DRTP Comments on the Public Discussion Draft BEPS Action 12: Mandatory Disclosure Rules

The OECD recently released the Public comments received on discussion draft on Action 12 (Mandatory Disclosure Rules). They are available here.

We reproduce below DRTP Consulting comments on the matter. The opinions expressed in the document below are those of the author. For a pdf version click here.


April 29, 2015
Committee on Fiscal Affairs (CFA), OECD
By email: MandatoryDisclosure@oecd.org

We are pleased to comment on the public discussion draft BEPS Action 12: Mandatory Disclosure Rules (the OECD draft) through the consultation taking place from March 31, 2015 to April 30, 2015.

This document may be posted on the OECD website. Full credit goes to Robert Robillard, DRTP Consulting Inc.[1]


It is with great interest that we read the OECD public discussion draft issued on March 31, 2015 on BEPS action 12 which pertains to mandatory disclosure rules. Annex VI of the draft provides with a specific set of “questions for consultation” (a summary that is). These questions are for the most part technical in nature.

This should come as no surprise since the philosophical foundations for mandatory disclosure rules shall remain unchallenged according to the OECD. Paragraphs 8 and 9 of the draft are indeed explicit on that matter. For instance, paragraph 9 indicates that “taxpayers agree to make full disclosure of material tax issues and transactions they have undertaken to enable tax authorities to understand their tax impact”.

To which extent do “taxpayers” indeed “agree” with this process is certainly questionable. But we shall not dwell on this issue here. The rest of this text will instead provide some general thoughts and comments on the relevance of mandatory disclosure rules in a modern tax system entrenched in the core belief that BEPS is a tax compliance issue.

To self-assess or to mandatory disclose?

Most tax regimes around the world are based on self-assessment and voluntary compliance.[2] As pointed out in paragraph 25 of the OECD draft, self-assessment is supplemented by “information and compliance initiatives”, usually with respect to precise categories of taxpayers or type of transactions, which are in fact part of the self-assessment process.[3]

Any tax administration is then expected to enforce due diligence and compliance with the law by its “taxpayers”. This is in a nutshell what tax administrations are primarily meant to be. In Canada, paragraph 2 of Information Circular IC71-14R3 The Tax Audit reminds “taxpayers” of all shapes and sizes that “while there is, in Canada, a high standard of public compliance with the law, a self-assessment tax system can be maintained only through vigilant and continuous inspection of returns. The primary purpose of the tax audit is to monitor and maintain the self-assessment system. As such, it plays an important role in the achievement of the objectives of the Department which are to collect the taxes imposed by law through the encouragement of voluntary compliance and to maintain public confidence in the integrity of the tax system.”

This very notion of self-assessment initially precludes the necessity of any type of mandatory disclosure regime. Self-assessment in its most basic quintessence is about voluntary disclosure of one’s tax burden.

However, in line with the rule of law, self-assessment for tax purposes has long been meant to self-assess oneself in such a way as to minimize the actual tax burden. In Canada, as elsewhere, the merits and legitimacy of tax planning, whether domestic or international, has been widely recognized by case law: “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.”[4]

From that perspective, any type of mandatory disclosure rules improperly infringes this enduring tax principle as it forces taxpayers to openly signal their strategies to the tax administrations. One of the questions that therefore arise is why is there a need in the first place for mandatory disclosure rules?

How come mandatory disclosure?

At first, any OECD member countries would forcefully proclaim that mandatory disclosure rules are rendered compulsory in international taxation by the alleged BEPS phenomenon. But the OECD draft on BEPS action 12 suggests a somewhat more disturbing and sinister objective for mandatory disclosure rules. It is indicated in paragraph 10 that “both mandatory disclosure and co-operative compliance are intended to improve transparency, risk assessment and ultimately taxpayer compliance. They do this is [sic.] in different ways and may be aimed at different taxpayer populations, for instance co-operative compliance programmes often focus on the largest corporate taxpayers. However, as mentioned later in this document, mandatory disclosure can reinforce the effectiveness of a co-operative compliance regime by ensuring that there is a level playing field in terms of the disclosure and tax transparency required from all taxpayers.”

The draft would therefore have the reader believe that mandatory disclosure is in fact a natural complement to self-assessment for some “categories of taxpayers”. Moreover, the OECD draft would like us to trust that mandatory disclosure rules are required to ensure a level playing field in the taxation arena. Finally, the draft suggests that mandatory disclosure rules are requisite to better risk-assess taxpayer compliance. Those statements indirectly imply, on the one hand, that some categories of taxpayers have gone rogue, in true unsubstantiated BEPS fashion, and surprisingly, on the other hand, that tax administrations are unable to properly enforce compliance in their respective tax jurisdictions.

But isn’t it tax administrations role to make rules which may be enforced to start with? According to the OECD action plan on BEPS, the answer is affirmative: “every jurisdiction is free to set up its corporate tax system as it chooses. States have the sovereignty to implement tax measures that raise revenues to pay for the expenditures they deem necessary. [However] An important challenge relates to the need to ensure that tax does not produce unintended and distortive effects on cross-border trade and investment nor that it distorts competition and investment within each country by disadvantaging domestic players.”[5]

Who should then be in charge of that alleged “important challenge” emanating from the existence of cross-border transactions? Remarkably, the OECD draft suggests that it should be the taxpayers involved in cross-border transactions by the obedience to mandatory disclosure rules, not tax administrations. It is an unsettling thought to consider that the burden of the inadequacies of any set of rules or of any set of interactions between various set of rules should be shouldered by the “taxpayers”.

This seemingly accelerating tax compliance trend directly contravenes at its core with the State sovereignty principle better known as the Westphalian sovereignty, as it was first defined in 1648. On that latter aspect of the issue, even the OECD member countries recognize the basic principle of Westphalian sovereignty, at least as it pertains to the potential implementation of a global formulary apportionment system. With respect to that controversial matter, paragraph 1.22 of the OECD Transfer Pricing Guidelines indicates that it would “require substantial international coordination and consensus” for any chance of a successful implementation.

Coming back to mandatory disclosure rules, it would now seem that they are meant to compensate for the lack of ability of tax administrations to properly enforce incoherent, usually artificially complex, and largely uncoordinated domestic tax rules with international tax principles. Mandatory disclosure rules are consequently framed to address the purported “natural” limitation of domestic tax rules and the suggested shortcomings of the international tax principles designed in the 1920’s.

However, we would posit that the remedies are in fact as clearly misunderstood as is the actual tax sickness in front of us. At its core, the alleged BEPS phenomenon, from which the purported need for mandatory disclosure rules arose, finds its source in the inherent and ever-increasing complexity of the domestic tax regimes (and multiplication of rules) all over the world.

Complexity, which is first created from an ever-increasing number of rules in domestic tax regimes and from the interaction of these regimes, ultimately feeds the creation of an even greater numbers of rules. This vicious circle has been going on for the last 60 years all around the world. It is precisely this artificially induced complexity by sovereign States all around the world which destroy any chance of a level playing field or for any sort of tax transparency between tax administrations.

Conclusion: Where to then?

As the mathematics and economics professor Donald G. Saari wrote in 1995:

“A lesson learned from modern dynamics is that natural systems can be surprisingly complex. No longer are we astonished to discover that systems from, say, biology (e.g., [GOI, Ma1, Ma2]) or the Newtonian n-body problem (e.g., [MM, Mo, Mk, SX, X]) admit all sorts of previously unexpected dynamical behavior. This seeming randomness, however, sharply contrasts with what we have been conditioned to expect from economics. […] what we do know indicates that even the simple models from introductory courses in economics can exhibit dynamical behavior far more complex than anything found in classical physics or biology. In fact, all kinds of complicated dynamics (e.g., involving topological entropy, strange attractors, and even conditions yet to be found) already arise in elementary models that only describe how people exchange goods (a pure exchange model).”[6]

There is an insight articulated in comprehensible terms, unlike most available tax law, that may greatly benefit every BEPS aficionado who believes that “BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation [or] arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place.”[7]

Getting on with the “program”, we obviously do not entertain any doubt whatsoever that the BEPS train will keep chugging along. After all, the OECD stated at the onset of the BEPS initiative that “if other taxpayers (including ordinary individuals) think that multinational corporations can legally avoid paying income tax it will undermine voluntary compliance by all taxpayers – upon which modern tax administration depends.”[8]

The fix is therefore clearly in: pay they shall, at any cost. The following is worth quoting one more time as it perfectly represents the BEPS initiative on our view:

– “Would you tell me, please, which way I ought to go from here?

– That depends a good deal on where you want to get to.

– I don’t much care where.

– Then it doesn’t much matter which way you go.

– So long as I get somewhere.

– Oh, you’re sure to do that, if only you walk long enough.”[9]

Robert Robillard, Ph.D., CPA, CGA, MBA, M.Sc. Economics
Senior Partner, DRTP Consulting Inc.
Professor, Université du Québec à Montréal

April 29, 2015


[1] Robert Robillard, Ph.D., CPA, CGA, MBA, M.Sc. Economics, is Senior Partner at DRTP Consulting Inc. He also teaches tax at Université du Québec à Montréal; 514-742-8086; robertrobillard@drtp.ca. Robert is the former Transfer Pricing Chief Economist at RBRT Transfer Pricing (RBRT Inc.) and a former Competent Authority Economist and Audit Case Manager at the Canada Revenue Agency. The opinions expressed in this document are those of the author.

[2] In Canada, the preamble of subsection 150(1) of the Income Tax Act indicates that “a return of income that is in prescribed form and that contains prescribed information shall be filed with the Minister, without notice or demand for the return, for each taxation year of a taxpayer”.

[3] In Canada, for transfer pricing and international tax purposes, the T106 Information Return of Non-Arm’s Length Transactions with Non-Residents and the T1134 Information Return Relating To Controlled and Not-Controlled Foreign Affiliates forms immediately both come to mind.

[4] Inland Revenue Commissioners v. Duke of Westminster [1936], AC 1, [1935] All ER Rep 259, 51 TLR 467, 19 TC 490, p. 14. See also Shell Canada Ltd v. Canada, 1999 3 SCR 622, paragraph 45.

[5] OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, July 19, 2013, p. 39.

[6] Donald G. Saari, 1995, “Mathematical Complexity of Simple Economics”, Notices of the American Mathematical Society, Vol. 42, No. 2, pp. 222-31.

[7] OECD (2013), Op. cit., p. 10.

[8] OECD (2013), Op. cit., p. 8.

[9] Lewis Carroll, Alice in Wonderland; the Cheshire Cat in answer to Alice’s questions…

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Senior Partner, DRTP Consulting Inc.
514-742-8086; robertrobillard “at” drtp.ca

DRTP Consulting Inc. solutions go beyond transfer pricing and international tax solutions. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. DRTP Consulting Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from DRTP Consulting Inc. as required.

Posted by drtp On 4 May 2015