Tax Tip[] quantification

Yes, Virginia, there is a Santa Claus – BEPS Action 11 is still searching for quantification of corporate income tax lost to BEPS

Of all the actions in the G20 and OECD Base Erosion and Profit Shifting (BEPS) Project Action Plan, Action 11 always seemed somewhat out of sequence.  Action 11 is preceded by ten other action items that propose changes to the international corporate tax system (many of these changes have to do with how to calculate a document a transfer price) that will lead to the payment by companies of their “fair share” of corporate tax.  Action 11 proposes to measure how far the current system leaves the world’s governments short of their “fair share” owing not only to incorrect transfer pricing, but also to other forms of base erosion and profit shifting.  Businesses have been asked thus far by the G20 to believe in Santa Claus – to accept that there are large problems with the transfer pricing regime, so that the OECD can get on with the urgent work of fixing things.

On April 15, the OECD released its draft Improving the Analysis of BEPS, making clear that the question of how to measure the loss of tax revenue from BEPS-afflicted transfer pricing activity is still very much unanswered.

Estimates of the loss from BEPS vary widely.  More fundamentally, there is no consensus yet on whether it is the lost tax revenue or the lost economic output that should be measured.  Looked at from a lost tax revenue standpoint, the most reliable estimates with which I am familiar are USD $22 billion (NBER) and USD $70 billion (MCSI).  Though not insignificant in nominal terms, these loss amounts are small when compared with world tax revenue or national income.

It becomes clear however that the political reality of our time will cause economists to wait for tax authorities to gather corporate tax return data to use to estimate the extent of lost tax revenue from BEPS.  The Action 11 draft talks about what should be measured using existing micro-level or firm-level data collected in tax returns.  Tax authorities will get a more thorough data set to work with from multinationals with sales greater than €750 million thanks to the Action 13 country-by-country reporting requirement expected to come into force in 2017 in many countries.  This will influence roughly 1700 US taxpayers, in addition to others. 

Given the ambitious timetable and state of progress of the OECD’s reforms, companies could soon find themselves in a position of having to comply with new transfer pricing legislation without seeing the proof that there is a compelling public finance rationale for this legislation.  Perhaps companies cannot be blamed this time for having been “affected by the skepticism of a skeptical age”, just like the young friends of Virginia O’Hanlon in 1897.

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