It was all about Base Erosion and Profit Shifting (BEPS) for Congressional tax writers Tuesday. A number of experts testified on the Organisation for Economic Co-operation and Development’s (OECD) sprawling international tax project at hearings Tuesday morning at the House Ways and Means Committee, and that afternoon at the Senate Finance Committee.
As discussed in an earlier TechWonk blog, the topic of BEPS is of great concern to ITI member companies who are directly impacted by the OECD’s work. In that spirit, we commend the committees for their attention to this issue, and implore them to pursue comprehensive tax reform to address the policy issues created by BEPS.
A lot of ground was covered throughout the day, so here are ITI’s top five takeaways from the proceedings:
1. Overall, there is broad agreement on two points: the system is broken and reform is needed. No one was defending the status quo. Policymakers agree that our tax system needs fixing. It is time to lower the rate and create globally competitive international tax rules.
2. Industry experts were most concerned with technical considerations around permanent establishment and transfer pricing rules, compliance burdens facing companies and the lack of a mandatory binding arbitration mechanism in the final reports. Testimony offered by panelists came back to a number of topics, time and again. On the technical side, panelists were nearly universally concerned about the changes to permanent establishment and transfer pricing rules, noting the impacts of shifts to these long-held standards to both companies and the U.S. Treasury. Next, panelists expressed concern with compliance issues as BEPS recommendations are implemented and companies face expansive new reporting requirements. Lastly, BEPS seems almost certain to increase tax disputes at least in the short-term, which seemingly heightens the need for a mandatory binding arbitration mechanism.
3. Tax writers were most concerned with congressional consultation, preventing future inversions, and the lack of inclusion of a mandatory arbitration mechanism. Despite occasional differences in tone and focus, lawmakers were mostly in agreement about the importance of the topic and the need for additional congressional attention. That said, a number of tax writers were concerned about insufficient consultation, especially in situations where congressional action will be needed to fulfill commitments. In addition, a wide array of lawmakers used recent inversions as a backdrop for the BEPS work. A bipartisan array of lawmakers acknowledged the need for reform to address the underlying dynamics leading American companies to move offshore for tax purposes. Lastly, echoing concerns from panelists, there were many calls for mandatory arbitration from lawmakers, suggesting it could be a main focus in the ongoing dialogue with OECD member states around BEPS.
4. The ongoing “state aid” investigations by the European Commission were a widely shared concern. Throughout the day, lawmakers on both sides of the Capitol raised the European Commission’s state aid investigations as a major cause for concern. Both the retroactive nature of these decisions, and the impact on the U.S. Treasury, were raised multiple times. Treasury officials echoed these concerns, suggesting strong consensus among policymakers that the Commission’s actions are concerning and require significant attention.
5. Inversions have once again moved to the forefront of the conversation. Current events have moved inversions to the top of policy makers’ minds once again, which led to a lot of discussion throughout the day. On one hand, this seems to bolster arguments for the urgency of tax reform. At the same time, it seems to have given new life to efforts to move standalone inversions legislation. We believe policymakers must focus on the underlying issues, all of which point to the need for quick action on comprehensive reform.
As ITI has noted, BEPS underscores the importance of U.S. tax policies to promoting strong economic growth. That’s particularly true for promoting innovation. We hope today’s hearings bring policymakers the focus and sense of urgency needed to address the issues facing the U.S. tax system. We must shape global rules of engagement to support innovation and competitiveness. This effort is critical to our nation’s economic outlook and should be a top priority for all lawmakers.