Harmful tax practices under the G20/OECD BEPS Action Plan

The Action Plan on Base Erosion and Profit Shifting (Action Plan) intends to “revamp” the work on harmful tax practices that has been undertaken by the Organisation for Economic Co-operation and Development (OECD) since the late 1990s. Further enhancement of the OECD’s transparency standards, the reinforcement of the requirement of a “substantial activity” for any “acceptable” preferential tax regime and an ambition to ensure a closer engagement of non-OECD economies re-open the debate on “harmful tax competition” that sparked in the academic literature and political arenas following the first attempt of international co-ordination.

This research project analyses the priority measures that are envisaged by Action 5 of the Action Plan and their foreseeable prospects. The paper first discusses the ambiguity of the concept of “harmful tax competition” and the difficulties of distinguishing “harmful” and “fair” tax practices. It focuses on fundamental concerns and controversies explored in the public finance literature. Then it looks back at the objectives of the 1998 OECD’s campaign and the key steps that have been undertaken in their pursuit and finally, it turns to the changes in the OECD strategy envisaged by Action 5 of the Action Plan and explores some of the open questions in relation to the priority measures. Although this contribution focuses on the OECD’s actions, it also draws some parallels with the actions undertaken by the European Union, since the overlap between the two campaigns against harmful tax practices has increased due to the EU’s intention to promote “minimum standards of good governance in tax matters” beyond the borders of the Single Market.

Overall, this paper argues that the OECD is merely seeking to upgrade its existing mandate and exploit the political momentum that has been created by the BEPS campaign. Conceptually, the strategy proposed by Action 5 of the Action Plan remains within the original remit that was indicated by the 1998 OECD Report and it can be seen as a new attempt to reach the initial objectives. However, the vagueness in formulations of “expected output”, as well as the absence of any measurable goals and explicit political commitments towards them, makes the outcomes of Action 5 highly dependent on political support within and beyond the OECD member countries. The proportionality of the “substantial activity” test and its consistent application, as well as sustaining the balance between costs and benefits in setting transparency requirements will be among key issues to be addressed in this regard.

This research project will be taken further to reflect the most recent developments in the G20/OECD and the EU campaigns against harmful tax competition. Both initiatives have clearly indicated their interest in the assessment of the “harmfulness” of patent box regimes. By September 2014, the Forum on Harmful Tax Practices should complete a review of all OECD member country tax regimes in its search for any potentially abusive practices. The EU Code of Conduct group is also expected to publish the assessment of EU patent boxes by the end of 2014. These outcomes will be of great relevance to the United Kingdom as they will demonstrate whether there is any realistic possibility that the UK patent box regime will be challenged. Stage 2 of this research project will focus on the analysis of patent box regimes against the background of these international and EU developments.

Joachim Englisch and Anzhela Yevgenyeva, The upgraded strategy against harmful tax practices under the BEPS Action Plan, British Tax Review 5, pp.620-637