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Does BEPS result in increased globalisation?

States complain about inadequate fiscal income, while international companies try to minimise their tax liability – in some cases they do not even pay taxes at all. The goal of the Anti-BEPS initiatives (BEPS = Base Erosion and Profit Shifting) is to prevent this in future. To this end, currently legal tax loopholes are identified and closed.

Interview with Professor Martin Wenz, PhD, Head of the Institute for Financial Services at the University of Liechtenstein
Written by: Heike Esser

 

Martin Wenz: Well, let’s first look at the issue in general. On the one hand we have extreme examples, let`s take Starbucks in the UK, who sell a lot of coffee in their trademark cups and make a lot of profit, while paying little or no tax. On the other hand there are examples of states whose tax system is non-competitive, i.e. states that try financing their inordinate public spending ratio with very high taxes, which is becoming more difficult for these but also for more competitive states in a global environment.

The initial question – and this is the actual BEPS issue – is: where should the value creation of globally acting companies be taxed? The creed of BEPS, according to the OECD and the EU, is that value creation should be taxed where it arises. This, however, is already where common ground ends, because: what is value creation? Are brands such as Hilti or Daimler so valuable because the products are based on skilled engineering – that is the European approach – or are the respective brands so valuable because the products are being sold on a vast market – that is the Asian/Chinese approach. These two approaches are irreconcilable, and insofar actually incompatible concepts gather under the shared roof of the entire Anti-BEPS initiative.

The second point is the question of tax competition – is it good or bad? Simply put, tax competition is bad when states only intend to finance the provision of public goods, in other words, when they are efficient. Because less taxes lead to a lower level of public goods. However, when states use tax revenues to do much more than just to provide public goods, for instance acting as an entrepreneur or logistician or spilling them over into social or many other things, then tax competition is beneficial.

With the question of tax competition on the one hand, and the value creation discussion on the other, BEPS is trying to somehow arrive at a fairer distribution of fiscal income among the countries in a globalised world. The problem is just that fiscal law is one of the central pillars of national sovereignty, hence it is a prerequisite, that states must be widely non-restricted, free and able to individually make their own tax laws according to their respective needs.

 

So BEPS is not concerned with criminal activities but with legal tax avoidance?
M.W.: It is exclusively about legal, however regarding the result seen as unsatisfying, application of taxes. In general, for instance, it can be assumed that listed companies pay tax according to the law and absolutely obey the rules of the tax law system. Their financial statements, which they draw up in line with international accounting standards and have them certified by leading auditing firms, are additionally controlled by very strict stock exchange regulators, in particular the US-American SEC.

Whether a tax system contains ‘presumed tax loopholes’ or not is an expression of national sovereignty – this means, that none other than the respective state has created – either deliberately or thoughtlessly – ´presumed tax loopholes’. Furthermore, tax loopholes can arise from cross-border matters through the interplay of several national tax systems and/or international tax agreements. Though, the tax systems are made by states. So, should these lead to unwanted results for them, it is first and foremost – and there is no coordination through BEPS needed – a matter of these national states, to avoid such undesired effects.

 

Ireland, for instance, has no interest in BEPS – while the community of states exerts pressure to implement BEPS. So where does this leave national sovereignty?
M.W.: Here, there are also two directions. Ireland is a member of the EU, Liechtenstein is a member of the EEA (European Economic Area). Consequently, both have voluntarily subjected themselves to the rules of the European Single Market through these memberships. In particular, these affect the fundamental freedoms, essentially principals of non-discrimination, and the ban on state subsidies i.e. that different companies, industrial sectors that are comparable, meaning generate the same profit, may not be taxed differently. In order to gain access to the European Single Market, states subject themselves voluntarily to these rules. In relation to Apple, Ireland ‘only’ has to form its laws in compliance with the European Community Law.

BEPS is differently oriented, that needs to be clearly separated. BEPS is forced upon by the G20 and the OECD as they decreed a ´global standard´ for themselves and other states without having a particular legitimation. Whoever wants to take part in the global financial system and ultimately in the global market – in globalisation – has to meet this standard. This seems dirigiste and denationalising, and aims to reducing the individual competitiveness. If others run faster than you do, you can either train harder or ensure that they will no longer be able to run as fast. BEPS is the latter approach.

 

The country-by-country reporting, which is requested by BEPS, guarantees confidentiality. Isn’t that unrealistic?
M.W.: Well, the more data is generated and exchanged, the higher the chances of data abuse. Country-by-country reporting is yet another variety of automatic exchange of information on how much turnover and profit a company made in which countries and allows comparison as to how much tax was respectively paid. In the case of Starbucks UK it is immediately visible: high turnover, high profits, but little or no tax in the UK. Country-by-country reporting allows for automatic transmission of data from the tax administration of the country where a company`s headquarter is located to the tax administrations in other states, in which subsidiaries or branches are located. However, a publication of the data does not happen. It remains to be seen, whether this might lead to data abuse. In either case, based on this data a country can realize: ´oh, there could be an aggressive tax management behind it, which we should look into´.

 

Which implications does BEPS have for the Liechtenstein industry and tax administration?
M.W.: It will be fairly easy for us to form our tax law in accordance with BEPS requirements, since our tax system is very modern and fully accommodates the afore-mentioned European standards and hence, we operate on a very high 2.0 level. No incentives, no special treatments – everything is consistently regulated. The problem rather lies abroad, where it is attempted to deem values, so far identified as Liechtenstein profits, to be foreign in order to tax them there. This means that profits abroad increase and profits at home decrease, if double taxation is to be avoided. This puts pressure on Liechtenstein’s tax-liable profits, and hence also on tax revenue. Guaranteeing attractiveness and securing tax revenue clearly becomes more difficult. This is the big risk, especially in the range of residual profits, so profits the headquarter accrued and which until then were taxed accordingly. These could melt away, and so too would tax revenue.

 

So more companies would need to settle inland in order to avert this melting away?
M.W.: For example. In a way, that is somehow the bad joke regarding BEPS issues, that alleged global rules lead to increased renationalisation and, however, not to global trade. This is grotesque. By the way, it is very difficult to find out who will be the winner in BEPS. The losers are likely to be the companies, and consequently the citizens, because presumably there will be an increase in double taxation and every state will strengthen anti-abuse measures for cross-border activities under the guise of BEPS. This is an attempt to make the impossible possible: an equally large piece of the pot tax pie is meant to lead to increased tax revenue for all states. That is why BEPS is neither a contribution to globalisation nor does it help to secure national sovereignty.