The allocation of taxing rights between jurisdictions is a major international tax issue. The current analysis of this issue has largely been set in motion by the OECD/G20 base erosion and profit shifting (BEPS) project and by programs that other international organizations have initiated.
It’s important to consider whether jurisdictions interested in reallocating taxing rights will be motivated to develop comprehensive and detailed proposals and to press for those proposals to be implemented. There are also possible common—or conflicting—interests with regard to reallocating taxing rights.
The complexity and multifaceted nature of the BEPS projects have intensified certain conflicts and led to concerns about what some call a “tax war.”
The OECD BEPS project affects the allocation and possible reallocation of taxing rights, through BEPS and otherwise. Several BEPS Actions directly affect the allocation of taxing rights, including the tax challenges posed by the digital economy; neutralizing the effects of hybrid mismatch arrangements; limiting base erosion through interest deductions and other financial payments; and countering harmful tax practices more effectively, taking into account transparency and substance. Allocating taxing rights does not always require international agreement, and in the context of income tax treaties, several possible scenarios exist whereby allocating taxing rights could pose challenges.
International tax issues, such as the allocation (reallocation) of taxing rights, have to be analyzed before a decision is made. The major changes in both substantive international tax rules and decision-making processes will affect how any allocation (reallocation) of taxing rights will be implemented. The OECD has taken steps to deal with tax avoidance and evasion by, for example, creating global forums that focus on illicit financial flows and capital flight, primarily due to the actions of individuals, and on the BEPS project. The role of international organizations has also increased as they become more actively involved in and dedicated to resolving international tax issues collaboratively.
The complexity and multifaceted nature of the BEPS project have intensified certain conflicts and led to concerns about what some call a “tax war.” Several factors have contributed to conflicts about international tax, including but not limited to issues of transparency, quantifying the magnitude of tax avoidance and tax evasion problems, and the increase in stakeholders. Resolving these conflicts has proved difficult.
To learn more, read the complete three-part series on BEPS and the allocation of taxing rights in the Journal of International Taxation. A blog referencing the article can be found at https://tax.thomsonreuters.com/blog/checkpoint/BEPS-allocation-of-taxing-rights.
David Spencer, an attorney in New York City, is a member of the board of advisors of the Thomson Reuters Checkpoint publication Journal of International Taxation and a frequent contributor to it.