The OECD’s Committee on Fiscal Affairs (CFA) has published its Action Plan to address Base Erosion and Profit Shifting (BEPS). This sweeping international effort aims to combat a comprehensive range of international tax reduction techniques on a scale that is without precedent.
The Action Plan follows from the directive given the CFA by the G20 group of countries to better address global corporate taxation and builds upon the general concepts set forth in the OCED report on BEPS issued in January 2013. The Action Plan asserts: “The BEPS project marks a turning point in the history of international co-operation on taxation.”
The Action Plan will require coordinating individual OECD member (and non-member) countries to act individually (e.g., changes to legislation, regulations, administrative practices), bilaterally (e.g., through changes to bilateral treaties) or multilaterally (e.g., multilateral treaties or changes to OECD Guidelines) . Moreover, the scale of the Action Plan is vast. It has the support of the finance ministers of the G-20 - the world’s largest economies –and it includes the involvement of many emerging economies.
The CFA members reached the following general conclusions with respect to BEPS:
Fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it.
New standards must be designed to ensure the coherence of corporate income taxation at the international level.
A realignment of taxation and relevant substance is needed to restore the intended effects and benefits of international standards, which may not have kept pace with changing business models and technological developments.
The actions implemented to counter BEPS cannot succeed without further transparency, nor without certainty and predictability for business.
Fifteen action areas
The BEPS Action Plan sets forth 15 general areas for further action by OECD member and non-member interested countries. These Actions Steps and a brief summary of each step are set forth below.
1. Address the tax challenges of the digital economy
Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation.
2. Neutralize the effects of hybrid mismatch arrangements
Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralize the effect (such as double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities.
3. Strengthen CFC rules
Develop recommendations regarding the design of controlled foreign company rules.
4. Limit base erosion via interest deductions and other financial payments
Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments.
5. Counter harmful tax practices more effectively, taking into account transparency and substance
Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime.
6. Prevent treaty abuse
Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.
7. Prevent the artificial avoidance of PE status
Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions.
8, 9 and 10: Assure that transfer pricing outcomes are in line with value creation
Develop rules to prevent BEPS by moving intangibles among group members.
9. Risks and capital
Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members.
10. Other high-risk transactions
Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties.
11. Establish methodologies to collect and analyze data on BEPS and the actions to address it
Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis.
12. Require taxpayers to disclose their aggressive tax planning arrangements
Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules.
13. Re-examine transfer pricing documentation
Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business.
14. Make dispute resolution mechanisms more effective
Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.
15. Develop a multilateral instrument
Analyze the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.
The Action Plan sets forth an aggressive timeline, with deadlines which generally range from 12 to 24 months.
Nearer terms goals (12-18 months) include actions relating to:
hybrid mismatch arrangements, treaty abuse, transfer pricing of intangibles, documentation requirements for transfer pricing purposes, a report on identifying issues raised by the digital economy and possible actions to address them and part of the work on harmful tax competition.
Actions to be delivered in two years include:
CFC rules, interest deductibility, preventing the artificial avoidance of PE status, the transfer pricing aspects of intangibles, risks, capital and high-risk transactions, part of the work on harmful tax practices, data collection, mandatory disclosure and dispute resolution.
Actions that may require more than two years include:
the transfer pricing aspects of financial transactions, part of the work on harmful tax practices and the development of a multilateral instrument to implement changes to bilateral tax treaties.
What should multinationals do now?
The BEPS project is aimed at low-taxed or non-taxed profits that have been artificially shifted away from the jurisdictions where value is being created - not at low-taxed profits per se. Therefore, it should be possible, even after the BEPS recommendations are adopted, to support low-taxed profits provided significant value-creating activities are conducted in tax-favorable jurisdictions.
Most of the BEPS Action Plan items will require local jurisdictions to adopt changes in laws, regulations or treaties. Multinationals should therefore monitor these develops to make sure that their views are heard and taken into account before final change to existing rules and procedures are made.
The Action Plan is still just a plan, not final guidance. That being said, the publication of the BEPS Plan does provide taxpayers with some time to modify and enhance existing structures to better align with the general principles.
The OECD will invite comments from business and civil society representatives as the Action Plan is developed.