investment) to a relevant tax indicator (e.g. the effective tax rate on profits from investment), where plausible elasticity estimates may cover a wide range, and where the identification of the relevant tax indicator is not certain�

In addition to market failure arguments for and against tax incentives for SME investment, the study presents arguments that address whether certain basic tax policy and/or administration provisions, with uniform application to firms of all sizes, may result in a relatively high tax burden on SMEs, possibly creating impediments to SME creation and growth� In this context, the following topics are considered: the double taxation of corporate profits and implied cost of capital effects for SMEs; non-deductibility of interest expense (for business start-ups unable to access debt financing); limited loss offset provisions that may discourage risk-taking; cross-border tax planning opportunities limited to multinational enterprises; a relatively high compliance burden on SMEs; and taxation on sale or inheritance of an SME�

Depending on country circumstances, adjustments to tax policy and/or administration provisions may or may not be justified on the basis of cost-benefit assessments of likely effects, including efficiency and revenue losses� Where adjustments to basic provisions are not warranted, attention may turn to the possibility of tax relief targeted at SMEs to counter a relatively high tax burden, where, again, a variety of measurement and targeting uncertainties and difficulties would arise�

Where certain factors including possibly government policy (e.g. financial markets policy) are constraining the financing of “quality” SMEs, it makes sense to consider first whether the relevant factors or policies can be adjusted, and at what cost� That is, well before considering a targeted “tax fix”, generally the first-best approach is to consider whether and how the contributing factors can be addressed directly, and avoid reliance on the tax system to correct other barriers�


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SME Tax Compliance and Simplification Provisions

The second main component of the overall tax burden on SMEs, in addition to tax liability (payments to government) – is compliance costs, which typically have a significant fixed cost component, tending to impose a relatively higher burden on SMEs� Approaches to reducing compliance costs borne by SMEs are identified in the study, and country examples are provided of policy and administrative measures implemented to reduce compliance costs� In particular, the study considers provisions of VAT and income tax systems targeted at small businesses to simplify their compliance requirements and thereby lower their tax compliance costs – that is, lower the amount of time and resources required by firms to comply with the tax system (aside from their tax liability)�

A number of approaches may be taken to reduce VAT compliance costs� The main options include: introducing a VAT collection threshold; using a single VAT rate; allowing a simplified VAT remittance calculation (“presumptive approach”) for small firms; allowing cash accounting for small firms; and allowing less frequent filing of VAT returns for small firms�

Various measures are also observed in countries to reduce the compliance requirements on small businesses of (self-assessed) regular income tax, in support of the creation and tax compliance of small businesses, including: exempting firms with turnover under a small business threshold from regular income tax, replaced by some form of “presumptive” tax; allowing small firms to adopt cash accounting and other simplified accounting procedures; and less frequent filing requirements for small firms� ■

Tax Policy Studies on the Web

■ www.oecd.org/ctp/taxpolicystudies

Participants at the ITD Global Conference on Taxation of SMEs in Argentina, October 2007.

Business Restructurings

© OECD 2009 29

HOT TOPICS

Business restructurings by multinational enterprises have been a widespread phenomenon in recent years� They are typically aimed at rationalising supply chains and maximising synergies, and they involve the cross-border redeployment of functions, assets and/or risks between associated enterprises, which affects the profit and loss potential in each country� Restructurings may involve cross-border transfers of valuable intangibles� They typically consist of the conversion of full-fledged distributors into limited-risk distributors or commissionaires for a related party that may operate as a principal; the conversion of full-fledged manufacturers into contract-manufacturers or toll-manufacturers for a related party that may operate as a principal; and the rationalisation and/or specialisation of operations�

These restructurings raise difficult transfer pricing and treaty issues, for which the OECD Transfer Pricing Guidelines and the OECD Model Tax Convention provide insufficient guidance� These issues involve primarily the application of transfer pricing rules upon and/or after the conversion, the determination of the existence of, and attribution of profits to, permanent establishments (“PEs”), and the recognition or non-recognition of transactions� In the absence of a common understanding on how these issues should be treated, they may lead to significant uncertainty for both business and governments, as well as possible double taxation or double non-taxation�

The CFA therefore decided to develop guidance on these transfer pricing and treaty issues� A Discussion Draft on the transfer pricing aspects of business restructurings was released for public comment in September 2008� The Discussion Draft is made up of four Issues Notes:

1� In light of the importance of risk allocation in relation to business restructurings, the first Issues Note provides general guidance on the allocation of risks between related parties in an Article 9 context and in particular the interpretation and application of paragraphs 1�26 to 1�29 of the Guidelines�

2� The second Issues Note, “Arm’s length compensation for the restructuring itself”, discusses the application of the arm’s length principle and Guidelines to the restructuring itself, in particular the circumstances in which at arm’s length the restructured entity would receive compensation for the transfer of functions, assets and/or risks, and/or an indemnification for the termination or substantial renegotiation of the existing arrangements�

Business Restructurings


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3� The third Issues Note examines the application of the arm’s length principle and the Guidelines to post-restructuring arrangements�

4� The fourth Issues Note discusses some important ideas around the exceptional circumstances where a tax administration may consider not recognising a transaction or structure adopted by a taxpayer, based on an analysis of the existing guidance at paragraphs 1�36-1�41 of the Guidelines and of the relationship between these paragraphs and other parts of the Guidelines�

Over 35 contributions were received from companies, business associations, advisory firms and academics in response to the Discussion Draft (see www.oecd.org/ctp/tp/br)� A public consultation with the commentators will be held in June 2009 and final guidance will be developed on how the Guidelines apply to business restructurings� A separate discussion draft will be prepared considering PE definitional issues under Article 5 of the Model Tax Convention, both in the context of business restructurings and more broadly� ■

Key Publications:

■ Discussion Draft on the Transfer Pricing Aspects of Business Restructuring

Business Restructurings on the Web

■ www.oecd.org/ctp/tp/br

Collective Investment Vehicles

© OECD 2009 31

HOT TOPICS

The value of assets that are currently managed by collective investment funds is in excess of USD10 trillion� A substantial part of these assets represent cross-border portfolio investment, the income from which is entitled to the benefits of tax treaties� Unfortunately, there are both legal and practical issues that may prevent these benefits from being granted effectively, and may sometimes cause them to be granted inappropriately�

The legal issues relate primarily to the treaty entitlement of the funds themselves and of their investors� Collective investment funds take different legal forms (e.g. companies, limited partnerships, trusts, contractual arrangements) and their tax treatment varies from country to country; it is therefore often unclear whether the benefits of tax treaties are available to the funds themselves� Where these benefits are not available at the level of the fund, they would normally be available to the investors themselves if they are residents of countries which have concluded a tax treaty with the country from which the fund derives income�

There are, however, very important compliance and administrative difficulties involved in ensuring that the benefits of tax treaties are effectively granted to a large number of investors in a fund, taking into account that the number of investors in a given fund may change on a daily basis and that there are a number of different intermediaries involved� These difficulties may result in the benefits of tax treaties not being granted or being granted inappropriately, with risks of double taxation or double non-taxation that are of concern for both the country of source of the income and the country of residence of the investor�

Following a Roundtable discussion of these problems held by government and industry experts in 2006, the Committee on Fiscal Affairs in 2007 established the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors (the “ICG”) to take forward the work� The group was made up of government representatives with both policy and operational responsibilities and business representatives from various sectors of the financial services industry� The ICG had a mandate to look at legal and policy issues, primarily relating to the extent to which either the vehicles or their investors are entitled to treaty benefits, and procedural aspects regarding claims for treaty benefits when assets are held indirectly, whether through CIVs or through nominees



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and custodians� The goal was to improve the procedures for claiming treaty benefits, while protecting the compliance interests of governments� The ICG completed its mandate by presenting two reports to the CFA in January 2009�

The ICG’s first Report, on the “Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles”, includes a comprehensive set of recommendations with respect to the legal and policy issues relating specifically to CIVs (i�e� the extent to which either the vehicles or their investors are entitled to treaty benefits)� The Report analyses the technical questions of whether a CIV should be considered a “person”, a “resident of a Contracting State” and the “beneficial owner” of the income it receives under treaties that, like the OECD Model Tax Convention, do not include a specific provision dealing with CIVs (i�e� the vast majority of existing treaties)� Further, the Report includes proposed changes to the Commentary on the Model Convention to reflect the conclusions of the ICG with respect to these issues�

The ICG’s second Report, on “Possible Improvements to Procedures for Tax Relief for Cross-Border Investors”, discusses the procedural problems in claiming treaty benefits faced by portfolio investors more generally and makes a number of recommendations on “best practices” regarding procedures for making and granting claims for treaty benefits for intermediated structures� The Report recommends that countries develop systems for claiming treaty benefits that allow authorised intermediaries to make claims on behalf of the investors on a “pooled” basis� One of the major benefits of such a system, variations on which have been adopted by a few countries over the past decade, is that information regarding the beneficial owner of the income is maintained by the intermediary at the bottom of the chain, rather than being passed up the chain of intermediaries�

Although a country may be willing to provide benefits on the basis of pooled information, it may want to maintain the ability to confirm that benefits that have been provided were in fact appropriate� For that reason, and in order to encourage compliance in the residence State, the ICG also recommends that those financial institutions that wish to make use of the “pooled” treaty claim system be required to report directly to source countries (i�e� not through the chain of intermediaries) investor-specific information regarding the beneficial owners of the income� By agreeing to assume this information reporting obligation as a condition of benefitting from the streamlined claims procedure, financial intermediaries can contribute greatly to the ability of governments to ensure, through their exchange of information practices, that investors’ tax obligations are met in both source and residence countries on the ever-increasing flows of cross border investment income�

The CFA has now referred the first ICG Report to Working Party 1 to consider the recommendations and make final proposals on changes to the Commentary� The CFA has referred the ICG’s second Report to a newly formed Pilot Group, also made up of government and business representatives, with instructions to develop standardised documentation for the implementation of the best practices as recommended in the ICG’s Report� The OECD’s ability to undertake both of these initiatives has been made possible in part by funding made available from the private sector� ■


© OECD 2009 33

■ Did you know… that over USD 20 trillion is invested through collective investment vehicles worldwide?

Key Publications:

■ ICG Report on the Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles

■ ICG Report on Possible Improvements to the Procedures for Tax Relief for Cross Border Investors

Tax Treaties on the Web

■ www.oecd.org/ctp/tt


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HOT TOPICS

Why Tax is Important for Development

Tax and aid have quite different effects on governments� Tax encourages governments to be accountable to their citizens, aid to donors; tax can provide a predictable long-term source of revenue which is within the control of the government, aid is less predictable; tax enable governments to use the money where it is most needed, aid is often tied to specific projects�

Aid and tax should be seen as complementary: poor countries will continue to need aid as they set about building up their tax capacity� In fact, aid can play a vital role in helping developing countries build up their tax capacity, decreasing in the long term their overall reliance on aid�

The Monterrey Consensus recognised the key role of taxation in mobilising domestic resources (90% of domestic revenue is usually derived from tax with 10% coming from non-tax sources, e.g. fees and charges)�

This was confirmed at the UN Doha meeting in December 2008 where tax issues ran throughout the discussions� Yet the ratio of tax to GDP in lower income countries is, on average, about half of that in OECD countries� Many low income countries could increase their tax take through better designed tax systems and more effective tax administrations�

What Prevents Developing Countries From Raising Their Tax Take?

A typical developing country faces multiple constraints in improving its tax capacity: cultural attitudes towards government; weak tax administrations; narrow revenue tax base; competitive pressures from other countries; corruption; capital flight; aggressive tax planning and many more�

The three major constraints are:

1) Heavy reliance on cross-border tariffs: A typical African country relies on tariffs for more than half of its revenue� Yet this source of funding is under pressure from trade liberalisation promoted by the WTO and regional blocks (e.g. SADC)� As countries join these initiatives, they are required to reduce their tariffs� Trade liberalisation is in itself desirable, but it comes at a price for a low income country since tariffs are far easier to administer than

Tax and Development

Tax and Development

© OECD 2009 35

alternative sources of revenue (e.g. VAT)� Consequently, low income countries are facing a major challenge just to maintain their current revenue base�

2) Weak tax administrations: Many, although not all, low income countries have tax administrations which are corrupt, with poorly trained and underpaid officials; antiquated administrative structures, often still based upon the old colonial model (e.g. separate departments to deal with income and consumption taxes); weak risk management and poorly articulated strategic goals� Yet a tax system is only as good as its tax administration and without a dramatic improvement in these administrations, it is unlikely that developing countries will meet the Monterrey commitments�

3) Outflow of funds to tax havens: The OECD defines a tax haven as a jurisdiction which has no or nominal taxation and lacks transparency, effective exchange of information and “real activities”� Many citizens of developing (and developed) countries now have easy access to tax havens and the result is that these countries are losing to tax havens almost three times what they get from developed countries in aid� If taxes on this income were collected, billions of dollars would become available to finance development�

What Needs to be Done?

1) Phase-in trade liberalisation: Before removing tariffs on cross-border trade, governments need to ensure that alternative sources of revenue are already in place� This suggests that as the process of liberalisation continues, there needs to be a phase-in period since all the sources of revenue which could replace tariffs – personal or corporate incomes taxes; sales or VAT; taxes on moveable or immoveable property – are far more complex to administer than tariffs�

2) Build up the capacity of the tax administration: In most developing countries this will require creating an independent revenue service with well paid officials, free from corruption and political interference� The Commissioner must be a strong visionary individual, and be able to see tax in the broader perspective of developing a market-based democracy� The old colonial divisions between direct and indirect taxes need to be replaced with an integrated administration arranged on functional lines� Risk management needs to replace a system based upon trying to control and audit the vast majority of taxpayers� A balance between enforcement and taxpayer service must be achieved with the revenue service being seen as a “friend” rather than “foe” of business� New technologies will have a role to play in modernising the tax administration but can never, by themselves, provide a substitute for a well designed administration�

3) Broaden the tax base: Developing countries need to explore how the tax base can be broadened and how people in the informal sector can be brought within the tax base� This may require reviewing the taxation of land and buildings; exploring new ways to tax households; re-examining the tax treatment of small and medium-sized enterprises; introducing simple environmental taxes� It may also require moving towards a heavier reliance on fees and charges�


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4) Reduce the outflow of funds to tax havens: Over the last 10 years OECD countries have established high standards of transparency and exchange of information in tax matters to help deter, detect and tackle cross-border tax evasion� The OECD’s standards have achieved a global endorsement from the G8, G20 and United Nations Committee on Taxation� Regular assessments are undertaken of how far on and offshore financial centres are meeting these standards� Implementation of these standards is progressing� The latest assessment of 84 jurisdictions was issued in September 2008 under the title Towards a Level Playing Field� For more information, see “Tackling Tax Evasion”� ■

■ Did you know… that the OECD has been working for the last ten years with African tax administrations to improve their tax systems and administrations?

■ Did you know… that over 35 tax administrations, working with the OECD and the African Development Bank, agreed in August 2008 to launch the African Tax Administration Forum?

Participants at the Taxing Micro and Small Businesses – From Confrontation to Cooperation conference, Kigali, Rwanda, 22 – 24 April 2009.

CORE ISSUES

CORE ISSUES

Tax Policy Analysis and Statistics

© OECD 2009 39

CORE ISSUES


Tax Policy Analysis

The past two decades have been characterised by an on-going process of tax reforms, with governments restructuring their tax systems to achieve their social and economic objectives and, at the same time, secure the revenues required to finance their expenditures� The OECD helps countries in this process by undertaking tax policy analysis from an international comparative perspective, and thereby assisting policy makers in designing tax policies that are suited to their objectives� The OECD’s work in this area uses a combination of economic theory and evidence, both statistical and case study materials, to provide an account of likely intended and unintended effects of alternative tax policies� These effects are evaluated in terms of their impact on economic efficiency, income distribution, economic growth and other policy objectives�

Topics that have been addressed by CTPA in Tax Policy Studies include:

■ Taxation and SME Creation, Growth and Compliance Costs

■ Tax Effects on Foreign Direct Investment: Recent Evidence and Policy Analysis

■ Fundamental Reform of Corporate Income Tax

■ Encouraging Savings Through Tax-preferred Accounts

■ Taxation of Capital Gains of Individuals: Policy Considerations and Approaches

■ Fundamental Reform of Personal Income Tax

■ Taxing Working Families: A Distributional Analysis

■ The Taxation of Employee Stock Options

■ E-Commerce: Transfer Pricing and Business Profits Taxation

■ Recent Tax Policy Trends and Reforms in OECD countries

■ Using Micro-Data to Assess Average Tax Rates

■ Fiscal Design Survey across Levels of Government

■ Tax and the Economy: A Comparative Assessment of OECD Countries


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Taxation and Economic Growth

Much of the work at the CTPA involves working with various OECD Directorates in a number of areas where tax is an important issue� A good example of such work is Taxation and Economic Growth – a project which investigates the design of tax structures to promote economic growth� Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes� Recurrent taxes on immovable property appear to have the least adverse impact on growth� A revenue-neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption� Meanwhile, it must be recognised that practical tax reform must achieve a balance between efficiency, equity, simplicity and revenue concerns�

Tax and the Environment

Another good example of work with other OECD Directorates is on how tax policies can contribute to address climate change and other environmental challenges�

Important obstacles exist to the full use of environmentally related taxes:

■ The fear of reduced international competitiveness in energy intensive sectors of the economy may prevent the implementation of environmentally related taxes�

■ Blanket exemptions for polluting products, along with rebates for heavy polluting industries, can significantly reduce the effectiveness of environmentally related taxes in curbing pollution and also reduce incentives for developing and introducing new technologies�

■ Modifying the application of environmental taxes to reduce the impact on low-income households can reduce the environmental effectiveness of the taxes� Other and more direct measures, such as transfers, can be used to maintain the price signal of the tax, whilst reducing the impact of the tax on household income�

The OECD concluded that the income distribution obstacle can generally best be overcome by the use of direct measures to compensate low-income households� The competitiveness obstacle was more difficult, but the 2006 publication The Political Economy of Environmentally Related Taxes examined modelling and simulating the effects of introducing environmentally related taxes on heavily polluting industries, as well as the effects of possible approaches to mitigate international competitiveness pressures� The report also analysed case studies of countries that have successfully introduced environmentally related taxes on business, including how competitiveness concerns were overcome�

Current work is focussing on the effects of taxation on environmentally friendly innovation� Taxation of pollutants imposes an additional cost on users, and in theory gives an incentive to develop and apply new technologies that pollute less� Through a number of case studies across countries involving both tax and environmental experts, current OECD analysis seeks to shed light on how


© OECD 2009 41

it works in practice� Does the design of environmental taxes matter? And how should tax instruments be combined with other environmental and R&D policies to best nurture environment-friendly innovation? The CTPA, working with business and government, is also examining how to remove the obstacles to a broader use of tradable permits�

The Role of Taxation in Reducing Inequities

Governments recognise that the tax system has an important role to play in reducing inequalities in the distribution of income and wealth� Nobody is suggesting a return to the highly progressive tax rates of the 1970s (top marginal rates exceeding 80% in many countries), but the overall tax and benefit system must remain progressive� The CTPA and the Directorate for Employment, Labour and Social Affairs have initiated a joint study in how this can be achieved in today’s global environment�

Tax Statistics

To support analytical work and inform both governments and the wider public, the CTPA collects a wide range of information on tax revenues and tax systems in its member countries� The work on tax statistics provides policy makers and business with high quality international comparative data on the levels and structures of taxes in OECD countries� This complements the work on tax policy analysis, by providing regular quantitative comparisons of tax systems across OECD countries� The main outputs are two annual publications�

Revenue Statistics presents a unique set of detailed and internationally comparable tax revenue data in a common format for all OECD countries from 1965 onwards� It also provides a conceptual framework defining which government receipts should be regarded as taxes and classifies different types of taxes�

This annual publication reports tax revenues for each OECD country, providing a very detailed breakdown by type of tax (see figure 1)� This allows a comparison of tax levels between countries and within countries across levels of government� It also allows an analysis of differences in tax structure� The OECD Revenue Statistics builds on a very long tradition, but it is constantly refined to address emerging trends in government finances� A question currently being discussed relates to global climate change: should revenue from the allocation of tradable permits for CO2 emissions be considered equivalent to taxes in international revenue statistics?

Taxing Wages provides unique information on income tax paid by workers and social security contributions levied on employees and their employers in OECD countries� In addition, it specifies family benefits paid as cash transfers� Amounts of taxes and benefits are detailed program by program, for eight household types which differ by income level and household composition�

This annual publication provides information on how personal income taxes, social security contributions, payroll taxes and universal cash benefits affect the disposable income of different “typical” households (varying in income levels and household composition)� It provides figures on average tax rates


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(see figure 2) and marginal effective tax rates that apply to additional earnings� These provide insights into the effects of direct tax systems on incentives for employment and increasing hours of work, and on the distribution of disposable income between different types of household� In addition, the OECD Tax Database (www.oecd.org/ctp/taxdatabase) provides detailed comparative information on the rate structure of personal and corporate taxes�

Figure 1� Total tax ratio as percentage of GDP, 2006

0 10 20 30 40 50 60

Mexico

Turkey

Korea

Japan

United States

Switzerland

Slovak Republic

Australia

Greece

Ireland

Canada

Poland

Germany

Portugal

Luxembourg

Spain

New Zealand

Czech Republic

Hungary

United Kingdom

Netherlands

Iceland

Austria

Italy

Finland

Norway

France

Belgium

Sweden

Denmark


© OECD 2009 43

Figure 2� Income tax plus employee contributions less cash benefits, by family type (as % of gross wage earnings), 20081

1� Countries ranked by decreasing tax burden�

Tax Policy Activities with Non-OECD Economies

For several years, tax policy activities with non-OECD economies have focussed on tax-modelling workshops� However, the range of activities has now expanded to include workshops on tax incentives and on a selection of tax policy issues�

The aim of these workshops is to share the experiences that OECD countries have accumulated of using various tax policies, as well as methods that have been developed to analyse and predict their likely impacts� For more information, please see “Taxation in the Global Context”�


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MENA-OECD Investment Programme

Working Group 3 (Tax Policy Analysis) of the MENA-OECD Investment Programme supports a regional (Middle East and North Africa) network of senior tax policy officials organised to enable dialogue on the implementation of tax policies supportive of economic development, including exchanges of views on alternative approaches, and experience with specific policy measures� The role of the OECD is to help foster dialogue in support of tax reform efforts, drawing on data, analytical tools, publications and reports on tax policy making, compiled by the CTPA, with insights from activities of other working groups organised under the Investment Programme�

The fourth meeting of WG3, 28-29 January 2009 in Paris, at OECD headquarters, held discussions on tax implications of the current global financial crisis, considered work analyzing the implications of globalisation for the taxation of small and medium-sized enterprises, advance work on “tax indicators” and planned future WG3 activities� An informal half-day technical meeting was held prior to the WG3 meeting to discuss tax policy theory and analysis in relation to “tax indicator” work� ■

■ Did you know… The size of total tax revenues measured as a share of GDP varies from just 20% in Mexico to nearly 50% in Denmark?

Key Publications

■ Taxing Wages 2008: Special Feature: Consumption Taxation as an Additional Burden on Labour Income, May 2009, ISBN: 978-92-64-04933-8

■ Revenue Statistics 2008: Special Feature: Taxing Power of Sub-central Governments, October 2008, ISBN: 978-92-64-05139-3

■ The Political Economy of Environmentally Related Taxes, June 2006, ISBN: 978-92-64-02552-3

Tax Policy Analysis and Statistics on the Web

■ www.oecd.org/ctp/tpa

■ OECD Tax Database: www.oecd.org/ctp/taxdatabase

■ MENA Initiative on Governance and Investment for Development: www.oecd.org/mena

Tax Conventions and Related Questions

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CORE ISSUES

Cross-border investment would be seriously impeded if there was a danger that the returns on such investment would be taxed twice, both where the money was invested and in the country of residence of the investors� The OECD Model Tax Convention and the worldwide network of tax treaties based upon it help to avoid that danger by providing clear consensual rules for taxing income and capital�

For most types of income, especially business profits and investment income, double taxation is avoided in treaties based on the OECD Model Tax Convention by allocating taxing rights between the resident and source countries and by requiring the former to eliminate double taxation where there are competing taxing rights� Most bilateral tax treaties follow both the principles and the detailed provisions of the OECD Model� Close to 390 treaties between OECD member countries and over 3000 worldwide are based on the Model, and it has had considerable influence on the bilateral treaties between non-member countries�

As a sign of that influence, the Working Party on Tax Conventions and Related Questions has regular contacts with non-OECD countries to discuss developments in the Model and problems of application and interpretation of bilateral treaties� The OECD Model has not resolved all problems of interpretation and application and requires constant review to address new tax issues� The Working Party meets this need and its work results in regular changes to the Model� The most recent update to the model was published in 2008�

As part of its regular work, the Working Party analyses a number of issues that could result in further changes to the Model and the Commentary thereon� Some of these issues are described below:

Clarifying the Permanent Establishment Concept (Article 5)

Representatives of the business community invited the Working Party to include expressly in the Commentary to the OECD Model Tax Convention some widely-accepted interpretations related to the permanent establishment concept� Proposals to that effect were included in the 2005 update to the Model� Further issues have also arisen (e.g. with respect to the scope of the dependent agent permanent establishment concept and to the issue of when



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premises are “at the disposal” of an enterprise), in particular as a result of work being done by the Working Party in coordination with Working Party 6 on the Taxation of Multinational Enterprises� These include work relating to business restructurings (see Hot Topic: Business Restructurings) and the attribution of profits to permanent establishments, as a result of which the Working Party has now renewed its efforts to provide further clarity on this important issue�

Taxation of Services (Articles 5 and 17)

The Working Party has been reviewing the treatment of services under the current provisions of the OECD Model Tax Convention� That review has included a discussion of when it is appropriate to allow source taxation of services, taking into account the need for practical rules to determine the profits that would then be subjected to tax� As part of that work, the Working Party developed an alternative provision for possible use by countries wishing to treat the performance of services within their territory beyond a minimum time threshold as a permanent establishment� That alternative provision was included in the Commentary on the Model as part of the 2008 update� The Working Party is continuing to examine the scope of the application of Article 17 (Artists and Sportsmen) to particular situations and intends to clarify that in a future update to the Commentary�

Tax Treaty Policy Implications of the Communications Revolution (Articles 4, 5, 7 and 12)

Significant work has been undertaken on this issue in recent years� The first results were included in the 2003 Update of the Model Tax Convention� These results included changes aimed at clarifying the circumstances in which computer equipment such as a server can constitute a permanent establishment and the tax treaty characterisation of electronic commerce payments� Subsequent results included the final reports of the Business Profits Technical Advisory Group (which included representatives of the private sector and non-member countries) on the use of the concept of place of effective management as a tie-breaker for residence of legal persons (that report was finalised in June 2003) and on whether the current treaty rules are appropriate for taxing business profits arising from electronic commerce, which was finalised in April 2004� The Working Party has now begun further work on tax treaty issues relating to telecommunications, including an examination of the treatment of transponder leases, roaming payments, broadcasting payments and spectrum licenses�

Employment Services Provided on Short-Term Foreign Assignments (Article 15)

According to paragraph 2 of Article 15 of the OECD Model Tax Convention, a non-resident employee who performs services in a country on a short-term assignment is not subject to tax in that country in certain circumstances� The exact scope of the paragraph is sometimes unclear when those services


© OECD 2009 47

are provided in the context of an arrangement between the individual’s nonresident formal employer and the local enterprise where he carries out his assignment� A discussion draft concerning that issue was released in April 2004, and a follow-up consultation with business was held in January 2006� The Working Party produced a further report for public comment in March 2007 and intends to finalise its conclusions for inclusion in a future update to the Model�

Non-discrimination (Article 24)

The Working Party has undertaken work to examine issues relating to the interpretation and application of Article 24 (non-discrimination) of the OECD Model Tax Convention� In the first stage of its work, the results of which were included in the Commentary on Article 24 as part of the 2008 update to the Model, the Working Party clarified the interpretation and application of Article 24 in its current form� A second stage of the project, involving consideration of the broader issue of whether new or alternative non-discrimination provisions should be included in the Model, was launched in 2008�

Attribution of Profits to Permanent Establishments (Article 7)

The Working Party is working in coordination with Working Party 6 on the Taxation of Multinational Enterprises on issues of implementation arising from the latter’s project on the attribution of profits to permanent establishments which was finalised in July 2008� That project introduced the so-called “authorised OECD approach” (AOA) aimed at maximising the use of the arm’s length principle and the functionally separate enterprise concept in determining the profits of a permanent establishment� In order to provide the maximum legal certainty on the interpretation of existing and new treaties, it was decided to adopt a two track approach� First, revised Commentary on the existing text of Article 7 was prepared to incorporate as many as possible of the AOA conclusions, without conflicting with the Commentary’s prior interpretation of Article 7� That revised Commentary was included in the 2008 update on the Model� Second, text of a new Article 7 and accompanying Commentary, designed to fully implement the AOA, were released in draft form in July 2008 for public comment, and are intended to be included in a later update to the Model�

Mutual Agreement Procedure (Article 25)

As global trade and investment increase, the possibility of cross-border tax disputes increases as well� Left unresolved, these disputes can result in double taxation and a corresponding impediment to the free flow of goods and services in a global economy� Both governments and business need effective procedures to keep such disputes to a minimum and to resolve them satisfactorily when they arise� Work was undertaken several years ago to examine ways of improving the effectiveness of the Mutual Agreement Procedure (MAP) under Article 25 of the Model Tax Convention� Two important results of that work were included in the 2008 update to the Model� First, a


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provision requiring mandatory, binding arbitration to settle issues that remain unresolved after two years of MAP consideration was added to Article 25� Countries can enhance the effectiveness of the existing MAP process by including this arbitration procedure in their bilateral tax treaties� Second, changes were made to the Commentary on Article 25 to provide guidance on the proper application of that provision, to promote consistency and to improve its operation� The Working Party also helped to develop a “Manual on Effective Mutual Agreement Procedures” (MEMAP) as an on-line resource to explain the MAP process and to describe “best practices” for effective MAP (www.oecd.org/ctp/memap)�

Emerging Challenges

The leading role of the OECD in the area of tax treaties requires it to keep abreast of developments which might affect treaties in the long term� Some of the questions that are being looked at in that context include: What will be the role of tax treaties in the 21st century? How do tax and non-tax treaties interact? What are the tax treaty issues related to the identification and characteristics of the taxpayer? How can the process of amending treaties in a timely fashion be improved?

Upcoming Work

In addition to other new work mentioned above, the Working Party has begun work in 2009 on clarifying the meaning of the term “beneficial owner” in various provisions of the Model�

Model Tax Convention on Income and Capital

The OECD Model Tax Convention on Income and on Capital is the benchmark for negotiating, implementing and interpreting of tax conventions� Originally developed to harmonise conventions between OECD Member countries, its influence is increasingly extending to non-Member countries� The most recent update was published in September 2008� ■

■ Did you know… that there are over 3000 bilateral tax treaties around the world based on the OECD model?

Key Publications

■ Model Tax Convention on Income and on Capital 2008, September 2008, ISBN: 978-92-64-04818-8

■ Discussion draft on a new Article 7 (Business Profits) of the OECD Model Tax Convention

■ Revised Draft Changes to the Commentary on Paragraph 2 of Article 15

■ Improving the Resolution of Tax Treaty Disputes


© OECD 2009 49

Key Events

The conference celebrating the 50th Anniversary of the OECD Model Tax Convention in September 2008 brought together over 650 participants from 100 economies to discuss what the next decade holds for tax treaties�

The panel on Tax Treaty Treatment of Portfolio Investment at the conference celebrating the 50th Anniversary of the OECD Model Tax Convention in September 2008.

Left to right: Mr� Michael Mundaca, Deputy Assistant Secretary for International Tax Affairs, Treasury Department United States, Mr� Stephen Shay, Ropes & Gray LLP, Boston, Mr� Guglielmo Maisto, Maisto e Associati, Milan, Ms� Carolina Del Campo, Deputy Director General for Non-residents Taxation, Ministry of Economy and Finance, Spain�

Tax Treaties on the Web

■ www.oecd.org/ctp/tt

■ Model Tax Convention www.oecd.org/ctp/tt/mtc

■ Manual on Effective Mutual Agreement Procedures www.oecd.org/ctp/memap


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CORE ISSUES

The Transfer Pricing Guidelines

Commercial transactions between different parts of a multinational group may not be subject to the same market forces shaping relations between two independent firms� Transfer prices – payments from one part of a multinational enterprise for goods or services provided by another – may diverge from market prices, with consequences for the division of tax revenues between governments�

The standard, accepted worldwide, for multinational enterprises to price the cross-border transfer of goods, intangibles and services among related enterprises is the arm’s length principle set out in Article 9 of the OECD Model Tax Convention and described in the OECD’s 1995 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the Guidelines)� The Guidelines are not immovable: flexibility and adaptability are crucial to their success� They are therefore continuously reviewed by Working Party 6 and are updated as needed�

New Guidance on the Attribution of Profits to Permanent Establishments

Structures involving Permanent Establishments (PEs) have long been used by multinational enterprises (MNEs) in the financial sector, primarily by banks, and are increasingly created by business models now used outside the financial sector� The Working Party’s work on this key project started in 1998�

However, the pre-2008 Commentary on Article 7 of the Model Tax Convention allowed a divergence of opinion over the correct conceptual approach to attribution of profits and there was very little practical guidance on how to implement the (divergent) principles� It was therefore essential to first establish a consensus view on the conceptual approach� Once consensus was reached, on the “functionally separate enterprise” approach, it was then necessary to test how far it was possible to apply the Guidelines, which address transactions between associated enterprises that are actual separate enterprises, to attribute profits to permanent establishments treated as if they were separate enterprises�

Taxation of Multinational Enterprises

Taxation of Multinational Enterprises

© OECD 2009 51

The 2008 Report on the Attribution of Profits to Permanent Establishments, based on extensive consultation with business, outlined how this principle should apply to allocate an enterprise’s profits between its permanent establishment in one country and its operations in another country (e.g. the home office)� The report covers general considerations, as well as special considerations for banks, global trading of financial instruments, and insurance� Working Party 6 is assisting Working Party 1 to incorporate the conclusions of the Report in the Model Tax Convention�

Implementating and Updating the Guidelines

Successful implementation of monitoring is a key feature to achieving consistent application of the Guidelines� The main purpose of the monitoring is to examine how far member countries’ legislation, regulations and administrative practices are consistent with the Guidelines, and to identify areas where the Guidelines may require amendments or additions� Resource constraints have meant that this monitoring role has not been fully carried out� Nevertheless, work is currently underway on a number of projects�

Working Party 6 has identified two related priority areas to review: comparability issues encountered when applying the transfer pricing methods authorised by the Guidelines and the application of transactional profit methods, i�e� the transactional profit split methods and the transactional net margin method�

One of the pillars on which the arm’s length principle is based is the need to conduct a comparability analysis in order to compare conditions made or imposed between associated enterprises and those which would be made between independent enterprises, and to calculate the profits that would have accrued to the enterprise at arm’s length� A series of Issues Notes on questions of the comparability standard under the arm’s length principle were released for public comment in May 2006, a public consultation was held in 2008, and the Working Party is now completing its work on updating the Guidelines to reflect the conclusions reached�

The related project on transactional profit methods has focused on a number of issues, including reviewing the methods’ “last resort” status, considering aspects of the application of the profit split method, e.g. determining the combined profit to be split and how to split it, and analyzing issues that arise in applying the transactional net margin method, e.g. the standard of comparability, and the selection and determination of the net margin indicator� A discussion draft was released for public comment in January 2008, a public consultation was held later in the year and the Working Party is now preparing its revisions to the Guidelines�

Working Party 6 will now look at administrative aspects of applying the transfer pricing rules, including tax administrations’ risk assessment strategies and issues of increasing the efficiency of the use of resources by both taxpayers and tax administrations faced with applying those rules� The Working Party will also begin a new project to review the Guidelines’ treatment of intangibles� ■


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■ Did you know… The 650 participants at the conference held at the OECD in September 2008 to celebrate the 50th Anniversary of the OECD Model Tax Convention overwhelmingly voted the OECD’s 1995 Transfer Pricing Guidelines as the most important treaty development of the past 50 years?

■ Did you know… that major non-OECD economies like China, India, South Africa, Russia, Indonesia and Singapore base their transfer pricing legislation on the OECD guidelines?

■ Key Publications

■ Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, ISBN 978-92-64-18628-6

■ Report on the Attribution of Profits to Permanent Establishments (Web report)

■ Discussion Draft on Transactional Profit Methods

■ Discussion Draft on Comparability

Transfer Pricing on the Web

■ www.oecd.org/ctp/tp

Key Event

Transfer Pricing and Treaties in a Changing World

21-22 September 2009OECD Conference Centre

2 rue André-Pascal, Paris (16th Arrondissement)

The conference “Transfer Pricing and Treaties in a Changing World” will take place in Paris at the OECD’s Conference Centre on 21-22 September 2009�

More than 600 participants from all over the globe will gather in Paris for what is expected to be the transfer pricing event of the year� Some of the world’s leading specialists will share their expertise on cutting-edge transfer pricing and treaty developments that affect governments and multinational enterprises in a changing world� The conference programme will also offer ample opportunities to exchange views with representatives from more than 100 governments and from the business community, universities and international organisations�

Registration opened on 8 April 2009 and only limited places are available� To register, email: [email protected] or visit www.oecd.org/tax/ttpglobalforum

Tax Administration

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CORE ISSUES

In July 2002, the Forum on Tax Administration (FTA) was established in recognition of the potential for improvements to tax administration that might flow from regular exchanges of experiences and approaches to tax administration and the identification of best practices�

The FTA looks to develop effective responses to important tax administration issues in a collaborative fashion, and discusses strategic issues that may emerge in the medium to long term, or which affect tax administration� To do this, it brings together commissioners and heads of tax administrations through regular meetings, and projects involving subject matter experts� The objectives of these activities are to share information and experiences, and to identify international good practices for resolving particular administration issues� To ensure that such information and experiences are made available to other tax administrations, many of them have been published in the tax administration guidance series� The CTPA supports the work of the FTA in the pursuit of its key objectives in a broad range of areas�

Improving Voluntary Compliance

The FTA aims, within the context of an increasingly global economy and rapid technological change, to improve tax compliance and taxpayer services by helping revenue bodies increase the efficiency, effectiveness and fairness of tax administration and reduce the costs of compliance for taxpayers� Recent work undertaken by the FTA has examined compliance management, including risk management, to identify innovative ways that tax administrations can promote greater voluntary compliance and reduce costs for taxpayers� Compliance Management of Large Taxpayers

Compliance Management of Large Taxpayers

International non-compliance has been a key topic for the FTA since its third meeting in Seoul, Korea in September 2006� The FTA commissioned a study into the role of tax intermediaries in relation to voluntary compliance and the promotion of aggressive tax planning and the report Study into the Role of Tax Intermediaries was released in January 2008 at the fourth FTA meeting in Cape Town, South Africa�

Tax Administration


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This impetus towards more effective management of tax compliance of large taxpayers by revenue bodies continues with the upcoming release of four new reports which examine other dimensions of large taxpayer compliance�

Banks

The study Building Transparent Tax Compliance by Banks examines the role of banks in the provision of aggressive tax planning arrangements, including the complex financial transactions developed by banks that can be used for aggressive tax planning by banks and their customers� The report recommends that revenue bodies should gain an understanding of how individual banks manage the risks posed by these transactions as robust risk management processes can provide revenue bodies with greater assurance of the bank’s tax compliance� The report examines the nature of the banking business and concludes that, in relation to their own tax affairs, banks can engage in an enhanced relationship with tax administrations in the same way as other large corporate taxpayers� For more information see “Building Transparent Tax Compliance by Banks”�

High Net Worth Individuals (HNWIs)

The study, Engaging with High Net Worth Individuals on Tax Compliance, identifies and recommends to tax administrations a number of best practices for dealing with HNWIs, including:

■ understanding the risks posed by the HNWI segment, including the motivations of HNWIs and the wider marketplace for aggressive tax planning;

■ establishing an appropriate structure in tax administrations to deal with HNWIs; and

■ improving international co-operation at both a strategic and operational level, including regular meetings between HNWI specialists within tax administrations�

Large business

The FTA’s Compliance Management of Large Business Task Group report: Experiences and Practices of Eight OECD Countries is an overview of the practices and experiences in managing the compliance of large business taxpayers in Australia, Canada, France, Ireland, the Netherlands, Norway, the United Kingdom and the United States�

The report highlights common compliance issues associated with large taxpayers and identifies practices and innovative programs or initiatives used by tax administrations to deal with these challenges�

Tax Administration

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Corporate Governance

The Guidance Note on Corporate Governance and Tax Risk Management shares and builds on the experiences and lessons from Australia, Canada and Chile in encouraging good corporate governance by large business taxpayers through the engagement of their Boards and CEOs in dialogue about corporate governance and tax risk management�

These countries’ experiences suggest that large businesses that have good corporate governance and more transparent relationships with tax administrations can expect fewer audit interventions and hence greater certainty� The FTA is currently examining the links between tax compliance and good governance�

Effective Compliance Risk Management Techniques

Today, vastly increased demands on tax administrations require a thorough approach to identifying key compliance risk areas and the treatments (e.g. service, education, audits, enforcement, legislative change) to be applied to address those risks� To achieve the best outcomes, tax administrators must design a strategy for each of the major compliance risks identified, recognizing that non-compliance behaviours and attitudes vary substantially across different taxpayer segments� This represents one of the most significant challenges to effective administration of tax laws�

The FTA co-ordinates efforts by member countries to share and examine approaches on compliance risk management (and associated research efforts) and to prepare materials on successful practices for the guidance of OECD member countries and non-members�

In 2004 a Guidance Note titled “Compliance Risk Management: Managing and Improving Tax Compliance” was published� That Guidance Note described and promoted the concept of compliance risk management as an essential management tool for revenue bodies and gave a description of practical approaches that could be adopted� The model of compliance risk management recommended, which draws on leading revenue body experience, and which continues to underpin the work of the FTA is set out on the following page�


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The Compliance Risk Management Process

Monitor performance against plan

Evaluate compliance outcomes

Assess and prioritise risks

Analyse compliance behaviour(causes, options for treatment)

Determine treatment strategies

Plan and implement strategies

Identify risks

Monitor performance against plan

Operating Context

Evaluate compliance outcomes• Registration• Filing• Reporting• Payment

The current work programme in this area includes providing more practical guidance in the application of compliance risk management techniques; measuring and evaluating compliance programmes; compliance management issues of large businesses; and selected issues covering improved debt collection strategies� Some key recent reports include:

■ Monitoring Taxpayers’ Compliance: A Practical Guide Based on Revenue Body Experience (June 2008)

■ Managing and Improving Compliance: Recent Developments in Compliance Risk Treatments (March 2009)

The ongoing work also includes a study on the use of withholding and information reporting regimes covering the income of SMEs and self-employed taxpayers, developments in selected countries in managing the VAT compliance risks, a study of recent research findings on factors that may influence taxpayers’ behaviour, and auditing techniques for businesses operating substantially via the Internet�

Taxpayer Service Delivery Trends

Service is a key component of any revenue administration’s strategy for improving compliance with tax laws� Over the last decade, the capacity of revenue administrations to expand the range of services provided, and improve service delivery, has been greatly enhanced by developments with, and growth in the use of, modern information technology systems (e.g., the Internet)�

The FTA oversees the work of the Taxpayer Services Sub-group that has as its mandate monitoring and reporting on developments and experiences in the delivery of taxpayer services, including the use of electronic services� Some recent reports include:

■ Programs to Reduce the Administrative Burden Resulting from Tax Regulations (January 2008)

Tax Administration

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■ Standard Business Reporting (May 2009)

The current work programme in this area includes activities associated with identifying key strategies relating to the emerging development of standardised business reporting on a “whole of government” basis, and experiences with and opportunities to use new web-based approaches to provide information to taxpayers�

Comparative Data on Revenue Administration

To support analytical work undertaken by country members to appraise and improve the efficiency and effectiveness of their revenue administrations, the CTPA has co-ordinated the development of a comparative information series on revenue administration� This series, the first edition of which was released in October 2004, provides internationally comparative data on aspects of tax systems and their administration in OECD member countries� The primary purpose of the series is to provide information that will facilitate dialogue among members on tax administration issues and which may also identify opportunities for members to improve the design and administration of their respective tax systems� This information series is intended to be updated around every two years, and should evolve to become the definitive source of comparative tax administration-related information for OECD countries� A second series, covering an increased array of information and extended to include selected non-OECD countries, was published in October 2006 and a third series was published in January 2009� This covers 43 countries and includes new sections on issues such as large taxpayer operations, tax debt management, service delivery standards, electronic filing and other e-services, tax disputes and administrative review�

■ Did you know… that the FTA is chaired by Mr� Pravin Gordhan, Commissioner of the South African Revenue Service and that over 15 non-OECD economies are full participants in this work?

■ Did you know… that the tax burden across countries surveyed in 2007 ranges from just over 13% to over 48%?

■ Did you know… that 27 out of 43 revenue bodies still reported non-automated methods (e.g. mailed cheques or in-person payments) as the primary or secondary most common tax payment method used?

Key Events

■ Fifth Forum on Tax Administration, Merida, Mexico, September 2009


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Key Publications

■ Guidance Note on Compliance Risk Management: Managing and Improving Tax Compliance (2004)

■ Programs to Reduce the Administrative Burden Resulting from Tax Regulations (January 2008)

■ Monitoring Taxpayers’ Compliance: A Practical Guide Based on Revenue Body Experience (June 2008)

■ Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series (January 2009)

■ Managing and Improving Compliance: Recent Developments in Compliance Risk Treatments (March 2009)

■ Building Transparent Tax Compliance by Banks (forthcoming)

■ Engaging with High Net Worth Individuals on Tax Compliance (forthcoming)

■ Forum on Tax Administration Compliance Management of Large Business Task Group: Experiences and Practices of Eight OECD Countries (forthcoming)

■ Guidance Note on Corporate Governance and Tax Risk Management (forthcoming)

■ Standard Business Reporting (May 2009)

Tax Administration on the Web

■ www.oecd.org/ctp/ta

Consumption Taxes

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CORE ISSUES

The spread of Value Added Tax (also called Goods and Services Tax – GST) has been the most important development in taxation over the last half century� Limited to less than ten countries in the late 1960s, it has now been implemented by nearly 150 countries, where it often accounts for one fifth of total tax revenue� The recognised capacity of VAT to raise revenue in a neutral and transparent manner has drawn all OECD member countries, except the United States, to adopt this broad-based consumption tax� Its neutrality principle towards international trade has also made it the preferred alternative to customs duties in the context of trade liberalisation� OECD member countries have relied increasingly on Value Added Tax (VAT) as a source of revenues� Over the last ten years, the share of VAT as a percentage of total taxation has risen up from 17% to 19%� These ratios vary considerably between countries, but in 24 of the 29 OECD countries with VAT, the tax accounts for more than 15 percent of total taxation� Following its adoption by a growing number of countries, a shift occurred within the category of taxes on consumption so that while the share of VAT rose, the revenue from consumption taxes on specific goods and services (mainly excise taxes) fell from 24% to less than 11%�

The International VAT/GST Guidelines

At the same time as VATs have been spreading across the world, international trade in goods and services has also been expanding rapidly� As a result, the interaction between value added tax systems operated by individual countries has come under greater scrutiny as potential for double taxation and unintentional non-taxation has increased� Recent work, led by the OECD’s Committee on Fiscal Affairs (CFA) in cooperation with business, has revealed that the current international consumption taxes environment, especially with respect to trade in services and intangibles, is creating obstacles to business activity, hindering economic growth and distorting competition� Complex, unclear or inconsistent rules across jurisdictions are difficult to manage for revenue bodies and create uncertainties and high compliance costs, which can lead to reduced compliance� Such an environment may also facilitate tax fraud and avoidance�

Consumption Taxes


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Since 2006, the CFA has been working on the development of the OECD International VAT/GST Guidelines (www.oecd.org/ctp/vatguidelines)� These will include a broad range of issues in the VAT area including cross-border trade in services and goods and refund and dispute resolution mechanisms� During 2008 two consultation documents were issued by the CFA, both of which attracted support for the principle of applying the tax rules of the jurisdiction in which the customer is located for cross-border business-to-business supplies of services and intangibles� Guidelines expanding on this will be developed during 2009�

VAT Abuse

Despite their in-built self-policing features, VAT systems have been subject to a significant level of fraud over recent years, especially among EU countries� The OECD Forum on Tax Administration (FTA) commenced work in this area in 2004, with the objective of providing revenue bodies with comparative information and a discussion forum on countermeasures being taken by countries and their impacts� Further work is being done in this area in 2008/09� The OECD also works closely with the Financial Action Task Force (FATF) in this area, notably as regards the laundering of the proceeds of VAT fraud�

Consumption Tax Trends

This biennial publication presents information about VAT/GST and excise duty rates in OECD member countries� It provides information about indirect tax topics across OECD countries and contains articles on recent developments of interest� The 2008 edition contained an informative article on VAT in three significant non-OECD countries – China, India and Russia� ■

■ Did you know… the share of VAT on general consumption as a percentage of total taxation has risen to 19%?

■ Did you know… that the United States is the only major economy that does not have a VAT?

Key Publications

■ Consumption Tax Trends 2008: VAT/GST and Excise Rates, Trends and Administration Issues, December 2008, ISBN: 978-92-64-03947-6

Consumption Tax on the Web

■ www.oecd.org/ctp/ct

■ International VAT/GST Guidelines www.oecd.org/ctp/vatguidelines

International Tax Co-operation

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CORE ISSUES

The unprecedented liberalisation of national economies and progress in information and telecommunication technologies has made the world a smaller place where an increasing number of businesses operate at a global level� In contrast, tax administrations remain largely confined to national jurisdictions� The proper exercise of fiscal sovereignty crucially depends upon the development of international cooperation� The OECD work in this field includes countering harmful tax practices and facilitation of effective exchange of information (see also “Tackling Tax Evasion”), combating aggressive tax planning and corruption, and improving co-operation between tax and anti-money laundering authorities�

Working Towards a Level Playing Field of Transparency and Exchange of Information: The Harmful Tax Practices Project

OECD members seek to establish standards that encourage an environment in which fair competition can take place� In the tax area this means promoting principles that are designed to enable each country to apply its own tax laws without the interference of practices that operate to undermine the fairness and integrity of each country’s tax system�

With this objective in view, the OECD set out criteria for analyzing preferential tax regimes and identifying tax havens, and has worked since 1998 with both member and non-member economies to address harmful tax practices� The main focus of this work is on improving transparency and exchange of information so that countries can fully and fairly enforce their tax laws� In this regard the OECD has developed principles of transparency and exchange of information widely accepted by jurisdictions around the world and that have been supported by the G8, G20, the UN and the EU (see “Setting Standards” below)�

In May 1998, the OECD issued a report entitled “Harmful Tax Competition: An Emerging Global Issue�” The Report focused on geographically mobile activities, such as financial and other services activities, including the provision of intangibles and divided the work into three areas: (1) member country preferential regimes, (2) tax havens, and (3) non-OECD economies�



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The report set out four key factors used to define tax havens:

1) No or nominal tax on the relevant income;

2) Lack of effective exchange of information;

3) Lack of transparency;

4) No substantial activities�

No or nominal tax is not sufficient in itself to classify a country as a tax haven�

The report Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices (2000) outlined the progress made and, among other things, identified 47 potentially harmful regimes within OECD members as well as 35 jurisdictions found to have met the tax haven criteria (in addition to the 6 jurisdictions meeting the criteria that had made advance commitments to implement the OECD standards of transparency and exchange of information)� Progress reports were released in 2001, 2004 and 2006�

The jurisdictions that had committed to implement the standards were invited to participate in the Global Forum on Taxation along with OECD members to further articulate the standards and ensure their implementation� The Global Forum developed in 2002 the Model Agreement on Exchange of Information in Tax Matters, and in 2005 agreed standards on transparency relating to availability and reliability of information�

The Global Forum also launched a process in 2004 to assess progress made in implementing the standards� As a key objective is to achieve a level playing field, the Global Forum invited a number of other jurisdictions to participate in the assessment process� The assessments, published annually since 2006, now cover over 80 jurisdictions� The 2009 assessment will be published shortly�

The jurisdictions covered by the Global Forum assessments include the 30 OECD members, countries that participate in the OECD’s Committee on Fiscal Affairs as “Observer” countries (Argentina, Chile, China, Russia, and South Africa), jurisdictions that met the tax haven criteria and other financial centres identified by the Global Forum�

Since the start of this work, significant results have been achieved:

■ Of the 47 regimes initially identified as potentially harmful in the 2000 Report, 46 have been abolished, amended or found not to be harmful following further analysis� Only one preferential regime was found to be harmful, the 1929 Luxembourg Holding Company Regime� Since that finding was made in 2006, Luxembourg has enacted legislation to abolish this regime�

■ All 41 jurisdictions identified as tax havens according to the OECD criteria have now endorsed the principles of effective exchange of information and transparency and agreed to implement them�


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■ More than 70 tax information exchange agreements (TIEAs) have been signed since the project began, and over 25 of these have been signed since the beginning of 2009�

■ The promotion of information sharing to ensure compliance with the tax laws featured prominently in the November 2008 and April 2009 G20 Summits on the Financial Crisis� On the occasion of the 2nd of April G20 Summit, the OECD Secretariat issued a progress report describing which jurisdictions assessed by the Global Forum were making substantial progress in implementing the standards� See “Tackling Tax Evasion” for more information

■ Many jurisdictions have made progress in achieving high standards of transparency, for example, by immobilising or abolishing bearer shares or improving their record-keeping requirements�

Setting Standards

Effective exchange of information requires a legal mechanism that permits exchange of information between two or more jurisdictions� The Committee has developed several bilateral and multilateral instruments that can be used as a framework for exchange of information for tax purposes� The OECD standard on information exchange are relevant not just for OECD members, but have also found wide support beyond the organisation’s membership� The OECD standard has been endorsed by the G20 and by the UN Committee of Experts on International Co-operation in Tax Matters�

The standard can be implemented through bilateral tax treaties or tax information exchange agreements; by multilateral agreements (e.g. the Convention on Mutual Administrative Assistance in Tax Matters); or by domestic legislation allowing for the provision of information on a unilateral basis� Some of the main instruments are described below:

Article 26 of the OECD Model Tax Convention

The most commonly used legal mechanism is Article 26 of the OECD Model Tax Convention on Income and on Capital, which provides for exchange of information in the context of a comprehensive bilateral income tax treaty� Over 3000 bilateral tax treaties are based on the OECD Model Tax Convention� Article 26 sets forth the rules under which information may be exchanged between tax authorities� It does not limit the form of such exchanges, although the main forms used are on request, automatic and spontaneous exchange� Article 26 first establishes the obligation to provide information to a treaty partner and the circumstances under which this obligation exists� It then sets out rules that ensure that any information provided to a treaty partner is subject to strict confidentiality that protect the legitimate privacy rights of any person to whom the information relates� Finally, it provides certain exceptions from the obligation to provide information, but notes specifically that grounds for declining a request can not be based on bank secrecy or the absence of a domestic tax interest in the information�


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Following the recent withdrawal of reservations by Austria, Belgium, Luxembourg and Switzerland in March 2009, Article 26 has the support of all OECD members� For more information, see “Tackling Tax Evasion”�

Convention on Mutual Administrative Assistance in Tax Matters

The multilateral Convention on Mutual Administrative Assistance in Tax Matters was developed jointly by the OECD and the Council of Europe� It provides for exchange of information for a wide range of taxes as well as other forms of mutual assistance such as assistance in the collection of taxes and the service of documents� The Convention is currently in force with respect to the following 14 countries: Azerbaijan, Belgium, Denmark, Finland, France, Iceland, Italy, the Netherlands, Norway, Poland, Sweden, the Ukraine, the United Kingdom and the United States� There is a growing interest in the Convention particularly as it allows for exchange of information for consumption tax purposes, assistance in tax collection, but also for multilateral exchange and in particular multilateral simultaneous tax examinations� The Ukraine ratified the Convention on 17 December 2008� Canada and Germany, which respectively signed the Convention on 28 April 2004 and 18 April 2008, are still in the process of ratifying the Convention�

2002 Model Agreement on Information Exchange on Tax Matters

This model was developed in partnership with non-OECD jurisdictions committed to the principles of effective exchange of information and transparency in the context of the harmful tax practices project described above� It is designed as a model for TIEAs outside the context of comprehensive income tax treaties, and has been used extensively� Unlike Article 26 and the Convention on Mutual Administrative Assistance in Tax Matters, it is limited to exchange of information on request�

Balancing the Interests of Tax Authorities and Taxpayers

Mechanisms for exchange of information need to balance the interest of tax authorities to have access to pertinent information with the need to protect the legitimate interests of taxpayers and to guarantee the confidentiality of taxpayer information� All exchange of information instruments developed by the OECD recognise that there are legitimate reasons for declining to provide information, for instance, in cases where information contains a trade secret or is protected by attorney-client privilege� In addition, the instruments impose strict rules of confidentiality on any information supplied to the tax authorities of another country and prohibit “fishing expeditions”� These rules restrict the persons to whom information may be disclosed and the purposes for which the information may be used�


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Promoting Effective Exchange of Information Beyond the OECD

Effective exchange of information is a global issue and the Working Party on Tax Avoidance and Evasion continues to promote standards of information exchange throughout the world� Regular events are held with the Inter-American Center of Tax Administrations (CIAT), the Intra-European Organisation of Tax Administrations (IOTA), the Study Group on Asian Tax Administration and Research (SGATAR), and other organisations, for the purpose of exchanging experiences between OECD and non-OECD economies regarding exchange of information and to identify ways of improving the efficiency of this process�

Improving the Technical and Practical Aspects of Information Exchange

Through the Taxation Information Exchange Systems Sub-Group (TIES), systems and procedures are being developed and improved to facilitate the exchange of tax information between countries, taking into account the latest technological developments� A key aspect of this work is to ensure that existing standards of data integrity and security are not compromised when information is exchanged electronically� The technological and operational improvements developed by the Sub-Group will incorporate the requirements of both direct and indirect tax administrations� With respect to automatic exchange of information, a new OECD Standard Transmission Format has been designed based on Extensible Markup Language (XML)� A tool kit for automatic exchange is available on the OECD website: www.oecd.org/ctp/eoi�

There is also an increased focus on the practical and operational aspects of information exchange� For instance, a Manual on Information Exchange has been developed which provides practical assistance to officials dealing with all forms of exchange of information for tax purposes� It is available on the OECD website: www.oecd.org/ctp/eoi/manual� CIAT has developed a similar manual�

Assistance in Tax Collection

Globalisation of the economy not only makes it harder for tax authorities to accurately determine the correct tax liabilities of taxpayers but also makes it more difficult to collect taxes owed� Taxpayers may have assets around the world but tax authorities generally cannot go beyond their domestic borders to take action to collect taxes� For this reason the Working Party developed an article on collection assistance which has now been included in the OECD Model Tax Convention as new Article 27� The Convention on Mutual Administrative Assistance in Tax Matters also provides for collection assistance� A manual on the implementation of collection assistance has been developed and is available on the OECD taxation website (www.oecd.org/ctp/eoi)�


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Aggressive Tax Planning

The OECD’s work in this area focuses on improving the response time to emerging tax risks, trends and patterns already identified and experienced by some tax administrations, and to share experiences in dealing with them� The timely sharing of such information is intended to assist member states in understanding new schemes, facilitate their detection, and enable countries to adapt their risk management strategies and identify successful legislative and administrative responses� Recent projects in this area include a study on the potential application of forms of co-operative compliance and other strategies to High Net Worth Individual (HNWI) taxpayers�

The work is supported by the OECD’s Aggressive Tax Planning (ATP) directory which contains a growing number of generic ATP schemes� The scheme descriptions are non-taxpayer specific (i.e. they do not disclose the identity of the taxpayers involved) and thus protect taxpayer privacy�

Tax Crimes and Money Laundering

Tax evasion and money laundering often thrive together� In May 1998 the G7 Finance Ministers therefore encouraged international action to enhance the capacity of anti-money laundering systems to deal effectively with tax related crimes� The G7 considered that international action in this area would strengthen existing anti-money laundering systems and increase the effectiveness of tax information exchange arrangements� Since then, the OECD’s Committee on Fiscal Affairs has strengthened its involvement with the Financial Action Task Force (the international standard setter in anti-money laundering) so as to improve co-operation between tax and anti-money laundering authorities and enhance government’s ability to combat money laundering and tax crimes�

The OECD’s work on tax crime and money laundering is designed to complement that carried out by FATF� This work is being pursued in a variety of ways including typologies exercises, developing an awareness handbook on money laundering for tax auditors, examining key risk areas and reviewing current country practices for sharing information between tax and anti-money laundering authorities� Recent reports produced by the OECD can be found on www.oecd.org/ctp/taxcrimes�

To facilitate co-operation between tax and other law enforcement authorities, the Commentary to Article 26 of the Model Convention contains optional language for inclusion in bilateral treaties for countries wishing to share information for non-tax purposes� It allows, under certain circumstances, competent authorities to pass information received for tax purposes to other law enforcement agencies and judicial authorities for enforcement of laws related to high priority areas such as combating money laundering�


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Combating Corruption

In order to discourage the solicitation and payment of bribes to foreign public officials, the OECD recommended in 1996 that OECD countries that do not disallow the deductibility of bribe payments to foreign public officials re-examine such treatment, with the intention of denying deductibility� The Committee on Fiscal Affairs regularly reviewed the self evaluations of countries’ progress in implementing the 1996 Recommendation and participated in country reviews undertaken by the Working Group on Bribery� Updates with country-by-country information are regularly published on the OECD taxation website� The CFA has designed a Bribery Awareness Handbook to assist tax examiners in the detection of suspicious payments� This handbook is available in 18 languages on the OECD taxation website (www.oecd.org/ctp/nobribes)�

The 1996 Recommendation has had an important impact both within and outside the OECD, but its monitoring and the country reviews have indicated a need to strengthen the 1996 Recommendation� A new Recommendation on Tax Measures for further Combating Bribery of Foreign Public Officials in International Business Transactions has been prepared and will be finalised shortly� It calls in particular on parties to the OECD Anti Bribery Convention to adopt explicit legislation denying the deductibility of bribe payments to foreign public officials� ■

■ Did you know… that China uses the 2002 Model Agreement for their dialogue with tax havens?

■ Did you know… that an increasing number of countries’ tax administrations and Financial Intelligence Units exchange information that helps the efforts against money laundering and financing of terrorism?

Key Publications

■ The Convention on Mutual Administrative Assistance in Tax Matters: Twentieth Anniversary Edition, March 2008, ISBN: 978-92-64-04103-5

■ Tax Co-operation 2008: Towards a Level Playing Field: Assessment by the Global Forum on Taxation, August 2008, ISBN: 978-92-64-03919-3

■ Engaging with High Net Worth Individuals on Tax Compliance, May 2009

■ Recommendation on Tax Measures for further Combating Bribery of Foreign Public Officials in International Business Transactions, forthcoming

International Tax Co-operation on the Web

■ Exchange of information www.oecd.org/ctp/eoi

■ Harmful Tax Practices www.oecd.org/ctp/htp

■ Bribery Awareness Handbook www.oecd.org/ctp/nobribes

■ Manual on Information Exchange www.oecd.org/ctp/eoi/manual

■ Tax Crimes and Money Laundering www.oecd.org/ctp/taxcrimes


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CORE ISSUES

The OECD cannot achieve a truly global perspective without a close partnership with economies outside its current membership� In the tax area, the increasing globalisation and inter-dependence of the world’s economies increases the importance, to both governments and business, of developing and implementing internationally accepted principles of taxation and standards for the administration of taxation systems� It means that the borders for taxation issues, and the need for dialogue and consistency of approach, reach far beyond the existing OECD membership�

The CTPA’s Global Relations programme acts as a bridge between OECD member countries and non-OECD economies to ensure that non-OECD economies are given a voice in developing the international tax rules so that they continue to be of wide relevance in an increasingly interdependent global economy� This means:

■ Listening to non-OECD economies, understanding their perspectives and enabling OECD approaches to reflect the reality of non-OECD economies’ circumstances,

■ Promoting OECD standards and guidelines, global consensus and good practices in the international tax area�

Furthermore, there is increasing recognition that taxation itself has implications that stretch beyond the narrow sphere of revenue raising� Taxation policy and administration shapes the environment in which economic activity and investment takes place and shapes the relationship between the individual and the state� Bargaining between governments and citizens over tax can contribute to more effective and accountable states as well as to better governance� Taxation therefore can increase government responsiveness and accountability and strengthen capacity both by providing resources for infrastructural development and by reinforcing the relationship between state and population�

Enlargement and Enhanced Engagement

In order to maintain the OECD’s relevance in a changing world, in May 2007, the OECD countries agreed to invite Chile, Estonia, Israel, Russia and Slovenia to open discussions leading to membership in the OECD� At the same time they proposed a strategy of enhanced engagement, with a view to eventual possible

Taxation in the Global Context: Engaging with Non-OECD Economies

Taxation in the Global Context: Developing our Co-operation with Non-OECD Economies

© OECD 2009 69

membership, to Brazil, China, India, Indonesia and South Africa� In addition, it was agreed to enhance engagement with countries in South East Asia�

These developments will mean:■ A larger OECD which will reflect a broader range of perspectives adding

to the vibrancy and diversity of the organisation while presenting the challenges that such diversity will bring�

■ An historic opportunity to develop close dialogue with these key economies and to encourage reform where needed as the process develops�

The CTPA’s Global Relations programme is integral to this dialogue, providing the framework within which these countries become involved in a dialogue with OECD countries and are able to share experience with each other and with other non-OECD economies (NOEs)�

The Global Relations Programme in Taxation

The Opportunity

An increase in the numbers of members, no matter how significant these countries may be, still leaves a significant proportion of the global economy potentially outside the global tax dialogue� The Global Relations programme with non-OECD economies in taxation provides a mechanism for all interested countries to share their experiences on common issues and develop solutions to emerging challenges in tax policy and administration�

Unique Aspects of the Programme

The programme is based on direct interaction between serving tax officials in OECD member countries and NOEs, as well as experts from the OECD Secretariat, enabling them to share practical experience and expertise, and contribute their own perspectives into the dialogue and to understand the tax environment faced by others�

Senior tax officials from 11 countries share their approaches to auditing international groups at a Global Relations workshop in Kuala Lumpur in December 2008 – one of 63 such events held in 2008.


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The Global Relations programme promotes international co-operation on all the core work areas of the CTPA, including transfer pricing, exchange of information, tax treaties, and a variety of topics in domestic tax policy and revenue administration� The programme has global reach and is an essential element of the global dialogue on taxation involving all interested countries, including those moving to a closer relationship with, or full membership of, the OECD�

The Global Relations programme is playing a central role in promoting good practices in the tax policy and administration areas, with the objective of promoting fair tax systems, which treat similarly placed taxpayers in the same way, and achieve the desired allocation of the tax burden� Other key objectives are to improve compliance and to promote efficient and competitive tax systems that reduce compliance costs for taxpayers and administrative costs for tax authorities�

Delivery

The programme is overseen by an Advisory Group with a Board which brings together OECD and non-OECD economies� The programme is delivered through more than 60 week-long events each year� Each event brings together tax officials with deep specialist knowledge and expertise� Around 40% of these events take place in the OECD Multilateral Centres located in Austria, Hungary, Korea, Mexico and Turkey� Other events are focused on particular regions or countries, and may be hosted in partnership with individual countries and/or regional tax organisations� These include bilateral events held in Russia, China, and India and multilateral events held in Malaysia, South Africa, Egypt, the Baltic countries, Singapore and Vietnam, Chile, Argentina and Brazil�

The events are directed towards the needs of participating countries and aim to address issues of particular relevance to NOEs� Their agendas are developed collaboratively with participating countries and focus on OECD standards and guidelines as well as issues, questions and illustratory case studies provided by participants� In addition, the CTPA is developing a series of events in conjunction with the OECD’s Development Assistance Committee on taxation, state building and capacity development� ■

Further Information

The Global Relations website (at www.oecd.org/tax/globalrelations) includes the Users’ Handbook, a guide for anyone who is directly or indirectly in the OECD’s programme of co-operation with NOEs�

■ Did you know… in 2009, the CTPA will hold 66 Global Relations events in 22 different countries?

■ Did you know… that more than 40,000 tax officials have attended one of the 1200 Global Relations events delivered since 1992?

Global Relations on the Web

■ www.oecd.org/tax/globalrelations

International Tax Dialogue

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CORE ISSUES

The International Tax Dialogue (ITD) is a collaborative project involving the European Commission (EC), Inter-American Development Bank (IDB), International Monetary Fund (IMF), OECD, UK Department for International Development (UK DFID) and World Bank to encourage and facilitate discussion of tax matters among national tax officials, international organisations, regional development banks and other key stakeholders� The ITD aims to facilitate dialogue to share good practices and pursue common objectives in improving the functioning of national tax administrations�

The ITD was initiated principally in response to the Monterrey Financing for Development Conference call for more international dialogue on tax matters� Increasing dialogue and strengthening national tax systems will in turn assist the mobilisation of tax revenues for development� The ITD believes it is important to develop practical means of pursuing dialogue on this important issue, in a way that minimises the need for additional resources while maximising gains for all countries� The ITD’s approach is to build on the strengths of existing organisations and to promote an inclusive forum where all organisations interested in the issues can come together�

The main elements of the ITD initiative are:

Objectives

■ Promote effective international dialogue between participating organisations and governments on taxation, giving all countries a real input into the discussion of tax administration and policy issues;

■ Identify and share good practices in taxation;

■ Provide a clearer focus for technical assistance on tax matters; and

■ Avoid duplication of effort in respect of existing activities on tax matters�

Scope

■ International and domestic tax policy and administration issues�

ITD Websitewww.itdweb.org

The ITD operates a free, multilingual, multinational website found at www.itdweb.org� The site provides an opportunity for tax administrations,

International Tax Dialogue


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ministries of finance, and international and regional organisations to share experiences and knowledge with peers on a global basis� Over 3 000 documents from around the world are currently online, with more added daily� The site also includes an extensive range of links, a one-click search across more than 300 ministry of finance and revenue administration websites worldwide, feature articles, a tax reform questions service, newsletters and a directory of technical assistance events delivered by key international and regional organisations�

All countries are invited to make use of this resource and to contribute their own knowledge and experience�

International Conferences

ITD conferences bring together leading experts and practitioners to share developments and consider key challenges and solutions� Two conferences are scheduled in 2009:

■ Africa conference on “Taxing Micro and Small Businesses – From Confrontation to Cooperation”, which was held in Kigali, Rwanda, on 22-24 April

■ Global conference on “Financial Institutions and Instruments – Tax Challenges and Solutions” hosted by the Chinese government in Beijing on 26-28 October�

Two previous global conferences have been held to date, both attended by senior officials from approximately 100 countries� The 2005 conference considered value added taxes (VAT) now found in more than 140 countries� The 2007 conference addressed taxation of small and medium enterprises, focussing on identifying good practice in ensuring compliance whilst minimising compliance burden and providing the best environment for growth� ■

For more information, contact the ITD Project [email protected]

■ Did you know… the ITD website now has over 3 000 documents from tax organisations around the world?

Key Events

■ Taxing Micro and Small Businesses – From Confrontation to Cooperation conference, Kigali, Rwanda, 22-24 April 2009

■ Financial Institutions and Instruments – Tax Challenges and Solutions global conference, Beijing, China, 26-28 October 2009�

International Tax Dialogue on the Web

■ www.itdweb.org

CTPA Management Team

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CORE ISSUES

CTPA Management Team

Jeffrey Owens

Director

Email: [email protected]

Grace Perez-Navarro

Deputy Director


Mary Bennett

Head, Tax Treaty, Transfer Pricing & Financial Transactions Division


Sean Moriarty

Head, Tax Administration and Consumption Taxes Division


Stephen Matthews

Chief Economist and Head, Tax Policy and Statistics Division


Pascal Saint-Amans

Head, International Co-operation and Tax Competition Division


Richard Parry

Head, Global Relations Unit


Web site: www.oecd.org/ctp

OECD PubliCatiOns, 2 rue andré‑Pascal, 75775 Paris CEDEx 16PrintED in FranCE

(00 2009 48 1 P) – no. 89265 – 2009

OrganisatiOn fOr ecOnOmic cOOperatiOn and develOpment

OECD’s CURRENT TAX AGENDA

OECD Paris June 2009

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