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Economics References Committee - 09/04/2015 - Corporate tax avoidance
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SAINT-AMANS, Mr Pascal, Director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development

[16:00]

Evidence was taken via videoconference—

ACTING CHAIR: We welcome you to this inquiry into corporate tax avoidance and aggressive minimisation. Where are you?

Mr Saint-Amans : I am in Paris. I wish I was with you in Australia, but I had to stay in Paris because I had back-to-back meetings yesterday and I have another meeting tomorrow, so I could not travel down to Australia. I am based in Paris because the OECD headquarters are in Paris.

ACTING CHAIR: You are able to be with us because of technology, and technology is topical in this environment. We had appearing before us yesterday Microsoft, Google and Apple. We heard about them. They are in the frame of this issue around the world. It was a very interesting day. Do you have an opening statement to provide, Mr Saint-Amans?

Mr Saint-Amans : Yes. I am happy to share with you some general ideas on the work we are doing and the reason we are doing it which I think will resonate in your committee. The OECD is an organisation that, as you know, Australia is a member of. We have 34 member countries. We do some work on tax. We have been doing work on tax for the past 50 years, developing instruments to guide countries on the way they should eliminate double taxation. As you know, when there is a cross-border investment there is a risk of double taxation because the investor will be taxable in the country of residence and in the country of source. Double taxation is no good for cross-border investment. As for ourselves, the OECD since the 1950s has developed rules to eliminate double taxation—a model tax convention on the one hand and transfer pricing guidelines on the other hand.

It has been the case over the past few years that in many countries there have been growing concern about double nontaxation, seeing how companies in a globalised environment have been able to legally—or, most often, legally—plan their tax affairs in quite an aggressive way which has reduced their tax burden to something which is very different from the nominal tax rates in different countries. This is a worldwide issue. From China to the US, from Australia to Europe, almost all countries in the world have faced that phenomenon that we in the OECD have quantified as base erosion and profit shifting.

This is why a bit more than two years ago we proposed to the G20 that we address this issue of base erosion and profit shifting. In return we got a mandate from the G20 to elaborate on an action plan which would put an end to this phenomenon of base erosion and profit shifting. We proposed an action plan of 15 measures to the G20 leaders in St Petersburg at their meeting in September of 2013. The G20 leaders adopted that plan, and we have developed all the 15 measures. We presented in Brisbane, Australia, at the leaders' summit and prior to that in Cairns in September 2014 the first seven measures in accordance with the plan. We had time lines. Seven measures were to be delivered in 2014 while the other eight measures are to be presented to the G20 in October-November this year, 2015.

These measures aim to put an end to aggressive tax planning by fixing the loopholes which exist currently in the international tax framework. So they are aimed at fixing transfer pricing loopholes, fixing the model tax convention which currently facilitates schemes like commissionaire arrangements where companies which are in the distribution business can move their profits two digits to one digit just by shifting and changing countries but also they are aimed at organising better cooperation between governments.

The principle in tax, as you know—you are at the core of democracy and concerns through to representatives about tax are absolutely key—is that tax is at the core of sovereignty. But this can be only nominal in the globalised environment. if you want to protect your actual sovereignty, you need to cooperate with other countries. Part of the action plan is to organise that cooperation by strengthening controlled foreign company legislation, providing for instruments to reduce interest deductibility and the number of multinationals that deduct much more interest from external debt through internal loans. Finally, we have been addressing harmful tax practices to put an end to a number of schemes which were offered by governments to facilitate tax avoidance. Rulings that lack transparency facilitate tax avoidance.

You can see that there is a comprehensive action plan which aims at bringing countries together so that they will be more efficient in addressing aggressive tax planning rather than taking unilateral measures which might be disruptive and might increase the risk of double taxation. We do not want to see that. We do not want double nontaxation but we do not want double taxation either. We are trying to do that quickly because we know that there is an urgency. You, the representatives of the people, have to face angry people who can see that multinationals can have a zero effective tax rate while there is—not necessarily in Australia but in many countries— increased VATs or personal income tax. People who cannot move their tax have faced increased taxation while multinationals are legally in a position to reduce their tax burden. If it is legal and we do not like it we need to change the law. Sorry, I am speaking from an international organisation where we do self-legislation; it is not the laws you adopt. But this is a legal framework—the model tax convention, the transfer pricing guidelines and also recommendations in different areas.

ACTING CHAIR: Thank you very much. On the action plan that you referred to in the latter part of your statement, are there any milestones in there that you believe are critical in the short to medium term? What do you believe is critical about them?

Mr Saint-Amans : Indeed, we have very tight time lines. The next milestone is 8 October 2015 when the Secretary-General of the OECD will be presenting to the G20 finance ministers the consolidated deliverables, meaning the seven deliverables which were presented to the G20 in Australia together with the eight new deliverables which are being prepared. What is critical now is for us to get agreement, because nothing is agreed at the OECD without consensus.

I should have added that this work is carried out by all the OECD countries—the 34 member countries—and the G20 countries which are not OECD countries—there are eight of them: Argentina, Brazil, South Africa, Saudi Arabia, Russia, India, China and Indonesia—and they are all on an equal footing in this project, meaning that they contribute to consensus. The hard part of the work is to get consensus on quite difficult and technical measures. They are difficult, technical but also political. It is about the way governments want to share the rights to tax. We are currently in a process of trying to identify where we shall get agreement and to what extent we will have agreement based on the objectives which were fixed in the action plan, which is a public document and was endorsed by the G20 leaders.

The milestone is, internally, a number of meetings of working parties of the Committee on Fiscal Affairs, where you have the tax techies who meet on a regular basis, and then the presentation of all that to the G20 finance ministers on 8 October. What we are going to present are soft law instruments that will include minimum standards that countries will have committed to, and then countries will be invited to translate these into their domestic legal and regulatory frameworks as necessary.

ACTING CHAIR: So you are hopeful; you can never predict the future with these things. There will be some work done in September, as I understand it, and on 8 October you will be able to table the seven deliverables. There is the balance of eight. What is the time line on the total 15, then?

Mr Saint-Amans : The total 15 is for 8 October. We presented seven already in Cairns and Brisbane. They are adopted. To be more specific, you have a report on hybrid mismatches—how to neutralise hybrid mismatches. It is more than a report, because you have domestic draft legislation which is annexed to that report. Mismatches are bonds convertible into shares, meaning that they are a bond in country A, a share in country B, and if you have an internal loan with this hybrid mismatch, you will have an interest deductible in the country receiving the loan, but in the other country it is a dividend, which is tax exempt. It is very easy to plan with these mismatches. We have provided already draft domestic legislation and draft provisions to address these. We also have a report on the digital economy and we have a provision to be included in tax treaties which would neutralise treaty shopping. You go through a third party because you have a better tax treaty with the third party and just a sham entity in the third country. We would neutralise that with a minimum standard. All countries have committed to this. We have changes in transfer-pricing guidelines on intangibles. You had hearings yesterday, I heard, with some tech companies where intangibles are key. They are located in jurisdictions where nothing is happening, so how can you neutralise these schemes? We also have action on country-by-country reporting—how to oblige multinationals to disclose their tax affairs to tax administrations. Where is the turnover located, where are the profits located, where is the tax bed, where are the employees employed and where are the assets deployed? Finally, we had a report on the digital economy to identify the challenges of the digital economy, which is a big concern in many countries.

ACTING CHAIR: Thank you very much. That was a comprehensive answer. In this inquiry we have heard from a number of witnesses. Indeed, today some participants from the Senate in this inquiry called for some unilateral action on this issue in Australia. Is that likely to be counterproductive in the terms of what you and I have just been exchanging?

Mr Saint-Amans : We know that a number of countries are very eager to take action and take action quickly, and that is why we have fixed very ambitious time lines for this BEPS project. Usually to change international laws it takes a decade or a few years. We have decided to change on 15 actions in two years time, precisely because of that pressure on you, on the politicians, on the governments, on the representatives, because of people's anger. That said, we do think that multinational action is much more fit for purpose than uncoordinated unilateral actions, for a couple of reasons. One is that unilateral action is much less efficient and effective than multilateral approaches. If you act on your own, it is going to be more difficult to fix the issues than if all the countries act together or all the countries recognise that a number of actions are fit for purpose. So that is the first element.

The second element is about keeping the balance between putting an end to double non-taxation—stateless income, if you want to qualify it this way—and keeping away from double taxation. The risk of unilateral action is about creating risks for double taxation. At the OECD our business is multilateral business—to try to keep countries away from unilateral actions, especially before the action plan is completed. We know that some countries have done so, and for us it is not a great success of the BEPS Action Plan, because we have been told by countries: 'We want to act, but we'll be better off all together. Please carry this out as quickly as possible.' And we are doing it, so waiting for a few months for having the outputs of the BEPS Action Plan probably would be better, but we also understand the political pressure which is on governments and on representatives.

ACTING CHAIR: Given my experience in government, which is only four years, that few months would be a relatively short term—in terms of my experience in this environment. Just before I hand over to my colleagues, how would you assess Australia's involvement in this process of getting this issue accelerated onto the world stage and indeed getting some kind of affirmative action?

Mr Saint-Amans : Australia has been very much involved since the beginning. Australia is a member of the OECD. It was a member of the Bureau of the Committee on Fiscal Affairs, where actually most of this was designed in the early stages of the process. As chair of the G20, Australia has been a mentor of that project. Your Prime Minister, your Treasurer, were instrumental in putting very high on the agenda the BEPS discussions during the G20. This is now in the hands of the Turkish presidency of the G20, but Australia has been absolutely involved in all working groups. We know what it means when it is about travelling to Paris on a regular basis for your delegates. It is a very long trip, but they are attending the meetings and they are very active in the meetings.

ACTING CHAIR: I will hand now to the leader of the Greens party in this country, Senator Milne.

Senator MILNE: Thank you for that update. I wanted to particularly go to the time lines again, following from Senator Edwards. In October this year—I understand you are saying—the deliverables will be, essentially, trying to get agreement on minimum standards and then agreement that those minimum standards will then be translated into domestic law. If there is agreement to those propositions that are put forward by the OECD in that group, what is the time frame then that people have agreed they will have legislated by?

Mr Saint-Amans : There will be minimum standards, but there will be actions without minimum standards. We have come up with 15 actions. Among these actions, you have actions which are for countries to decide whether they want to protect their tax base or not, and you do not need the others to act. Let me give you the example of hybrid mismatches—you do not need all the countries in the world to implement that legislation. What is important is that all the countries agree on what needs to be done, so that it is agreed to by the other country even though they would not implement the legislation, if Australia wants to be protected from hybrid mismatches. That may be the case already in your domestic legislation, which I do not know well enough to assess. But assuming you do not have that in your domestic legislation and you want to implement it, you can do it as of now, because this was an action delivered in 2014.

We can take another example where you do not have a minimum standard either, but you may want to protect your tax base through CFC—controlled foreign company—this is the anti-abuse type of legislation. Would it make sense to have a minimum standard? If a company does not want to protect its tax base, I see it as extremely difficult for the international community to tell them: 'You must do it.' What matters» is that this country should not undermine the sovereignty of the other countries, and that is about the other measures which are being delivered. On transfer pricing, it is not the minimum standard, but actually a common interpretation of article 9 of tax conventions. All tax conventions across the world are similar as regards article 9, paragraph 1, which is the rules the arms-length principle on how you price internal transactions.

We are coming up with new transfer pricing guidelines. They must be agreed by consensus, which is very difficult because a number of countries have divergent views, but we are trying to get there. As soon as we have that, it will mean that the judges in Australia or in the US or in Europe will interpret the cases based on these new interpretations, so it will be implemented immediately—it will not need legislative translation. I can take the example of a minimum standard that you were referring to, which is on tax treaties or on country-by-country reporting. On tax treaties we have action 6, which is about providing anti-abuse measures, and the minimum standard that has been agreed will be either an LOB—limitation of benefits—combined with domestic legislation to make it impossible to use sham entities, or a main purpose test to be included in tax treaties. The countries have agreed to include that in their tax treaties as quickly as possible. There is not time line there, but action 15 has provided for the development of a multilateral convention which will encapsulate the tax treaty BEPS-related measures. The government will not have to go back to you with changing the 70 or 80-plus tax treaties that Australia has, but will have to go back to you once with the ratification of this multilateral convention that we are currently developing to incorporate all these measures.

The time line which has been fixed and has been agreed to is that this multilateral convention should be developed by the end of 2016, meaning that the government should be back to you at some time in 2017 for the ratification. As regards a minimum standard, country-by-country reporting—there you have a time line. All the countries have agreed that companies should fill the country-by-country reporting forms in 2016 so that these forms be exchanged by governments to go to tax administration in 2017. So you see that you have quite a wide range of submissions there.

Senator MILNE: That is really important, because the impression that has been given here is that by October this year, providing people agree, this will all be rolled out. But obviously that is not the case; it is going to be a staged process according to which particular issue is being addressed and how it is being addressed. What you are saying is that this treaty, if it is negotiated to everybody's agreement, will be ratified some time in 2017; there would be an expectation that the participating countries would ratify by the end of 2017. Is that correct?

Mr Saint-Amans : It is correct. But I would like to add one consideration, which is the BEPS package in terms of messaging to the business community, to investors who anticipate before making their investment, that the rules of the game will have changed. We hope to have the behavioural impact much earlier than the domestic legislation being enacted.

Senator MILNE: On that basis, there will be an understanding that there will be no grandfathering?

Mr Saint-Amans : There will be no grandfathering in most cases. There will be grandfathering on what was agreed in Brisbane on some forms of harmful tax practices, the patent box that you may have heard about, which is a preferential regime for intellectual property. Here there was an agreement to change the rules there to make sure that patent boxes will be agreeable only where compatible with what we call the nexus approach. There, the UK negotiated a grandfathering clause, which has been agreed with the partners.

Senator MILNE: All this, as you rightly say, relies on a consensus outcome, and therein lies the politics of this. This committee has heard evidence from various witnesses that the United States is in this process to minimise the damage to its own companies, in particular, or companies domiciled in the United States, and that they will attempt to undermine the BEPS plan and the other OECD measures. We could end up with a lowest common denominator or no agreement because countries like the United States might decide to drag their feet, drag this out much longer, and bring the reporting down to virtual meaninglessness. Do you share the concerns people have that there is not necessarily the same level of goodwill around the table about trying to get to a consensus by October this year?

Mr Saint-Amans : They are different elements of response. The first one: shall we deliver in October this year a meaningful package? I am paid to say yes, but I strongly believe that the answer is: yes, we will. You can have a flavour of that when you look at the first seven measures which were adopted. If you look at the tax press, in particular in the US, you read that the measures which have been adopted have teeth. These are not meaningless measures. I hope that we will be able to deliver as good a package, a consolidated package, in October. I am confident that we will be making significant changes. The reason I am confident is that, if countries do not agree, if one country were to block the others from moving ahead, as countries are sovereign, what is going to happen is that countries will take unilateral measures, which will globally be detrimental to the tax affairs of the companies of the other countries. So it is a cooperative game. It is true—and that will be the last part of my response—that all the countries are sovereign and they want, one way or another, to protect their interest. The big question is: how do you best protect your interests—by blocking or by cooperating?

You have different constituencies. The US clearly is one constituency, as they are the main capital exporter in the world, and they have many businesses. Currently the US does not tax the offshore profits of their businesses, even though they have a worldwide system, because they have what you may know about, which is called 'check-the-box', which is a technique which has facilitated trapping the profits in tax havens, and currently there is US$2 trillion of accumulated profit in tax havens—in Bermuda, the Cayman Islands and jurisdictions where not much is happening. So that is one constituency. You have the Europeans, which are another constituency, but then you have different constituencies. You have small, open economies which are not very keen for tightening the rules. Being very open, they have a lot of investment. They are hubs for investment, even where there is not a lot of real activity. That is the case with Ireland, the Netherlands, Luxembourg and Switzerland. You have the big countries with high tax, which want to keep their high taxes. You have the Greeks. You have Australia, which is an interesting country, because you have some champions—a natural resource industry, in particular, which influences the views of Australia—

Senator MILNE: May I interrupt you there? You just said that the Australian government has some champions with the resource based industries. What are they lobbying against?

Mr Saint-Amans : I do not know what they are lobbying against, because they are part of the overall business consultations we do. I think they are concerned about interest deductibility, for instance, because their gearing is such that they seem to be concerned, and that is legitimate. I do not take lobbying as a negative term when it is about expressing concerns on the impact of legitimate business structuring of the measures we are taking. It is true that we also face some form of lobbying not from Australian companies on the fact that we should not change anything because the world is perfect as is. Actually a number of players love double non-taxation.

Senator MILNE: No surprises there! You have said in one of your reports that there is some 'very vicious' lobbying against BEPS taking place. I have noted that you have the US National Foreign Trade Council, the Confederation of British Industry, the United States Council for International Business and some major employers. Where is this vicious lobbying seeking to undermine this global effort coming from?

Mr Saint-Amans : Not from any of the organisations you have mentioned, which are structured organisations, but there are a number of coalitions which have been established and which have commented extensively on the draft we have put out. They have not always been very positive or constructive in their comments.

Senator MILNE: Who are those coalitions?

Mr Saint-Amans : You have a coalition for principled taxation, for instance. You have a number of groups in which when they submit their comments you can see their comments are about changing nothing. We have thousands of pages of comments which have been Sent. All this is public, so it is easy to find out the sense of the comments which are sent.

Senator MILNE: Sure I just wanted to know who the coalition of principled taxation are.

Mr Saint-Amans : It is a group of companies. I can send you a list of the companies which are part of the coalition.

Senator MILNE: I would be very interested in seeing the list of companies. That would be extremely useful. As a final question from me: in terms of unilateral action, there have been a lot of people saying we should not do anything until we get global action, but you said earlier that the things that have already been agreed up until now could be actioned and are being actioned around the world. Can you give me some examples of that? Are you aware whether Australia has actioned any of those things that have been agreed up until now?

Mr Saint-Amans : Until now we have had four actions which have been agreed. One is the hybrid mismatches. I do not know where Australia stands on this, so apologies for that.

The second is treaty shopping, action 6. On this one it by definition takes some time. If you are to obtain all your tax treaties, it is going to take a lot of time. This is precisely to address that frustration that it takes at the gate to change tax treaties because of bilateral negotiations that we are proposing this multilateral dimension which should wrap this up in one year's time. Australia is part and is going to be part of the group to negotiate that convention.

The third measure is about harmful tax practices. We issued a report—action 5—which deals with two main issues. One is the patent boxes, as I indicated earlier, and Australia did not have to act, because you did not have such a patent box, but you will benefit from the UK, Luxembourg and many other countries changing their patent boxes. The second part of this action was about tax rulings. I do not know whether you heard in Australia about the noise in Europe about tax rulings delivered by Luxembourg—the Lux Leaks were in October—

Senator MILNE: Yes, we know.

Mr Saint-Amans : and one of the measures is to say that countries will have to exchange tax rulings on an automatic basis to kill the possible or likely toxic features of rulings. When you keep the rulings for yourself and do not share it with the other tax administrations, it can be toxic. If it is shared, it will not be toxic. This is to be implemented as soon as 2016 by all countries and also Australia.

The fourth measure, which was adopted in 2014, is about the country-by-country reporting. We are currently developing the executive agreements—and Australia is part of the negotiation—so that this becomes a reality in 2016 for companies to fill in the forms and 2017 for the forms to be exchanged.

As regards measures to be developed and presented in October, we will have CFC legislation. It is going to be a best practice more than a minimum standard, and this will be implementable. The idea to have the best practice is what is the most efficient, what works best in the range of countries which participate in that project, so that countries will be able to increase the effectiveness of their CFC legislation. We have interest deductibility, which is a big chunk of the work. How do you make sure that companies which have external debt do not deduct internally much more than their external debt? There may be cases where it is justified to have interest deductibility even though you may not have external debt; but, when you deduct 1,000 times more than your external debt, it looks like there is an issue. There we are exploring different solutions: either the EBITDA ratio, which would cap the interest deductibility, a reference to the global allocation of the debt or the interest, or a combination of them both. This will be delivered in October.

We are making progress on harmful tax practices. We are going to kill the commissionaire arrangements on tax treaties. That is action 7. Then we will come up with a new set of transfer pricing guidelines to make sure that you cannot buy contracts which do not reflect the reality of the transactions; you cannot shift the profit in a jurisdiction where nothing is happening.

Senator MILNE: Thank you. For me: if there are measures being taken here which we think are contrary to or in conflict with these agreements, do we just write to you at the OECD and draw your attention to it?

Mr Saint-Amans : You mean from other countries or from Australia? I did not get the question.

Senator MILNE: From Australia.

Mr Saint-Amans : Countries are sovereign, so what is agreed at the OECD is morally binding but it is not legally binding. That said, it does not mean that we do not have teeth or that we are not having any impact. I think we are having an impact precisely because countries are committed only to the extent that they want to be committed. If they have agreed, it means that they will have been committed and therefore it will be the expectation from the international community that they will respect their commitment. This is the logic and the dynamic we had on bank secrecy. You will remember that back in 2008 bank secrecy was almost the rule in many countries. We have put an end to that by soft legislation, by saying countries should do that and by finding the right incentives for all countries to commit to automatic exchange of information, which they have now done. So I do believe that, in spite of just doing soft legislation, we can have an impact, yes.

Senator MILNE: Thank you very much. I really appreciate it.

ACTING CHAIR: Thank you. Senator Ketter.

Senator KETTER: I am sure we all wish your organisation great success in your very important endeavours, and thank you very much for your very clear explanation of what is happening. I am from the Australian Labor Party, and our party position is that we are quite prepared to move to counter hybrid mismatches. You have talked a bit about that. That was action item 2. I just want to be clear about this. Are you saying that that is an issue that we can take action on now if there is a will?

Mr Saint-Amans : This is an issue which has been agreed subject to one element, which is quite secondary and ancillary about financial regulations and the gearing which is imposed by financial regulators. Mostly this action indeed has been agreed.

Senator KETTER: Okay, so what would be any impediment to Australia going down that track now?

Mr Saint-Amans : I do not see much of it.

Senator KETTER: In respect of action item 4, could you give us a bit of an update as to where the consultation process is up to and what the OECD thinks about the various stakeholder views as part of that consultation process?

Mr Saint-Amans : Item 4 is about interest deductibility. We have issued a discussion draft that has explained the two main options that I described to you a few minutes ago. The options are: capping the deduction of interest through a ratio, which could be an EBIDTA ratio, moving to a global allocation of either the debt or the interest, or a combination of them both. You do not have any country currently doing a global allocation. A number of countries have caps. Germany is probably considered to be the better designed regime even though it is recognised that the threshold cap is put at a level that does not make it very stringent.

The comments we have received from business were quite extensive and we are still working on them. I do not know how many hundreds of thousands of pages we have received, but we have received a good chunk of comments there. I think businesses are concerned, legitimately, that a global allocation might prove extremely difficult to be implemented to the extent that the definitions of what an interest is are not the same from one country to another. Countries are not about harmonising their legislation on the interest deductibility and as a result you may face double taxation in spite of a global agreement on how to allocate interest. Given the differences in definitions there would be a problem. There would be a problem of reconciling also from an accounting perspective these and this might result in high compliance costs. These are the main comments we have received.

The other set of comments on the threshold is the fact that too low a threshold would actually undermine legitimate businesses which sometimes claim they are obliged to have debt in some countries even though the overall group would have no debt. We think that for local reasons also you might want to allocate debt to the business you do in one country. The claim is that too low a threshold would be penalising them. Obviously the lower the threshold is the tougher the teeth of this mechanism will be, and that is why you have quite a logical debate between government saying, 'If we want money, we want to lower the threshold,' and companies saying, 'You want money but you also want investment and as a result please do not put the threshold too low.' So that is where we are.

We are going to have discussions with the member countries on how to draw on the comments and how to design a system that probably will go in the direction of a ratio but which will have to take into account the different perspectives as well. The difficulty of our task is always to find a compromise that will keep the actions efficient while at the same time reflecting the diverse legislation, the diverse legal systems, in the different countries. I am confident that on this very important action we will be able to come up with something significant.

Senator KETTER: Thank you for that. I want to move to the concept of offshore marketing hubs. A number of companies use Singapore, for example, as an offshore marketing hub. Does the OECD view this as a harmful tax practice?

Mr Saint-Amans : I think it is primarily an issue of transfer pricing. The purpose of the BEPS action plan is to realign the location of the profits with the location of the activities. You cannot have a system where transfer pricing would result in locating all the profits in one jurisdiction where hardly anything is conducted. We are making very significant progress in the area of transfer pricing on intangibles, which is not your question, but it is the other big loophole in the area of transfer pricing; it puts your intangible in a cash box and all of the return goes there, even though there is nothing else in it other than the intangible and then contracts and capital in the cash box. We try to kill the cash boxes.

What you referred to is something different—a marketing hub where you have some form of activity. The question is: how much profit can be allocated there? I have read the Australian press over the past few days, and I have seen that a number of groups are supposed to have billions located in entities in Singapore. My experience is that Singapore, unlike many other places, requires some real activities to be located in their jurisdiction. It is not about sham businesses; however, it can certainly be questioned that the amount of money through transfer pricing would rightfully be located in the marketing hub. The work we are doing will probably result in changing very significantly the amount of money you can shift to hubs, even where you have some form of real activity but where you do not have the absolute value creation.

Senator KETTER: Thank you. I now want to move to the UK's proposed diverted profits tax. What is the OECD's view in relation to that?

Mr Saint-Amans : It is an embarrassed view, I must say. We have sympathy for the need to move and there is an «electoral» context, if I understand correctly the situation in the UK, where the government, which has been very instrumental in supporting BEPS in raising the profile of this project, wanted to show that it was acting very, very quickly—even before the time line of the BEPS project, which is after a very important «electoral date in the UK. So on the one hand there is sympathy; on the other hand, as I tried to explain earlier, unilateral actions are not exactly in the sense of what we are trying to develop, which is, 'Let's wait for a comprehensive package and then countries will decide'. You are sovereign; you will decide what to do. But you will be better informed with better instruments and with a lesser risk of having disruptive actions, which might push other countries, like Australia, to take unilateral measures, which are not that great when you are negotiating a multilateral package.

Senator KETTER: Are you aware that the Australian Treasurer has indicated he will introduce a diverted profits tax in the next budget?

Mr Saint-Amans : We read the press and also talk to our Australian colleagues.

ACTING CHAIR: That is very good to know!

Senator KETTER: Can I press you to say what you think of those plans?

Mr Saint-Amans : I can repeat my previous response, which is a diplomatic response but which reflects also what we think. Again, we have sympathy for that. We tend to think that unilateral measures will be better after we have completed the action plan, but countries are sovereign and it is for them to decide what to do.

Senator CANAVAN: Thank you for appearing via video hook-up for us. I want to go to some of Senator Ketter's questions that he asked about the discussion paper on interest deductions. You mentioned that no countries currently apply a global application of a gearing rule. Is that correct what I heard from you?

Mr Saint-Amans : That is my knowledge at this point in time, yes. We have not identified a global application rule. It may be the case that in some countries it would exist. It is not to my knowledge.

Senator CANAVAN: That is something you said you are considering and doing work on. What is the timing on that? When do you see the action statement on this particular policy being finalised at this stage?

Mr Saint-Amans : On 8 October 2015, like all the others. We have just one deadline to present a comprehensive package.

Senator CANAVAN: Would it be premature at the moment for a country to adopt such a policy ahead of potentially getting an agreement in only a few months time?

Mr Saint-Amans : I would definitely say yes, on this one in particular. This one will be efficient, as many countries will move in the same direction. Otherwise, you face a real risk of shifting the capital or the way companies are funded.

Senator CANAVAN: I will just drill down a bit more. So you are saying while this potential global application rule might have some benefits, it is very important in your view that that be done in a multilateral fashion, not unilaterally?

Mr Saint-Amans : I think one of the reasons why the interest deductibility rules have not been so efficient so far is the risk of competition. If you introduce such legislation and your partners do not do so, then you face the risk of shifting the capital to other countries. That is why we have a lot of interest from all the BEPS partners—the 34 OECD countries and the eight G20 non-OECD countries—to move altogether. That is probably the action where the divergences of views are the smallest among countries. There is a real will to make progress and to move at the same time in the same direction.

Senator CANAVAN: I have a final question on this topic. You mentioned that there are differences in 'interest' definitions. Could you explain that a bit further? What are some of the differences in how different countries define interest?

Mr Saint-Amans : I am not sure I can give you specific examples there, but I am happy to follow up with you. But the very domestic definition of 'interest' is a bit different from one country to another. I do not have the specific cases in mind, but it depends on the financial instruments which are used. You may have some payments which will be quantified as interest, not as interest, as equivalent to interest or as dividends. So you have quite a diverse situation there, potentially.

Senator CANAVAN: Going on to another topic, you were asked earlier about Singapore. I thought I heard you say that there is real activity occurring in Singapore and therefore perhaps there is not as much concern about money potentially shifting just to be put in a cash box or something like that. I think they were the words you used. We had some evidence presented to us yesterday from the Australian Taxation Office which showed that in the 2012-13 financial year $100 billion worth of related party flows went from Australia to Singapore, and that was a $40 billion increase from a year earlier. The flows to Singapore from Australia are the highest of any country. Despite Singapore being only our fifth biggest trading partner, they are the highest in related party flows. In the case of that evidence that we have received, does that indicate to you that perhaps it is more than just marketing that is going on in Singapore, that something else might be happening—particularly in recent times, given that large increase in the flows?

Mr Saint-Amans : Singapore is a very small, very open, very efficient economy and they have extremely attractive tax regimes. What I tried to say earlier is that Singapore is not in the same situation as a number of other very small economies where you have only sham entities—full stop. In Singapore my understanding is that there are some requirements for real activity. But, that said, the profit that is located in Singapore is probably much bigger than what at the end of the BEPS project transfer pricing rules and other rules will result in locating in such a jurisdiction, given the activity which is performed there.

Senator CANAVAN: Moving on, Senator Milne asked you a little bit about the risk of BEPS perhaps not succeeding. I want to take you back to that. Again, we heard yesterday in the committee that there was a similar process in the OECD in 1998. I think it was called the OECD Harmful Tax Competition project. A tax professor here in Australia told us that that failed, in a sense. He used the word 'failed', although he did say there were some transparency initiatives that succeeded from that. Have you looked, as an organisation, at why that failed, and are there any lessons we could learn from that initiative?

Mr Saint-Amans : Absolutely. The answer is yes. The way we have designed the BEPS project is precisely to draw on the lessons of the limitations, not to say failure, of the harmful tax practices project which was launched by the G7 in 1996 and which resulted in a report by the OECD in 1998. The harmful tax competition project, at that time, was about identifying tax regimes in countries and telling those countries that they had to change those regimes. It worked in a sense, but then the governments turned to a more aggressive tax competition. I can give you the example of Ireland. Ireland had to dismantle a few regimes and decided at some point not to ring-fence anything and to lower the effective rates to the nominal tax rate for incorporated enterprises—to 12.5 per cent. But what this project back in the nineties did not do was address the overall framework with a view that you do not need all countries to move. What you need to do is to provide countries who are willing to protect their tax base with instruments which are recognised by the international community as sufficient and legitimate. You do not rely on another country to protect your own tax base. You fix the transfer pricing rules, which have not kept pace with the way global business operates, and which have, as a result, facilitated that divorce between the location of the activities and the location of the profits. To summarise the response to your very interesting question: yes, we have drawn on the lessons of the past. We are not at all in the same dimension in the same sense of direction for this project. Finally, we have extremely strong political support. We have a very tight time line so that we do not lose that support, and we are reporting to the leaders of the G20 on a regular basis and the finance ministers of the G20 on a regular basis to make sure that countries keep together.

Senator CANAVAN: You mentioned Ireland. Are there not still risks? You mentioned before that this, in your view, was a cooperative game, but does it still have some prisoner dilemma elements that particular countries may seek to depart from whatever is decided upon and become an attractive base to gain investment, to gain economic activity? Is that still a potential risk of whatever we do? If 20-odd countries come together and agree and then one of them decides they are going to do something different and attract a lot of capital and economic activity, could that happen out of this process?

Mr Saint-Amans : Ireland is a good example, I think. Ireland has shown that they are part of the BEPS project. They are not resisting anything, but rather they are participating. You may have seen last year, even though it was largely symbolic—it was a good symbol—that they did put an end to what we call the 'double Irish' with a grandfathering clause. But the signal is here. Ireland is changing. Ireland has agreed on the minimum standard on treaty shopping. Ireland is participating fully in that project and will implement—I have no doubt about that—the conclusions which will be reached. Why is it so? Because you have multilateral action. Everybody has to gain out of multilateral action. If the small, open economies, which actually can be harmed by the BEPS project, do not participate in the BEPS project or try to block it, then other countries will take unilateral measures which will hit all the countries, in particular the small, open economy. That is the dilemma for all the countries. Do I participate losing something, or do I not participate but then I may lose even more? What I see is not the risk of some countries being free riders and trying to attract investment by still offering this ability to host investment without the real activity, because, again, other countries will have the means to protect their tax base. What I see, and I do not know whether it is a risk or an opportunity, is the fact that tax competition will not go away. What we are putting an end to is unfair tax competition or tax competition which does not make sense—in other words, the system where you can locate profits in zero tax jurisdictions, where nothing is happening. What is going to happen, I think, is that there will be some pressure to reduce corporate income tax in high-tax countries, from the high 30s, as is the case in the US, in France or in other countries, to probably the high 20s, and, for the small, open economies, probably between 10 and 20 per cent. But these will be nominal and effective rates. What was not fine with Ireland was that their nominal rate was 12.5 per cent but, through the double Irish, the effective rate was close to zero per cent.

Senator CANAVAN: This is my final question. If what you are saying is true, though, if this is a game and we are playing a game between small, open economies and larger economies, is it not worthwhile for some of these economies to be signalling issues like Google taxes or other options to establish a credible threat, to signal to these open economies: 'If you try to free ride'—in your words—'we have other options and other tools and you're best off being in the tent and being involved'?

Mr Saint-Amans : What you describe is exactly what we are trying to do with the BEPS project.

Senator CANAVAN: That is nice and succinct. I will leave it there. Thank you again.

CHAIR: Thank you, Mr Saint-Amans, for your participation. I am not quite sure what time it is at the moment in Paris.

Senator EDWARDS: It is early.

CHAIR: It is early in the morning, I believe. Thank you for your participation in our inquiry.

Mr Saint-Amans : Thank you, Chair.

Senator EDWARDS: You have added a great deal of prestige to our inquiry.

Senator MILNE: Thank you very much.

Senator EDWARDS: Au revoir.

Mr Saint-Amans : Au revoir. Merci.

Committee adjourned at 17:01