Published on Mon, Dec 30,2013 | 14:18, Updated at Mon, Dec 30 at 14:26Source : CNBC-TV18 | Watch Video : 
In February, 2013 – Australia proposed a new tax legislation to counter tax avoidance and multinational profit shifting
That same month, US Sentaor Carl Levin proposed legislation that would require country by country tax reporting for all SEC registered companies
In May - the 27 member European Union considered doing the same for all Europe based multinationals.
In June – the 8 most powerful nations (USA, UK, Canada, France, Germany, Japan, Russia, and Italy) in the world committed to tax & transparency.
Next month, the 34 country OECD set out a 15 point action plan to tackle base erosion and profit shifting.
In September the G20 decided on automatic exchange of information starting 2015
And last month – the EU proposed amendments to end double non-taxation
Doshi: There probably hasn't been a month this year when tax did not make the global headlines and there probably isn't a multinational company in the world that isn't facing tax scrutiny. What then is the future of tax? At the recently held FIT conference in Mumbai, CNBC-TV18's Menaka Doshi sat down with a one-of-a-kind panel. No corporate tax officials, no Big 4 consultants, no savvy tax lawyers. Instead we asked one Revenue Head and two Professors about the future of tax and the big changes on the anvil.
Liselott Kana, Head, Department of International Taxation, Internal Revenue Service, Chile Basically, last year, everything changed. We have to be aware of that. There is a very high level of political commitment and I also think - when you talked about morality- I would like to comment on that in the sense that inequality has actually risen. The gap between the rich and the poor is getting worse even within the OECD, even in the countries with better rates. So I think it is becoming a very political issue and apparently the multinationals have to rise up to it and start paying their dues- that is what people are saying from a political point of view.
Doshi: Do you think that the responsibility lies with multinationals or do you think it equally or more so lies on revenue authorities, on governments to write tax law that is easier to follow and that does not allow for loopholes that multinationals can exploit?
Michael Lang, Head, Institute for Austrian & International Tax LawOne of the problems is that we tend to mix policy issues on the one hand and the interpretation of the law on the other hand and I think we should keep that separate, but that is not always kept separate. Sometimes, in some countries, there is a certain influence from that political debate in applying the existing law and I think a long as we live with the existing provisions we have to apply the existing provisions and when there is a need to change the provisions, then the provisions have to be changed.
Doshi: The events of the last 12 months seem to indicate that governments do want to change the law as well.
Michael Lang: The general theme of the discussion that we are having for the last 12 months and even before that is more or less fairness and that fits into the bigger picture, because what we have seen even before in the last 5 or 10 years that there is a shift also in the tax architecture from direct taxation to indirect taxation. So, in most countries, indirect taxation has become much more important. Many countries have either introduced the Value Added Tax (VAT) or are considering a VAT. The only major country which so far has been seriously considering VAT is the US, but all other countries have either introduced the VAT or are considering introducing a VAT. VAT of course is a revenue generator and therefore I think in the long run we will see and we have seen already that direct taxes will lose relevance at least as a revenue generator and therefore it is kind of natural that the focus is more on fairness issues also. Of course VAT has in its nature a kind of regressive effect- therefore politicians in many countries, where VAT plays an important role, are more concerned now about how to achieve fairness or how to compensate and of course there are different means to do that.
Doshi: Is it fairness or is it that the last few years the global economy has gone through a debilitating financial crisis, revenue is under pressure and therefore these are things that are actively on the agenda. If the global economy recovers, if countries starts seeing growth come back and hence revenue come back, do you think the BEPS 15-point plan will be as important to us two or three years down the line as it is today?
Jon Bischel, Professor & Author of International Taxation, United StatesThis issue of fairness is a question of fairness to whom. There are little over 150 countries that are not members of the OECD. In those countries, they talk about fairness not only in terms of revenue, but also in terms of economic development. What we are talking about- there are some countries like the United States that would not extend what was called a tax-bearing credit for purposes of economic development in the developing countries. So there will be probably a number of developing countries which will say- well how much fairness is enough in terms of rate structure? Because if a multinational corporation is paying an effective rate of 2 to 3 percent, that is clearly not very fair, we know that, but if they are paying the effective rate in the particular country in which they are headquartered or located and that rate is 20 points lower than the rate in another country, is that fair and the answer is I think so. So this has become a question amongst various countries in terms of saying, to what degree should the tax system be employed, not only to collect revenue, but also as an engine of economic development.
The BEPS report may take sometime to produce tangible results, but tax activists are in no mood to wait, putting pressure on governments to change now. We asked our guests about the top changes they expect soonest.
Liselott Kana: There will be more automatic exchange of information- that is the latest and I think that will also change the revenues the way that we administrate it, because the whole structure will change within the administration.
Michael Lang: Exchange of information has already become very important and will become even more important. Personally I hope that the pendulum will swing back at least a bit as far as legal protection is concerned, because today we are talking only about how we can make exchange of information more effective, more efficient, but we do not talk about legal protection of the taxpayer. We also see that in the past international relations in the tax area had mainly been bilateral and this is going to change. The idea - also closely linked to the BEPS project- is to change bilateral basis on a multilateral basis to do that more effective, to speed up with changes in the tax treaty area. We see that in the area of exchange of information as well. We have multilateral agreements already in place, so I think there is a trend towards multilateralization also and in other trend we also see that soft law has become very important in the tax area.
Doshi: Can you explain soft law?
Michael Lang: We are used to applying conventional treaties which get the approval of the parliaments in the various contracting States. However what we see in the light of the BEPS discussion but not only in the light of the BEPS discussion that suddenly we have recommendations of international organizations, even of groups like the G20, like the G8 or so and those recommendations are extremely powerful, but that is not part of the law, but it is even more powerful than legal rules could be at the end of the day which I think is a very important development. It is also, to a certain extent, a frightening development because there is no rule making body; there are no rules how at the end of the day. So therefore the stronger players in this game will survive, they will win and the weaker ones have disadvantages.
Jon Bischel: Two things - instead of having a so called arm's length standard with regard to allocation of income, what they need to do with the multinationals is to take a look at the fact that they have residual profits in addition to what might be profits of the normal unrelated parties. They have to find the means of allocating the total profit- that is one. Two, another interim solution, at least for a while on the part of a number of countries would be outbound payments or mandatory withholding even on the treaty which they provide so that the taxpayer can show that it indeed has paid the tax on another jurisdiction, that that withholding tax would be remitted back to the taxpayer.
Earlier this month, global telecom giant Vodafone published data on how much direct and indirect tax it has paid in each of the 27 countries it operates in. A noble half gesture, because it lacked a region-wise revenue or profit breakup. But more MNCs may follow in Vodafone's footsteps, especially as both the US and European Union are now debating making country-by- country reporting mandatory.
Liselott Kana: We need to get everyone knowledgeable enough on what are the issues and what to do and not everyone is onboard in that sense. Not everyone gets the same information. So I think country by country reporting will be sometime off.
Doshi: Is country-by-country reporting the solution or the first step towards fighting double non-taxation as well? If you do not have the information on who is paying how much where, how do you fight this?
Jon Bischel: It is an essential first step. There is no question about that.
Doshi: Is it going to become a reality? Is this something companies should prepare for?
Jon Bischel: It is already being encouraged and fostered by a number of developed countries who are putting pressure on developing countries; especially those that do not have strong income tax systems and who are basically income tax havens- they have the other forms of taxation such as VAT, sales tax and things of that nature.
Doshi: So do you think that will eventually lead to formal country-by-country reporting requirements for most multinational companies across the world?
Jon Bischel: It is hard to say that that is actually going to happen, because it depends on where those multinationals are actually headquartered. They may fragment their functions and as a result it might be difficult to amalgamate all of them to come up with one number. That is part of the problem that we face.
Michael Lang: I think the overall theme is that there is more information available for the tax administration, but also that there is more awareness how much tax is paid by corporation in which country and there is also a trend that tax planning decisions are no any longer in the responsibility of the tax director, but also of the board. Taxes are more connected to public responsibility which is an interesting development.
A study by activist group- Citizens For Tax Justice- claims that at least 18 large American multinationals are stashing profits in offshore havens which if repatriated could yield the US a USD 100 billion in tax. Reuters says at least 206 of America's largest 500 companies by market capitalization have one or more subsidiaries in Ireland where the corporate tax rate is 12.5 percent. Almost three quarters of those 206 firms also had one or more Dutch units. As the activism builds, MNCs will most likely have to give up their steady diet of double Dutch-Irish sandwiches.
Jon Bischel: What the multinationals may do, instead of doing something directly, what they may do is work with unrelated parties to move funds from a country through an unrelated party, to another unrelated party, to their subsidiary or their headquarters in a tax haven country. So there are other ways for the multinationals if they wish to do so. We have some multinationals who are currently paying effective rates of 2 and 3 percent and I do not think that they are eager to pay 25 to 30 percent.
Doshi: How do you see Revenue starting to deal with some of these issues? Should we expect a big change in treaties across the board for most countries? Should we expect tax laws being rewritten in next 10 years to be able to plug all these loopholes? What will we see Revenue do?
Liselott Kana: We will see a lot of domestic changes, because it is much more on the front page. We are not accustomed to be on television and taxation now is front page news and that is unusual, that has not happened before. I think from my colleagues from the private sector I hear nowadays a complete different tune that multinationals that come into our country will say, I do not want anything strange, I do not want to be anything more than I can live with on the front page. So it is a different attitude and I think it has to do with what Michael was saying about soft law, because we do not want to be looked on as baddies and in the combination of soft law, I think the initiatives of the G20 which are more from G20 and the OECD taking onboard that work is going to lead to changes definitely. I think we will have things coming up in transfer pricing. I think we will have CFC rules. We have more exchange of information and all those things will have to be implemented country by country.
In OECD's 15 point BEPS plan, the very first action point is to address the challenges of the digital economy. India is yet to wake up to the problem, but Europe, USA and Australia are already hard at work.
Liselott Kana: I do think there will be changes, but that will have to be done within 2,500 tax treaties if we are going to change it. So it has to be done in a multilateral way and it has lots of challenges still.
Michael Lang: I think what is interesting is if you look at the BEPS report, it talks about digital economy and then the report leaves it open whether the measures should be taken in the area of direct taxation or indirect taxation and it proposes to study measures in both areas. I think this could be the key in that respect, because it is quite difficult. Of course the situation that it is today is not very satisfactory because it is the allocation of taxation rights for those kind of businesses is done on more or less arbitrary basis, because we have more or less residence taxation. In most of these situations, there is no permanent establishment in other countries and of course it is quite easy to manipulate which State is State of residences. On the other hand, it is quite difficult to change that system completely in the area of direct taxation. Of course there is some room for changes. We can work on the permanent establishment definition and the UN has gone in that direction and many developing countries have gone in that direction to lower the thresholds there for example. So there is some room, but I think there is more music in the area of VAT and therefore I would put more emphasis on indirect taxation here, because it might be more easier to change the rules in the area of indirect taxation, because we are not locked in by treaty network as we are in the area of direct taxation.
Jon Bischel: In the digital economy, income occurs in nanoseconds. So what happens in the course is with regard to that type of economy the issue with regard to where the income should be allocated depends upon where the value is created with regard to that particular income. I think that the tax administrators have to be much more aggressive in redefining the so called arm's length standards or income allocation to take into account those factors.
