Stopping corporations from artificially moving profits to no tax jurisdictions

Malaysia signs OECD-led BEPS Multilateral Convention, bringing total signatories to 78

by HABHAJAN SINGH / pic source: OECD

Malaysia has joined the international community in taking collective measures to make it more difficult for large corporations to artificially shift their profits to low, or no tax jurisdictions.

A fortnight ago, Malaysia signed a multilateral instrument to execute what is deemed as the best tax practices under the international standards, including the implementation of base erosion and profit shifting (BEPS) action plans.

The signing of the Organisation for Economic and Cooperation Development (OECD)-led initiative signals Malaysia’s commitment in meeting the internationally agreed tax standards.

On Jan 24, ministers and high-level officials from Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention, bringing the total number of signatories to 78.

The convention updates the existing network of bilateral tax treaties and reduces opportunities for tax avoidance by multinational enterprises, according to an OECD statement.

Deputy Finance Minister I Datuk Othman Aziz represented Malaysia at the signing ceremony held at OECD headquarters in Paris, France.

Fair Share of Taxes

The move comes in the budget shortfalls and large corporations devising ways and means to avoid paying taxes

in jurisdictions where they operate. In response, the OECD is executing a multi-step plan, sponsored by the G-20 (Group of 20) governments, to reshape international tax rules for countries to implement, according to a global accounting firm PricewaterhouseCoopers (PwC) note on the subject.

“And some countries are already using ideas being considered in the BEPS project for tax examinations and to change tax laws in a manner inconsistent with current rules. These events are causing additional tax uncertainty for companies, increasing significantly the risk of double taxation and protracted cross-border disputes, with inadequate procedures for intergovernmental dispute resolution,” it said.

New reporting requirements for larger companies will make detailed country-by-country tax and financial information visible to many eyes, and possibly, in the future, not just those of tax authorities. In addition, the volume of data disclosed will be much more than companies are currently reporting worldwide, so your compliance burden will likely grow substantially, PwC note added.

Revenue losses from BEPS are conservatively estimated at up to US$240 billion (RM936 billion) annually, or the equivalent of up to 10% of global corporate income tax revenues, according to an OECD statement.

Double Taxation

In his speech, Othman noted the importance of the instrument to Malaysia due to the significant number of enforced double taxation avoidance agreement, which currently stood with 73 countries.

In the advent of globalised business activities and extensive cross-borders transactions, it is of prime importance that profits should be attributable to the jurisdictions where substantive economic activities are being carried out, according to a statement from Malaysia’s Ministry of Finance.

Malaysia as the BEPS associate has to fulfil the commitment in order to be competitive in attracting and promoting investments, including foreign direct investments for longterm sustainability and further enhancing the inclusive economic development model, the statement added. BEPS Multilateral Convention is badged as the first multilateral treaty of its kind, allowing jurisdictions to integrate results from the OECD/ G-20 BEPS Project into their existing networks of bilateral tax treaties.

The signing was a “major step towards updating the international tax rules through the swift implementation of the BEPS package”, said OECD secretary general Angel Gurría in a statement.

“Beyond saving signatories from the burden of re-negotiating thousands of tax treaties bilaterally, the convention results in more certainty and predictability for businesses, and a better functioning international tax system for the benefit of our citizens,” he said.

The OECD/G-20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to “disappear” or be artificially shifted to low or no tax environments, where companies have little or no economic activity.

Inclusive Negotiations

Almost 100 countries and jurisdictions are currently working on what it’s called the inclusive framework on BEPS to implement BEPS measures in their domestic legislation and bilateral tax treaties.

The sheer number of bilateral treaties makes updates to the treaty network on a bilateral basis burdensome and time-consuming, the statement added. The convention, developed through inclusive negotiations involving more than 100 countries and jurisdictions under a mandate delivered by G-20 finance ministers and central bank governors, solves this problem.

It will modify existing bilateral tax treaties to swiftly implement the tax treaty measures developed in the course of the OECD/G-20 BEPS Project. Treaty measures that are included in the convention include those on hybrid mismatch arrangements, treaty abuse and permanent establishment, and dispute resolution, including an optional provision on mandatory binding arbitration, which has been taken up by 28 jurisdictions, the statement added.

The OECD is the depositary of the convention and is supporting governments in the process of signature, ratification and implementation.

On the Malaysian side, Othman reiterated Malaysia’s commitment in meeting the internationally agreed tax standards, especially in the areas of automatic exchange of information (AEOI).

To date, the statement said Malaysia is the signatory to the Multilateral Competent Authority Agreement on Common Reporting Standards and Country by Country Reporting as well as the Convention on Mutual Administrative Assistance in Tax Matters and is scheduled to start its AEOI with the other participating jurisdictions in September 2018. In May, Malaysia will host the 17th AEOI Working Group Meeting and the 7th Competent Authorities Conference in Putrajaya.