RBRT’s Comments on the OECD Request for input on BEPS Action 11By Robert Robillard - 30 September 2014
This blogpost originally appeared on rbrt.ca.
OECD Request for input
(ref. : BEPS ACTION 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it)
September 17, 2014
By email : CTP.TPS@oecd.org
To Whom It May Concern:
We are pleased to respond to the Request for input on BEPS Action #11: Establish methodologies to collect and analyse data on BEPS and the actions to address it taking place from August 4, 2014 to September 19, 2014.
This document may be posted on the OECD website. Full credit goes to Robert Robillard .
1.1. The international tax rules embedded in the OECD Model Tax Convention (OECD MTC)  mostly date back to the 1920s. At the time, they were created and enacted by the International Chamber of Commerce and the League of Nations. 
1.2. These rules have shown remarkable resilience and, dare we say, great efficiency in eliminating double taxation pertaining to individuals all across the globe.
1.3. However, when it comes to the tax treatment of business profits emerging from any type of corporate entity, these rules have demonstrated the obvious shortcomings of any type of corporate taxation. 
1.4. The application of articles 7 and 9 of the OECD MTC has proven to be a perpetual source of uncertainty for the corporate sector as more rules and comments are added through time.
1.5. On the one hand, the use of articles 7 and 9 has been at the origin of numerous tax disputes and litigations between taxpayers and tax authorities, especially in the last 15 years all across the globe. Transfer pricing audits are obviously private in nature. However, tax court cases provide a glimpse of the state of affairs. 
1.6. Moreover, in the July 2008 version of the OECD MTC, the Commentary on article 7 concerning the taxation of business profits contained 21 pages of “instructions” for the proper applications of that article, most of which pertains to corporate entities. The July 2014 version now contains 44 pages. Are we nearer to clarity and ease of use? Not from a practitioner point of view, that much is certain.
1.7. On the other hand, the use and sometime abuse of articles 7 and 9 by tax administrations through the erratic application of the arm’s length principle as “defined” by the 371 pages of the OECD Transfer Pricing Guidelines  has created countless double taxation cases between tax authorities all over the world. 
1.8. A similar statement can be suggested as to the applicability of articles 4 and 5 when it comes to the taxation of corporate entities. What constitutes the status of “resident” for tax purposes and a “permanent establishment” for the application of corporate taxation have also created unexpected problems, nowadays magnified by e-commerce. 
1.9. Once again, in spite of all these shortcomings related to corporate taxation, these rules have shown remarkable resilience and great efficiency in eliminating double taxation pertaining to individuals all across the globe.
1.10. To sum things up, regarding international taxation, all these issues should come as no surprise as far as corporate taxation is concerned. As very aptly summarized by Ross (1988): “No finite and feasible system of business taxation can collect positive revenues.” 
2. Who pays taxes after all?
2.1. This seemingly audacious tax proposition derives from modern taxation theory which teaches us, through the wisdom of Edwin R.A. Seligman, that “the settlement of the tax burden [falls] on the ultimate taxpayer”. Nowadays this is known as “tax shifting”. 
2.2. Richard Musgrave, another well-known economist, tells us that “the term shifting, in the conventional usage, refers to the process by which the direct money burden is pushed along through price adjustments, from the point of impact (where the statutory liability is imposed) to the final “resting” place.” 
2.3. In broader terms, shifting of one’s tax burden is in fact recognized all over the world as perfectly legal. Theoretically, it should not matter if that shifting ends up being an added fiscal burden for the society as a whole as allowed by the jurisprudence or, as the case maybe for a given business, in the increases of the prices of its products or the modification of the compensation of its employees.
2.4. Furthermore, we would add that provided that this burden cannot be shifted, it should be diminished through the optimization of its localization which, again, is perfectly legal and in no way immoral. Localization being however much more than a simple geographical issue. 
2.5. In a few words, corporate entities do not pay taxes. Moreover, as very eloquently expressed by Gresik (2001), “Governments cannot accurately measure transnational profits they plan on taxing.” 
2.6. In answer to the purported problems of “base erosion and profit shifting”, Musgrave and Musgrave (1973/1984) would therefore have explained to the OECD member countries: “Those who take the integrationist position view the problem of taxation at the corporate level merely as a way of including all corporate-source income in the individual income tax base. Their basic proposition is that, in the end, all taxes must be borne by people, and that the concept of equitable taxation can be applied to people only. Moreover, they hold that income should be taxed as a whole under a global income concept, independently of its source. […] The integrationist’s position can be brought out most clearly by asking this question: What would be your view of corporate taxation if in fact corporations made it a practice to distribute all profits as dividends and to retain no earnings? The integrationist would answer that, in this case, no corporation tax would be called for.” 
2.7. Simply put, in order to eradicate “base erosion and profit shifting”, corporate taxation should be repealed. 
2.8. This proposal would, in itself, take care of action #11: “Establish methodologies to collect and analyse data on BEPS and the actions to address it” since most of the countries around the world have already implemented comprehensive processes to address tax avoidance on their territory and tax evasion (which is illegal).
2.9. But obviously, repealing corporate taxation usually meets with very strong headwinds in the political sphere since “corporations ought to pay their fair share of taxes”.
2.10. Sadly, numerous academic publications have espoused that somewhat naive view of the taxation world. Musgrave and Musgrave (1973/1984) would have explained to the OECD member countries that “those who take [that view, the absolutist view] believe that the integrationist approach rests on an unrealistic view of the corporation. The large, widely held corporation—which accounts for the great bulk of corporation tax revenue—is not a mere conduit for personal income. It is a legal entity with an existence of its own, a powerful factor in economic and social decision making, operated by a professional management subject to little control by the individual shareholder. From this it is concluded that, being a separate entity, the corporation also has a separate taxable capacity which is properly subject to a separate and absolute tax.” 
2.11. The latter view of the corporate tax world is nonetheless flatly unsustainable. This evidence has recently been stated once again: “No competent student of taxation believes that corporations pay the corporate income tax. Only people pay taxes. Things and abstractions do not pay taxes. A corporation is, in law, a legal person, but that is, in fact, a legal fiction. Therefore, corporations do not really pay the corporate income tax. Conservative Nobel Prize–winning economist Milton Friedman is well known for espousing that view, but liberal economists share it as well. The liberal Nobel economist Wassily Leontief told The New York Times 20 years ago:
Corporate income taxes fall ultimately on people. Economists have tried but have never succeeded in finding out how the weight of these taxes is ultimately distributed among income groups. There can be little doubt that elimination of corporate income taxes would simplify our tax system and limit its abuse.35” 
2.12. Anyone interested in taxation will recognize this fact.
2.13. In Canada, the Carter Commission ventured directly on that political landmine saying in the 1960s: “Because income tax is collected from corporations, trusts, and cooperatives, it does not mean that these organizations bear the burden of the tax. Ultimately, the burden of the tax on the organization is the relative reduction in the power of people to consume. This reduction can take the form of reduced payments to people who sell goods and services to the organization, increased prices for those who buy goods and services from the organization, reduced incomes to those who hold interests in the organization or reduced sale prices received for these interests by those who dispose of them.” 
2.14. Recently, the Canadian Chamber of Commerce also reminded us that: “according to an Oxford University study, a $1 increase in corporate taxes tends to reduce real median wages by 92 cents.14 The American Enterprise Institute for Public Policy Research found a one per cent increase in corporate tax rates leads to an almost equivalent decrease in wage rates.” 
3. BEPS works with apples instead of oranges
3.1. The OECD members allege that “base erosion and profit shifting” are suddenly major taxation issues. It is suggested that: “Base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike.” 
3.2. No allusion whatsoever is however made to the dreaded “tax havens”.
3.3. Nowhere in the documents related to that initiative can the expression “tax haven” be found. Worthy of note, it is missing in action in the Action Plan on Base Erosion and Profit Shifting. 
3.4. Soft to the touch, instead of an abrasive attack on tax havens, the building blocks of the BEPS initiative comprise the notions of “tax fairness” and “fair tax environment”. 
3.5. Nonetheless, sixteen years later, we cannot help but see permeate through these lenses the remnants of the 1998 plea which stated the necessity to “develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions and the consequences for national tax bases […]” 
3.6. Coming back to the BEPS initiative, “tax fairness” is hence suggested.
3.7. We subscribe to that intention without any reservation.
3.8. However, the OECD should not preoccupy itself with that concept as it applies to corporate entities and corporate taxation.
3.9. Taxation theory as seen above is quite clear in regards to the relevance of corporate taxation.
3.10. Simply stated, there is no such thing as “tax fairness” when it comes to the comparison of the taxation of individuals and corporate entities. It is like trying to compare apples to oranges.
3.11. Instead, the examination of the “effective” tax burden and tax rate in comparison to the “statutory” tax burden and tax rate of low income individuals, high income individuals and high-net-worth individuals would be much more promising to ensure “tax fairness”.
3.12. Along the way through that investigation, OECD member countries might discover patches and pockets of “real tax unfairness”; a subject which would need more space that what is available at this time and place.
3.13. As was once said: “Would you tell me, please, which way I ought to go from here?” To which it was wisely answered : “That depends a good deal on where you want to get to.”
3.14. But as then went on the dialogue:
– I don’t much care where.
– Then it doesn’t much matter which way you go.
– So long as I get somewhere.
– Oh, you’re sure to do that, if only you walk long enough.” 
3.15. In other words, as the BEPS initiative keep suggesting and countries keep implementing more and more technical rules to “regulate” international taxation and the use of tax havens by corporate entities, we may not like the coming end-result much more than the actual situation.
3.16. In fact, the number of double tax cases will likely grow exponentially in the next decade as will tax litigation cases.
Robert Robillard, CPA, CGA, MBA, M.Sc. Economics
robert.robillard “at” rbrt.ca
September 17, 2014 Robert Robillard, CPA, CGA, MBA, M.Sc. Economics, is the Transfer Pricing Chief Economist at RBRT Transfer Pricing (RBRT Inc.); 514-742-8086; robert.robillard “at” rbrt.ca.  OECD, Model Tax Convention on Income and on Capital, available online http://www.oecd.org/tax/ treaties/oecdmtcavailableproducts.htm.  OECD, Addressing Base Erosion and Profit Shifting, OECD Publishing, February 2013, p. 35, available online http://dx.doi.org/10.1787/9789264192744-en.  For greater certainty, the terms “corporate entity” and “corporate taxation” in this document are meant to include any other tax units except for “flesh and blood” individuals.  In Canada, see among others : Canada v. GlaxoSmithKline Inc., 2012 SCC 52 (CanLII); GlaxoSmithKline Inc. v. Canada, 2010 FCA 201 (CanLII); Canada v. General Electric Capital Canada Inc., 2010 FCA 344 (CanLII); Canada v. General Electric Capital Canada Inc., 2010 FCA. 290 (CanLII); Canada v. General Electric Capital Canada Inc., 2010 FCA 92 (CanLII); Smithkline Beecham Animal Health Inc. v. Canada, 2002 FCA 229 (CanLII); McKesson Canada Corporation v. The Queen, 2013 TCC 404 (CanLII); Alberta Printed Circuits Ltd. v. The Queen, 2011 TCC 232 (CanLII); General Electric Capital Canada Inc. v. The Queen, 2009 TCC 563 (CanLII); General Electric Capital Canada Inc. v. The Queen, 2009 TCC 246 (CanLII); GlaxoSmithKline Inc. v. The Queen, 2008 TCC 324 (CanLII); General Electric Capital Canada Inc. v. The Queen, 2008 TCC 256 (CanLII); HSBC Bank Canada v. The Queen, 2007 TCC 307 (CanLII); Glaxo Smithkline v. The Queen, 2003 TCC 258 (CanLII).  OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010, as modified since then (which include over 75 new pages of “guidance” in the newly released Chapters 5 and 6 on 16 September 2014).  Again, double taxation cases are obviously private in nature. However, the ever-increasing “closing APA balance” of the Canadian APA program provide us with another glimpse of the state of affairs (Canada, Advance Pricing Arrangement. Program Report, 2013-2014, Canada Revenue Agency, p. 9, available online http://www.cra-arc.gc.ca/tx/nnrsdnts/cmp/p_mp-eng.html).  See for example : OECD, 2010 Report on the Attribution of Profits to Permanent Establishments, July 2010; OECD, Revised Proposals Concerning the Interpretation and Application of Article 5 (Permanent Establishment), 19 October 2012 to 31 January 2013; OECD, “Taxation Aspects of Electronic Commerce: Publication of reports and technical papers”, available online http://www.oecd.org/tax/treaties/ecommercereports andtechnicalpapers.htm; and OECD, Addressing the Tax Challenges of the Digital Economy, OECD Publishing,16 September 2014, available online http://dx.doi.org/10.1787/9789264218789-en.  Stephen Ross 1988, “Comment on the Modigliani-Miller Propositions”, Journal of Economic Perspective, Vol. 2, No. 1, pp. 127-33; p. 132.  Edwin R.A. Seligman 1921, The Shifting and Incidence of Taxation, Columbia University Press, New York, p. 1, available online https://archive.org/details/shiftingandincid00seli.  Historically, it is notable that Mr. Seligman was a member of the group of economists appointed by the League of Nations to study the key principles of taxation of cross border activities (See Report on Double Taxation submitted to the Financial Committee by Professors Bruins, Einaudi, Seligman, and Sir Josiah Stamp, League of Nations Document No. E.F.S.73.F.19. 1923, available online http://adc.library.usyd.edu.au/ view?docId=law/xml-main-texts/brulegi.xml;chunk.id=item-1;toc.depth=1;toc.id=item-1;database=;collection=; brand=default).  Richard A. Musgrave 1959, The Theory of Public Finance, McGraw-Hill, New York, p. 230.  In Canada, it was stated a long time ago: “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.” (Inland Revenue Commissioners v. Duke of Westminster , AC 1,  All ER Rep 259, 51 TLR 467, 19 TC 490, p. 14; available online www.commonlaw.uottawa.ca).  Interestingly enough, the previously mentioned panel of 1923 limited itself to the observation that individuals may shift their tax burden from country to country by “dissolving existing intermediate entities so that the foreign shareholder becomes a direct holder, it is possible for the individual to shift according to his own interest from one class of assets to the other and to regulate under which scheme of taxes he will fall.” (Report on Double Taxation submitted to the Financial Committee by Professors Bruins, Einaudi, Seligman, and Sir Josiah Stamp, League of Nations Document No. E.F.S.73.F.19. 1923, p. 49, available online http://adc.library.usyd.edu.au/view?docId=law/xml-main-texts/brulegi.xml;chunk.id=item-1;toc.depth=1; toc.id=item-1;database=;collection=; brand=default).  Thomas A. Gresik, 2001, “The Taxing Task of Taxing Transnationals”, Journal of Economic Literature, Vol. 39, No. 3, pp. 800-38; p. 801.  Richard A. Musgrave and Peggy B. Musgrave, 1973/1984, Public Finance in Theory and Practice, McGraw-Hill, New York, pp. 386-87.  To be clear, we suggest that corporate entities should be transparent for taxation purposes. The tax burden would ultimately fall on the individual shareholders of any corporate group or structure, that is the “flesh and blood” individuals, a highly desirable result to start with for tax efficiency purposes.  Richard A. Musgrave and Peggy B. Musgrave, 1973/1984, Public Finance in Theory and Practice, McGraw-Hill, New York, p. 387.  Stephen J. Entin, 2004, “Tax Incidence, Tax Burden, And Tax Shifting: Who Really Pays The Tax?”, The Heritage Foundation, CDA04-12, November 5, 2004. Note #35 above pertains to “Wassily Leontief, “What It Takes to Preserve Social Equity: Amid Dynamic Free Enterprise,” The New York Times, February 1, 1985, p. A29.”  Canada, Report of the Royal Commission on Taxation, [Carter Commission] 6 volumes, Vol. 4, Ch. 19, Ottawa, 1966, p. 3, available online http://epe.lac-bac.gc.ca/100/200/301/pco-bcp/commissions-ef/carter1966-eng/carter1966-eng.htm.  The Canadian Chamber of Commerce, “Embracing a Growth-Oriented Tax System”, Policy Brief, Economic Policy Series, April 2010, p. 5. Note 14 above pertains to Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini, 2009, “The Direct Incidence of Corporate Income Tax on Wages”, Working Paper No. 0707, Oxford University Centre for Business Taxation, April 3. As for the American Enterprise Institute for Public Policy Research, see: Kevin A. Hassett and Mathur Aparna, 2006, “Taxes and Wages”, AEI Working Paper, No. 128, American Enterprise Institute for Public Policy Research, June, Washington.  OECD, Addressing Base Erosion and Profit Shifting, OECD Publishing, February 2013, p. 1, available online http://dx.doi.org/10.1787/9789264192744-en.  OECD, Action Plan on Base Erosion and Profit Shifting, OECD Publishing, July 2013, available online http://dx.doi.org/10.1787/9789264202719-en.  OECD, Addressing Base Erosion and Profit Shifting, OECD Publishing, February 2013, available online http://dx.doi.org/10.1787/9789264192744-en.  OECD 1998, Harmful Tax Competition. An emerging Global Issue, p. 7, available online http://www.oecd.org/tax/transparency/44430243.pdf. In fact, that cat was recently let out of the bag as it pertains to BEPS action 5: OECD, Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, OECD Publishing, 16 September 2014, available online http://dx.doi.org/10.1787/9789264218970-en; see the Executive summary and Chapter 3. We shall have more to say ourselves about the whereabouts of that “cat” below…  Lewis Carroll, Alice in Wonderland; the Cheshire Cat in answer to Alice questions…
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca
RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.