What the BEPS is going on?

Dear Editor, 

Global societal scrutiny of International Financial Centres’ (IFCs) alleged participation in aggressive tax avoidance and planning has predated the immense pressures that arose after the 2012 EU sovereign debt crisis, the 2008 financial crisis, and now the 2020 COVID-19 pandemic.

However, these societal pressures were exacerbated by media reports of the 2016 Panama Papers, 2017 Paradise Papers, and now the 2020 FinCEN Files. The latter of which has reinforced the Organisation for Economic Co-operation and Development’s (OECD) 15-point action plan, called the Inclusive Framework for Base Erosion and Profit Shifting (BEPS action plan) intending to regulate the global tax regime, especially concerning insufficient economic substance entities and the global digital economy.

The ever-increasing concerns of global poverty, inequality, climate change, natural disasters, and costly sustainable development goals have involuntarily made the global tax system (i.e. how governments cooperate to ensure fairer taxation and wealth distribution) a vital area of legal studies in the 21st Century.

In 2015/2016, I first came across this topic while interning at Holowesko Pyfrom Fletcher — a financial global advisory firm here in The Bahamas. I was shown the bill that enacted the OECD/G20’s Common Reporting Standard (CRS) into domestic law.

The CRS called on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. At that time, my initial concerns were whether the CRS undermines corporate legitimacy and privacy, and whether the technology and data were secure enough against cyber-attacks. These remain relevant concerns as we aim to re-establish The Bahamas’ position as the leader of offshore international banking in the world and to retool our offshore banking sector as a sector built upon bank “privacy” (meaning open to legitimate review but not to all and sundry) as opposed to the old corrupt notion of bank “secrecy”.

Today we must ask ourselves, “What the BEPS is going on?” How are superpower governments shaping the rules of the global tax regime, and does this undermine our country’s sovereignty?

In the past, the OECD/G20 and EU have applied soft power tactics like blacklisting developing countries and IFCs. They have also imposed new forms of aggressive unilateral taxation measures such as diverted profits taxes (DPT) and digital services taxes (Facebook, Google taxes etc). These taxes are rippling across the globe to coerce smaller countries into conforming to their competitive rules and standards of corporate taxes.

In layman’s terms, once again, we are witnessing that government revenues are down (i.e. nearly 50 percent) and the current fiscal climate will be exploited by governments to obtain a greater cut of global taxes — especially in a COVID-19 risk management era. However, these new measures arguably go beyond the initial purpose and scope of the BEPS action plan. More importantly, they seem to be kicking away the ladder for the growth of IFCs in the developing world and the notion of a cooperative global tax regime that legitimately works for everyone.

Firstly, given that the OECD/G20 is a democratic deficit organization, the BEPS action plan stems from the continuation of an arbitrary grouping of old-school superpowers. If the developing world was not involved in the process before the OECD’s agenda was set, it may be assumed that compliance may not be in their best interest or on the table at all for those that join later.

Nevertheless, this did not stop The Bahamas’ appointment, as the first-ever “No or Nominal Tax” jurisdiction, on the BEPS action plan’s Steering Group. This development raises concerns as to whether this “seat at the table” gives a false impression of the framework’s alleged legitimacy, and whether we will have little or any significant impact in shaping the policies for our betterment.

It is fair to assume that our seat will be displayed as a mere “token seat” with limited room to carve out “culturally appropriate” measures in alignment with our interests. Think of it like this, you have been invited to a party. Upon arrival, you notice most of, if not all, the food is gone. Now everyone else is smoking at the table but you are a non-smoker and none of your other non-smoker friends were invited. I

n this case the OECD/G20 are smoking, The Bahamas is the token non-smoker friend, and the other no or nominal tax countries were not invited. Overall, the legitimacy, inclusivity, and fairness of the framework remain to be seen.

Secondly, the BEPS global tax regime has arguably gotten out of control given the unilateral implementation of varying economic substance tax laws and enforcement reporting legislation across jurisdictions.

Take, for instance, the “hair triggering” conditions of the UK’s DPT under the Financial Act 2015, which is reported to be compatible with the BEPS action plan. The ‘“insufficient economic substance” limb in section 80 is intended to catch transactions, alleged diversion of profits from the UK to a low tax jurisdiction involving entities with limited economic substance.

It hinges upon the existence of a ‘“tax reduction” arising from an “effective tax mismatch outcome” (i.e. the offshore jurisdictions’ effective tax rate must be at least 15.2 percent).

It also requires the “insufficient economic substance condition to be met. All of which, in a Bahamian context, is very likely to be satisfied if new domestic legislation isn’t introduced.

It is submitted that taking this unilateral proposition lacks global commercial soundness and, appears to be a discriminatory (i.e. xenophobic) and anti-state equality element of the UK’s legislation. The Bahamas prides itself on being a self-determined low-tax jurisdiction, but such coercive measures are innately contrary to this ideal and have led to debates on minimum corporate taxes in The Bahamas.

(It is also my humble opinion that if all the elements of the DPT are satisfied in any given arrangement, it is ultimately discriminatory to charge a tax rate of 25 percent whereas the tax rate in the UK’s domestic context is only 19 percent.

There are also limited options for challenging a DPT notice, which must be paid in advance regardless of innocence. Is this a proportionate measure to counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK or is the additional tax percent arbitrary, disproportionate, discriminatory, and/or fundamentally unconstitutional?)

Finally, the uncertainty of the current global legal taxation framework creates an undue hardship on practitioners and clients. The unfortunate outcome has been businesses restructuring or liquidating, and their previous operations moving to lower tax jurisdictions that have not yet implemented aspects of the BEPS action plan, thereby perpetuating the zero-sum game. If The Bahamas does implement the BEPS action plan, the question is how much are we losing?

The fortunate outcome has been what financial service professionals call “compliance business”, which includes the implementation of G20 and EU-related taxation laws into domestic laws and establishing a compliance industry. However, our government should always keep in mind the ease of doing business in The Bahamas and aiming to be a self-determined and competitive IFC by enquiring about the compliance mandate imposed on them.

For example, the Penal Code (Amendment) Act, 2020 completely undermines these ideals as it discourages business due to fears of being imprisoned or fined in The Bahamas for failure or omission in complying with reporting rules.

In closing of this part saga, the OECD/EU have zero right or authority to enforce compliance by The Bahamas or any sovereign state. These are not institutions recognized in international law and nothing they propose carries the force of law until they are wilfully enacted into domestic law at our own expense.

It appears that the goal post has moved away from preventing legitimate economic crimes (i.e. corruption, money laundering etc.), which are rampant in the UK and EU, to kicking away the ladder for IFCs in the developing world and the dream of a cooperative global tax regime that legitimately works for everyone.

 Boykin G. Smith

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