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IRS Commissioner hints at changes to voluntary disclosure program at OECD conference

June 5, 2014

The Organization for Economic Co-Operation and Development (OECD) recently wrapped up its 2014 International Tax Conference, which focused largely on the group’s Base Erosion and Profit Shifting (BEPS) project. IRS Commissioner John Koskinen delivered the keynote address at the conference and, in addition to speaking about the importance of international tax compliance and efforts that IRS and the U.S. government have made to combat offshore tax evasion, he offered insight into changes that IRS is considering making to its voluntary disclosure program to better accommodate individuals whose compliance failures weren’t willful.

Background on the OECD. The OECD is an international organization that “provides a forum in which governments can work together to share experiences and seek solutions to common problems.” It currently has 34 member countries, including the U.S.

Although the OECD has no lawmaking authority, it is an influential organization that has recently done a good deal of high profile work on the issue of base erosion and profit shifting (BEPS; see below).

Background on BEPS. According to the OECD’s website, BEPS “refers to tax planning strategies that exploit loopholes in tax rules to make profits disappear for tax purposes or to shift profits to locations where there is little or no real activity but where they are lightly taxed, resulting in little or no overall corporate tax being paid.” In most cases, BEPS strategies are legal.

The OECD “is looking at whether, and if so why, the current rules allow for the allocation of taxable profits to locations different from those where the actual business activity takes place.” Its report suggested that the OECD and G-20 countries take a coordinated approach to developing an action plan that could successfully deter base erosion and profit shifting behaviors by multinationals. (See Weekly Alert ¶  14  04/25/2013 for more details on the OECD’s report on BEPS and for a Treasury official’s discussion of the U.S.’s position on BEPS.)

Back in July of 2013, the OECD issued its action plan which lists 15 specific actions to address BEPS. Among other things, it called for new international standards on corporate taxation, a better alignment of taxation with income-producing activities, improvements to the current transfer pricing rules, and greater overall transparency. (See Weekly Alert ¶  7  07/25/2013 for more details, and Weekly Alert ¶  40  03/27/2014 for details on a subsequently issued discussion draft.) The BEPS action plan was endorsed by the G20 Finance Ministers soon after it was issued.

2014 Conference. The 2014 OECD International Tax Conference was hosted by the OECD with the U.S. Council for International Business (USCIB) and the Business and Industry Advisory Committee (BIAC), in cooperation with a number of other tax groups. During the conference, there were a series of panels that addressed OECD tax projects and featured a number of different speakers from the business community, the OECD, and the U.S. government.

The primary topic covered at the conference was BEPS, with a specific focus on transfer pricing/intangibles, country-by-country reporting, the digital economy, treaty abuse, hybrids (i.e., arrangements used to achieve unintended double-non-taxation or long-term tax deferral), FATCA, and the common standard for automatic exchange of information.

Business community response. In a letter to Treasury Secretary Jacob Lew, the Business Roundtable (“an association of chief executive officers of leading U.S. companies working to promote sound public policy and a thriving U.S. economy”) described the BEPS project as “ostensibly initiated to address potential gaps in the taxation of cross-border income and improve tax coordination among jurisdictions to prevent the creation of “nowhere income.”” The group stated that, while it “respects the rights of governments to assert tax, where proper, on income arising within their jurisdictions and encourages companies to comply with the tax laws,” it was concerned that “the project is being used by some governments for the purpose of imposing extraterritorial taxes on U.S. business income.”

The group pointed to the risks of an increased likelihood of double taxation, direct revenue loss to the U.S., and additional disadvantages to U.S. enterprises relative to their foreign competitors (in addition to the U.S.’s worldwide tax system).

Political response. In a press release, House Ways & Means Committee Chairman Dave Camp (R-MI) and Senate Finance Ranking Member Orrin Hatch (R-UT) further challenged the BEPS project, characterizing it as a way for other countries to simply increase taxes on American taxpayers. In a joint statement, they said that “[w]hen foreign governments—either unilaterally or under the guise of a multilateral framework—abandon long-standing principles that determine taxing jurisdiction in a quest for more revenue, Americans are threatened with an un-level playing field.”

They also expressed concerns that the OECD’s “ambitious” time frame for the BEPS project raised serious questions about the U.S.’s ability to fully participate in the negotiations because of the limited ability to review, analyze and comment on the rules being proposed. Representative Camp and Senator Hatch concluded that the best way for the U.S. to address the potential problem of BEPS was to enact comprehensive tax reforms that lower the corporate rate to a more internationally competitive level and modernize the badly outdated and uncompetitive U.S. international tax structure.

Click here for Press Release “Camp, Hatch Statement on 2014 OECD Tax Conference.”

Commissioner Koskinen’s remarks. In prepared remarks at the conference, IRS Commissioner John Koskinen spoke of the importance of international tax compliance and efforts that IRS and the U.S. government have made to date to combat offshore tax evasion. He spoke of the collaborative efforts of international governments in working “together to ensure that taxpayers comply with the tax obligations of their home jurisdictions” and achieving international tax transparency. He said that this collaboration can be seen in the “process by which FATCA will soon go into effect,” and also referred to the Common Reporting Standard, or CRS, which “will soon be adopted globally.” He also stated that, while the policy issues and goals of tax transparency are settled, the practical means of accomplishing automatic information sharing are still in the works.

Koskinen emphasized that, in addition to maintaining strong enforcement programs, IRS “has also sought to encourage taxpayers to come into compliance voluntarily.” According to Koskinen, IRS’s offshore voluntary disclosure programs (OVDPs), the first of which was made available in 2009 and different versions of which were again made available in 2011 and 2012, have resulted in more than 43,000 voluntary disclosures from individuals who paid more than $6 billion in back taxes, interest, and penalties.

However, Koskinen stated that, while the 2012 OVDP and its predecessors were successful, IRS may enhance the program “to accomplish even more.” He said that the agency is “considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety.” He drew a distinction between U.S. citizens who have lived abroad for many years and U.S.-resident taxpayers who were willfully hiding their investments overseas and stated that “[w]e expect we will have much more to say on these program enhancements in the very near future.”

RIA observation: The National Taxpayer Advocate has previously criticized the 2009, 2011, and 2012 OVDPs as prescribing a “one-size-fits-all” approach with a stiff penalty, failing to draw any meaningful distinction between those who willfully vs. inadvertently fail to report foreign accounts. She stated that the penalties discouraged taxpayers from self-correcting errors and basically placed greater burden on IRS to commit limited enforcement resources as a result. (See Weekly Alert ¶  12  01/17/2013 for more details.)

With regard to FATCA, Koskinen acknowledged that its enactment “has had a dramatic impact on the global financial system” and that its implementation “has been difficult and costly.” He also spoke of the need for intergovernmental consensus with respect to the format for which FATCA data is to be transmitted, thanking the OECD for helping “to ensure that FATCA information reports can be used efficiently and effectively, not only by the IRS but by our reciprocal FATCA partners as well.” He stated that IRS is currently working on a new system for electronic data exchange that will be called the “International Data Exchange System,” or IDES, and emphasized that IRS is taking privacy and security concerns into account.

Finally, Koskinen addressed the main topic of the conference—BEPS. He stated that IRS “fully support[s] the goal of developing a coordinated and comprehensive action plan to update our international tax rules to reflect modern business practices” and hopes that “this coordinated work will help prevent, rather than exacerbate, the double taxation disputes that could arise if countries unilaterally attempt to address these issues without consensus-based principles.” However, maintaining a cautious tone, he urged the group to consider the practical implications of its proposals, for businesses as well as for tax administrations.