Rewriting the Fundamentals of International Taxation: the OECD BEPS Action Plan


The Organization for Economic Co-operation and Development has released its ambitious action plan to address base-erosion and profit-shifting. If the political will exists to enact the changes envisaged by the action plan, multinationals must take steps to proactively engage with the principles and policies underlying the plan’s stated aims.


In February 2013, the Organization for Economic Co-operation and Development (OECD) released its long-awaited report on base-erosion and profit-shifting (BEPS). The topic had become high on the political agenda in the preceding months owing to intense media scrutiny of the current principles of international taxation. Please see our previous coverage on the BEPS Report on the Transfer Pricing 360 blog.

Key Findings in the BEPS Report

The BEPS Report concluded that there was no empirical evidence that proved either the existence of BEPS or how BEPS could be affecting the tax-take of any given country. It also recognized that multinationals have a duty to their shareholders to minimize their tax bills, and it conceded that the planning strategies being castigated in the press simply involved multinationals legitimately using the current rules made available to them, such as the principle of separate legal personality.

The report concluded, however, that the current rules on international tax are outmoded because they have failed to keep pace with the way multinationals now do business. It recommended the development of an action plan to address BEPS and the underlying legal and tax bases that facilitate it. That action plan was released today.

The Action Plan: Overview

The action plan can be found by following this link. In a preview meeting about its content on 17 July, the OECD stated that the action plan “represents a unique opportunity that comes along once in a century to rewrite the principles of international taxation” and said its vision is to facilitate the creation, via the action plan, of a set of principles “that will last for the next 100 years”. Viewed against that background, it is clear that the OECD has high hopes for this initiative and the action plan itself certainly does not disappoint in terms of ambition from a content or timing perspective.

The Action Plan: Contents and Proposed Steps

The action plan identifies an extensive list of international tax principles for overhaul, ranging from the transfer pricing policies applicable, to intangibles, to the introduction of model “controlled foreign company” codes and changes to the “permanent establishment” definition. It also contains a timetable for reform, with deadlines for each action point. Most of these fall within the next 12 to 24 months, with the OECD playing a facilitative role in the process.

Viewed in insolation, the ambitious content of the action plan does not particularly set it apart from similar initiatives that have gone before, including, for example, the OECD’s previous work on Harmful Tax Practices. What does make the action plan arguably unique (and certainly more deserving of serious and considered thought) is the fact that it has apparently already been seen and approved in principle by the G20 Finance Ministers. Many of the “source” states, including Brazil, China, India, Russia and South Africa, have also, according to the OECD, adopted the action plan in principle. This is remarkable given the short passage of time since the BEPS Report was published in February this year. Indeed, at the 17 July preview meeting, the OECD commented that it had been “amazed at the speed of progress and the fact that we are reaching international consensus at the political level so quickly”. 


That being said, the OECD itself has no mandate to change the law so it relies on the take-up from interested sovereign states. And therein lies the fundamental problem for an initiative such as this: it relies on domestic implementation on a country-by-country basis. As there will inevitably need to be a degree of latitude in the way in which states adopting the action plan will be permitted to tackle BEPS, there can never be a perfectly co-ordinated, supra-national action against BEPS. In practical terms, this means that something like the action plan will not be a panacea for all the perceived shortcomings of the current principles of international taxation.

This is simply a function of the existence of national sovereignty in tax policy. There is only so far that states can go in order to fetter their neighbours’ abilities to utilise tax policy-making as a generator of inward economic investment. This is particularly true in the context of states pursuing a policy of capital import neutrality.

Take for example the United Kingdom’s newly-introduced Patent Box, which from one perspective could be interpreted as a base-eroding tactic in favour of the UK Exchequer. The OECD cannot force the United Kingdom to abandon the regime and, given its relatively recent appearance on the statute books, it seems highly unlikely that the United Kingdom would voluntarily remove the regime. In addition, it simply cannot have been enacted without due thought or consideration having already been given to the public and prominent work of the OECD in the BEPS space.

Another example would be country-by-country reporting which, as discussed below, is being proposed by the action plan as a deliverable. The US Treasury’s published position is that they reject public country-by-country reporting, although they are open to enhanced information exchange between taxing authorities.

These two basic examples show that in real terms, perfect alignment on international issues of such gravity is simply unfeasible. There can never be a truly global solution; principles are easier to agree in broad terms at an international policy level than they are to implement on the ground.

Notwithstanding this point, the action plan raises points that multinational enterprises operating in a global environment cannot afford to ignore.

The Action Plan: Deliverables

Particular areas on which the action plan has stated deliverables include the following:

  • The adoption of a multilateral international treaty that will automatically override existing double taxation treaties. The new treaty will contain anti-avoidance provisions, such as a limitation on benefits clause, that will reduce the opportunity for “treaty shopping” and tax avoidance involving the abuse of tax treaties.
  • The adoption of a new definition of “permanent establishment” for e-business and the digital economy, which will be taken forward by an OECD taskforce specifically briefed to develop this concept.
  • The introduction of country-by-country reporting, meaning multinationals will have to publicly report which jurisdictions they operate in and the amount of tax they pay in each jurisdiction.
  • An end to the use of Commissionaire structures, which are commonly used in civil law jurisdictions to prevent the creation of a “permanent establishment” and are akin to an agent with an undisclosed principal from a common law perspective.
  • The roll-back and dismantling of “harmful tax regimes,” with a particular focus on state-sponsored initiatives that go beyond what the OECD considers are legitimate measures to encourage inward investment.
  • Enhanced information exchange, with a focus on moving towards automatic and mandatory exchange of information between tax authorities in respect of cross-border transactions.
  • Focused rules intended to shut down the use of hybrid instruments and hybrid vehicles in achieving cross-border tax arbitrage benefits.
  • An acceleration of the OECD’s long-running intangibles project so its deliverables are achieved rapidly.
  • An improvement to existing Mutual Agreement Procedures – possibly by the introduction of mandatory arbitration rights – in an effort to enhance taxpayer protection and guard against the possibility that a state delivering on the action plan inadvertently visits double taxation upon a given taxpayer.


As noted above, the ultimate value of the action plan will be determined by its implementation. In truth, given that the current opportunities for international tax planning and BEPS are simply a consequence of the rules on international tax enacted by states (rather than anything multinationals have created of their own accord), it is possible that little may come of the action plan if those states ultimately feel more inclined to guard their national interests when the cards are on the table.

That being said, it seems possible that tackling BEPS has gained sufficient political momentum for some form of change to occur in due course – certainly one would think in the automatic information exchange space and in the context of an amended permanent establishment concept that seeks to align taxing rights more closely with economic activity.

Next Steps for Multinationals

If there is enough political will to push-through even some of the changes envisaged by the action plan, then in view of its envisaged timeframe multinationals need to act now in order to proactively engage with the principles and policies underlying the action plan’s stated aims. All multinationals should be keeping fully abreast of developments in this sphere and should be actively considering the potential implications of the action plan on their global value supply chains, particularly their global effective tax rate. Legacy structures will need to be revisited, especially where anticipated tax benefits are accruing annually and existing planning falls within the scope of a deliverable under the action plan. New approaches will also need to be developed.

We are entering an exciting and challenging time for multinationals. The OECD has made it very clear that it wants to drive a fundamental re-write of the principles of international taxation that were laid down almost a century ago. The challenge for multinationals will be to ensure that their existing structures evolve in parallel and are fit for purpose for the next century. The challenge for the sovereign states involved will be putting the stated principles into practice.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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