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December 22, 2014
Sol Picciotto -- BEPS and the Developing World
by David D. Stewart

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Lending his voice to the cause of leveling the playing field for developing countries, Sol Picciotto, senior adviser to the Tax Justice Network and coordinator of the BEPS Monitoring Group, has emerged as a key contributor to the OECD's work to curb international tax avoidance. The BEPS Monitoring Group brings together specialists on international taxation to collaborate on comments to the OECD and ensure that the concerns of developing countries are heard throughout the process.
Sol PicciottoPicciotto published a book on international business taxation in 1992 before turning to other areas of international business law. In 2003 he returned to corporate taxation as the pressure for change increased, and he helped to establish the Tax Justice Network.

"We felt that the damage [caused by the present system] was particularly significant to developing countries" because they rely more heavily on corporate income taxes to fund government operations than developed countries do, he explained. Developing countries are also hampered by their inability to generate revenue from other sources, and they lack the capacity to deal with complex international tax rules, he added.

Picciotto described his role as working on the "technical and analytical side" as the Tax Justice Network expanded beyond the U.K. to establish organizations in Africa and Latin America. He spoke with Tax Analysts from Nairobi, Kenya, where he was attending an International Tax Justice Academy organized by the Tax Justice Network-Africa.

The OECD BEPS Project

Picciotto's views on the BEPS project and what it means for the developing world are complicated. While he believes the project is long overdue, he fears that the OECD -- given its constituencies and consensus-based decision-making system -- will not be able to deliver the type of changes that developing countries require.

"Significant reform has been needed for the international tax system for quite a while, and it is great that finally there is a political impetus for change," Picciotto noted. He believes that, although Pascal Saint-Amans took over the OECD's Committee on Fiscal Affairs "with a change agenda," the political impetus came from the G-20. He said that the OECD recognizes the need to make significant changes and that it is demonstrating determination and commitment to the issue.

Picciotto is skeptical, however, that the OECD is prepared to make the changes needed to fully reform the international tax system. He warned that changes that merely reinforce current rules by adding more complexity will be good for tax advisers but will not help tax administrations and taxpayers.

"I commend the OECD for a determined effort, but I fear that where they are going won't resolve the problems, especially not for countries that would find it difficult to apply complicated rules like developing countries," Picciotto observed.

For Picciotto, the priority for reform is to stop companies from avoiding taxation by fragmenting operations among different countries. The way to achieve this goal, Picciotto believes, it to adopt a unitary entity approach to taxation. Article 9 of the OECD model treaty has been misinterpreted as precluding countries from looking through legal entities and fragmented functions, he commented.

On the positive side, Picciotto noted, some BEPS discussion drafts -- such as the action 7 draft on permanent establishment and the action 10 draft on the pricing of low-value intragroup services -- would address the issue in part. The action 7 draft, he observed, addresses fragmentation but only in relation to the PE exemptions. As to action 10, the OECD draft simply establishes a pricing formula for low value services. Picciotto believes that both actions should be expanded to address a wider scope of fragmentation and centrally provided services, respectively.

According to Picciotto, the lack of comprehensive action on fragmentation places greater pressure on the upcoming transfer pricing action items to achieve the desired outcomes of the BEPS project. Picciotto would prefer the OECD to explicitly endorse the right of tax administrators to disregard separate entities and treat related companies as unitary entities.

So far, said Picciotto, the most positive outcome from BEPS has been the proposal for country-by-country reporting and transfer pricing documentation. Much of its success, however, depends on how access to the information will be granted.

"Certainly, development of the template for country-by-country reporting and the three-tier country-by-country reports, master file and local file on transfer pricing documentation I think is the most significant gain for all countries. But I think it will be particularly helpful to developing countries which have very great problems in getting that information."

Picciotto said that while he sees areas where the country-by-country report could be improved, what the OECD did release is better than what he had expected.

The OECD and Developing Countries

Picciotto said that he sees a central dilemma in the OECD's work as it relates to developing countries. In principle, he said, a universal body like the U.N. should take responsibility for changing international taxation. But that task has fallen to the OECD, which has developed the capacity and expertise for the job. That capacity is missing from the U.N. tax committee.

Picciotto said that while the OECD has had some engagement with developing countries on BEPS issues, it has not adopted their views, such as the inclusion of location-specific advantages as intangibles.

"Although the OECD has tried to consult them, the most they have been able to do is alert them to the issues," Picciotto said. He did note that under the OECD's developing country engagement plan issued November 12, some countries would soon be participating in the BEPS meetings.

"One suspects that that means that they are really co-opting the countries, because inevitably they are viewing the issues from an OECD country point of view," Picciotto said.

One area Picciotto will be watching for is whether the input from developing countries will succeed in shaping the final form of the mutual agreement procedures under action 14. He said that developing countries do not favor compulsory arbitration, which businesses and some countries support.

Picciotto said that the BEPS project will not benefit developing countries if the outcome merely increases the complexity of existing rules. Such changes, he said, would exacerbate the existing resource constraints on tax administrators in developing countries.

For the BEPS Monitoring Group, Picciotto explained, its continuing mission is to provide an independent observer that can track the issues and explain them to the broader public.

He added, "These issues are too important to be left simply to tax advisers."

David D. Stewart is a legal reporter with Tax Notes International.
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