Philippines set to steer international efforts to address base erosion and profit shifting

The Philippines is set to take a major role in steering the global response to base erosion and profit shifting through its involvement in the Organisation for Economic Cooperation and Development’s (OECD) Committee on Fiscal Affairs (CFA) beginning January 2015. Joining the CFA places the Philippines at the forefront of the joint effort from both developed and developing economies in addressing troubling trends in unfair and unjust tax avoidance and evasion.

Base erosion and profit shifting (BEPS) by multinational enterprises, according to the OECD, is a “global problem which requires global solutions.” Exploiting gaps, mismatches, and asymmetries in domestic and international tax rules, BEPS artificially erodes the tax base by shifting profits to low or no-tax locations, where little to no economic activity and value creation has taken place.

Taking the lead through the CFA–the steering, standard-setting, and decision-making body of the OECD–the Philippines will use its seat to present developing country perspectives and priorities, as well as shape strategies, tools, and other outputs to curb the global BEPS phenomenon.

Commissioner Kim Henares of the Bureau of Internal Revenue, who has recently been appointed by Ban Ki-moon as a UN international tax expert, welcomed the development, saying, “We look forward to developing international tools to combat base erosion and profit shifting. Together, we can address a fundamentally unfair practice where multinationals make a huge profit in countries they pay little to no taxes to. We expect these corporations to at least contribute to building and developing the nations they made huge profits from.”

While most tax planning resulting to BEPS is legal due to the said gaps and loopholes, the double non-taxation it engenders distorts competition and investment decisions. More importantly, BEPS is an issue of fairness, especially for developing countries who expect revenues from corporate income taxes when multinationals make profits in their respective jurisdictions.

Referencing the recently concluded International Tax Forum organized by the Department of Finance (DOF), Commissioner Henares added, “Living in an increasingly globalized world requires governments to adapt and update tax policy and enforcement strategies. International cooperation is key if we want to raise sustainable amounts of revenues to continue funding growth and investments to our people and country.”

This initiative is also consistent with the Philippines’ need to rationalize fiscal incentives, a DOF priority bill on which is pending in Congress. While empirical evidence shows that granting of tax incentives is not a key motivation for multinationals on investment locations, it remains a major source of revenue loss for developing economies. Such revenue losses deprive governments of the capacity to invest in areas that actually boost investment, like infrastructure, health, and education, the OECD says.

The OECD strategy hinges on 3 main pillars: the coherence of corporate tax at the international level, the realignment of taxation and substance, and transparency coupled with certainty and predictability. Addressing BEPS will require multilateral cooperation on an international instrument that will give countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.

The Philippines is also invited to the 1st BEPS Technical Meeting for Partner Countries on 10-11 December 2014 in Paris, France. Joined by Albania, Jamaica, Kenya, Peru, Senegal, Tunisia, and many other countries yet to confirm, the Philippines will discuss participation and prioritization in the project. OECD and the donor community will also convene to discuss ways to build developing country capacity to counter the rising trend in BEPS.

According to the OECD, all eight non-OECD G20 countries, as well as OECD Accession countries (Argentina, Brazil, China, Colombia, India, Indonesia, Latvia, Russia, Saudi Arabia and South Africa) are “Associates” in the BEPS Project while 89developing countries engaged in the first 12 months of the project. Stakeholder input from business, civil society, and other international organizations has also been actively sought.

The OECD initiative plans to roll out outputs by September 2015 and unveil the multilateral instrument sometime in December 2015.