A forum for discussing tax

When the OECD makes statements about the tax practices of a country, the tax community sits up and takes notice.

Peter O’Halloran - Tax advice

The Organisation for Economic Co-operation and Development (OECD) plays a major role in the determination of the economic policy of countries around the world. Based in Paris, the OECD was established in 1961 with the aim of guiding Europe and its leaders to ensure that the mistakes that were made in the aftermath of World War I were never repeated.

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The organisation currently comprises 34 states. Most are from Europe, but the US, Canada and many Asian and Pacific Rim countries are also members. In addition, the organisation has close links with 70 non-member countries, including South Africa. The OECD interacts with parliaments of member states, and is actively involved with the European Council and the World Bank.

Its activities include the gathering of information and statistics. When actions of a certain nation are found to be harmful, for instance from a tax point of view, the OECD publishes warnings or might even blacklist a country. The OECD’s Harmful Tax Practices project is one of its major undertakings. Examples of these include:

  • Misuse of hybrid agreements involving ‘double dipping’, where an amount is received as capital by a beneficial owner, but expensed as a revenue deduction by the payer.
  • Misuse of corporate losses.
  • Tax base erosion in a high tax jurisdiction and shifting of profits to a low tax jurisdiction (transfer pricing arrangements).

More uniform
The project is ongoing. Harmful schemes are analysed and categorised. Member states are then able to take steps to amend their legislation in order to combat these schemes. Because they are faced with similar challenges – such as the challenge to their tax bases by countries that offer various tax incentives – the solutions tend to be similar. Largely thanks to the efforts of professionals such as those who make up the Harmful Tax Practices project, tax legislation is becoming more uniform around the world.

The OECD is intimately involved in the interpretation and drafting of double tax avoidance agreements. It provides a forum for tax authorities and tax professionals within the EU and the member and partner states to discuss all manner of cross border tax and VAT issues. Papers and discussion documents are then published. Again, this serves to reinforce the trend towards uniform tax practices among the more developed countries of the world.

Legitimate risks
On the downside, however, the efforts of the OECD may serve to limit the opportunities for the international entrepreneur to legitimately avoid tax. Its efforts have also resulted in more bureaucracy for those who operate internationally. The OECD has made it more difficult for risk-taking businesspeople to enjoy more of the fruits of their labours. As such, a certain amount of commerce is stifled, because high tax regimes tend to deter the taking of legitimate business risk. The rewards simply are too low.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected] with ‘Tax’ in the subject line of your email.