Cato Institute on the BEPS Project
Cato Institute
The BEPS Project: The OECD, Tax Policy, and U.S. Competitiveness
Friday, July 17, 2015
Key Topics & Takeaways
- BEPS as a “Moral Hazard“: Ekins, noting that BEPS’s goal is to stop double taxation and double non-taxation across jurisdictions, provided three categories of actions: 1) standardized tax data reporting; 2) harmonization of tax rules and 3) standardized income definitions. While good on principle, he said, these standards once implemented could create a “moral hazard” for tax authorities to seek out and grab revenue wherever they find it.
- Move Away from Income-Based Corporate Taxation: Ultimately, Ekins said, corporate income is “amorphous” and he advised a move away from an indefinable income tax base to something definable, such as a consumption tax.
Speakers
- David R. Burton, Senior Fellow in Economic Policy, Heritage Foundation
- Brian Garst, Director, Policy and Communications, Center for Freedom and Prosperity
- Gavin Ekins, Research Economist, Tax Foundation
- Moderator: Daniel J. Mitchell, Senior Fellow, Cato Institute
Daniel J. Mitchell, Senior Fellow, Cato Institute introduced speakers for a discussion on the base erosion and profit-shifting (BEPS) initiative promulgated by the Organization for Economic Cooperation and Development (OECD). The participants included David R. Burton, Senior Fellow in Economic Policy, Heritage Foundation; Brian Garst, Director, Policy and Communications, Center for Freedom and Prosperity; and Gavin Ekins, Research Economist, Tax Foundation.
Mitchell opened with the two key reasons the U.S. is losing corporate tax revenue: 1) the U.S. uses a worldwide tax system that applies to income earned in other jurisdictions and 2) the U.S. has the highest corporate tax rate globally. The result, he said, is a tax system that gives U.S. multinational corporations “every possible incentive” to move activity outside of the U.S.
BEPS Project
Garst outlined the history of the OECD’s attempts to decrease tax competition, noting that BEPS is simply another manner of attempting to achieve the same goal. He looked to the 1998 Report on Harmful Tax Competition and the 2000 Global Forum on Transparency and Exchange of Information for Tax Purposes as two previous avenues through which that the OECD had attempted to combat tax competition.
Garst highlighted that OECD attempts to eliminate tax competition are fundamentally harmful to consumers as harmonization of tax policy results in fewer constraints for politicians to raise taxes. He said the BEPS project is another vehicle in their “never-ending” attempts to stymie competition.
BEPS, Garst noted, asserts that having “no or low effective tax rates” is a key factor in identifying a “harmful regime.” He added that the OECD is moving BEPS along quickly in the hopes of keeping the focus on the “spectacle” of the progress itself and so it is up to the U.S. Congress to intervene on the issue.
Gast opined that the U.S. cybersecurity record is “atrocious” and that BEPS is simply an attempt to “jigger” the rules so that more data is available to tax collectors, which ultimately could compromise the competitive advantage of U.S. businesses and the nation overall.
Ekins, noting that BEPS’s goal is to stop double taxation and double non-taxation across jurisdictions, provided three categories of actions: 1) standardized tax data reporting; 2) harmonization of tax rules and 3) standardized income definitions. While good on principle, he said, these standards once implemented could create a “moral hazard” for tax authorities to seek out and grab revenue wherever they find it.
Burton noted that Action 1 of the BEPS proposal, which focuses on the digital economy, will reduce the efficiency of the internet and overall electronic economy, while Actions 2 and 4 would render “ordinary business expenses” deductible anywhere.
Burton added that OECD efforts to differentiate intangible income from other types would present an “impossible” task and would ultimately encourage firms to move their highest paid, most productive employees outside the U.S. He also expressed concern about proprietary information sharing components of BEPS which could lead to industrial espionage. Burton provided an alternative to the BEPS plan, calling for a real based tax system such as a sales or flat tax rate which would reduce complexity of the tax system overall.
Ultimately, Ekins said, income is very difficult to define for large, multinational organizations and in trying to define income, new costs are created. Corporate income, he said, is “amorphous” and he advised a move away from an indefinable income tax base to a definable one, like a consumption tax.
Patent Boxes
Burton also touched on the role of patent boxes in the international tax structure, noting that such entities are the “opposite” of tax reform since they create a new set of rules and lead to higher complexity and compliance costs. He encouraged legislators to oppose patent boxes as well.
Question and Answer
In response to a question about whether the OECD had been “friendly” to the U.S., Mitchell responded that while the organization is friendly to the Obama Administration, its behavior is very unfriendly to the free markets. He added: “It’s based in Paris,” and is naturally a “very statist, left-wing organization.”
An audience member asked whether overall U.S. attempts to increase taxation, such as those implemented through the Foreign Account Tax Compliance Act (FATCA) will ultimately hurt innovation and the U.S. markets overall.
Garst noted that FATCA is simply the “unilateral version” of the OECD’s multilateral convention and called upon Congress to repeal it immediately. Burton added that FATCA is only a small part of the problem, as the U.S. government’s attempts to enter into bilateral tax information sharing agreements represent the much larger problem.
When asked why BEPS encourages the transfer of proprietary information to governments, Garst responded that the OECD sought more in-depth information about what companies were doing so as to “take more of their money.” Burton added that another goal would be to have the information to “do the math” to challenge pricing positions taken by international subsidiaries.
An audience member asked what guarantees are in BEPS that help the “average worker.”
Burton responded that the U.S. government has placed a “Please Leave” sign in front of U.S. businesses by making it difficult for business to operate, with the tax system being a significant part. The damages, he said, are all flowing down to the “young people.” Ekins added that the corporate income tax is unstable and in the long-run only further harms economic development and the average worker.
For more information on this meeting, please click here.
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Cato Institute
The BEPS Project: The OECD, Tax Policy, and U.S. Competitiveness
Friday, July 17, 2015
Key Topics & Takeaways
- BEPS as a “Moral Hazard“: Ekins, noting that BEPS’s goal is to stop double taxation and double non-taxation across jurisdictions, provided three categories of actions: 1) standardized tax data reporting; 2) harmonization of tax rules and 3) standardized income definitions. While good on principle, he said, these standards once implemented could create a “moral hazard” for tax authorities to seek out and grab revenue wherever they find it.
- Move Away from Income-Based Corporate Taxation: Ultimately, Ekins said, corporate income is “amorphous” and he advised a move away from an indefinable income tax base to something definable, such as a consumption tax.
Speakers
- David R. Burton, Senior Fellow in Economic Policy, Heritage Foundation
- Brian Garst, Director, Policy and Communications, Center for Freedom and Prosperity
- Gavin Ekins, Research Economist, Tax Foundation
- Moderator: Daniel J. Mitchell, Senior Fellow, Cato Institute
Daniel J. Mitchell, Senior Fellow, Cato Institute introduced speakers for a discussion on the base erosion and profit-shifting (BEPS) initiative promulgated by the Organization for Economic Cooperation and Development (OECD). The participants included David R. Burton, Senior Fellow in Economic Policy, Heritage Foundation; Brian Garst, Director, Policy and Communications, Center for Freedom and Prosperity; and Gavin Ekins, Research Economist, Tax Foundation.
Mitchell opened with the two key reasons the U.S. is losing corporate tax revenue: 1) the U.S. uses a worldwide tax system that applies to income earned in other jurisdictions and 2) the U.S. has the highest corporate tax rate globally. The result, he said, is a tax system that gives U.S. multinational corporations “every possible incentive” to move activity outside of the U.S.
BEPS Project
Garst outlined the history of the OECD’s attempts to decrease tax competition, noting that BEPS is simply another manner of attempting to achieve the same goal. He looked to the 1998 Report on Harmful Tax Competition and the 2000 Global Forum on Transparency and Exchange of Information for Tax Purposes as two previous avenues through which that the OECD had attempted to combat tax competition.
Garst highlighted that OECD attempts to eliminate tax competition are fundamentally harmful to consumers as harmonization of tax policy results in fewer constraints for politicians to raise taxes. He said the BEPS project is another vehicle in their “never-ending” attempts to stymie competition.
BEPS, Garst noted, asserts that having “no or low effective tax rates” is a key factor in identifying a “harmful regime.” He added that the OECD is moving BEPS along quickly in the hopes of keeping the focus on the “spectacle” of the progress itself and so it is up to the U.S. Congress to intervene on the issue.
Gast opined that the U.S. cybersecurity record is “atrocious” and that BEPS is simply an attempt to “jigger” the rules so that more data is available to tax collectors, which ultimately could compromise the competitive advantage of U.S. businesses and the nation overall.
Ekins, noting that BEPS’s goal is to stop double taxation and double non-taxation across jurisdictions, provided three categories of actions: 1) standardized tax data reporting; 2) harmonization of tax rules and 3) standardized income definitions. While good on principle, he said, these standards once implemented could create a “moral hazard” for tax authorities to seek out and grab revenue wherever they find it.
Burton noted that Action 1 of the BEPS proposal, which focuses on the digital economy, will reduce the efficiency of the internet and overall electronic economy, while Actions 2 and 4 would render “ordinary business expenses” deductible anywhere.
Burton added that OECD efforts to differentiate intangible income from other types would present an “impossible” task and would ultimately encourage firms to move their highest paid, most productive employees outside the U.S. He also expressed concern about proprietary information sharing components of BEPS which could lead to industrial espionage. Burton provided an alternative to the BEPS plan, calling for a real based tax system such as a sales or flat tax rate which would reduce complexity of the tax system overall.
Ultimately, Ekins said, income is very difficult to define for large, multinational organizations and in trying to define income, new costs are created. Corporate income, he said, is “amorphous” and he advised a move away from an indefinable income tax base to a definable one, like a consumption tax.
Patent Boxes
Burton also touched on the role of patent boxes in the international tax structure, noting that such entities are the “opposite” of tax reform since they create a new set of rules and lead to higher complexity and compliance costs. He encouraged legislators to oppose patent boxes as well.
Question and Answer
In response to a question about whether the OECD had been “friendly” to the U.S., Mitchell responded that while the organization is friendly to the Obama Administration, its behavior is very unfriendly to the free markets. He added: “It’s based in Paris,” and is naturally a “very statist, left-wing organization.”
An audience member asked whether overall U.S. attempts to increase taxation, such as those implemented through the Foreign Account Tax Compliance Act (FATCA) will ultimately hurt innovation and the U.S. markets overall.
Garst noted that FATCA is simply the “unilateral version” of the OECD’s multilateral convention and called upon Congress to repeal it immediately. Burton added that FATCA is only a small part of the problem, as the U.S. government’s attempts to enter into bilateral tax information sharing agreements represent the much larger problem.
When asked why BEPS encourages the transfer of proprietary information to governments, Garst responded that the OECD sought more in-depth information about what companies were doing so as to “take more of their money.” Burton added that another goal would be to have the information to “do the math” to challenge pricing positions taken by international subsidiaries.
An audience member asked what guarantees are in BEPS that help the “average worker.”
Burton responded that the U.S. government has placed a “Please Leave” sign in front of U.S. businesses by making it difficult for business to operate, with the tax system being a significant part. The damages, he said, are all flowing down to the “young people.” Ekins added that the corporate income tax is unstable and in the long-run only further harms economic development and the average worker.
For more information on this meeting, please click here.