The Global Crackdown on Profit Shifting

by Pepper Hamilton LLP

This article was published in CFO's Special Report on Corporate Tax released on August 25, 2014. It is reprinted here with permission.

CFOs of multinationals need to prepare by assessing how much their companies engage in profit shifting to cut their taxes.

Do you have responsibility, whether direct or dotted line, for the tax function in your company?

Does your company have, or plan to have, operations outside the United States? If so, you need to know about a significant global tax initiative.

The initiative is known as the “base erosion and profit shifting” project. BEPS “refers to tax planning strategies that exploit gaps and mismatches 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 the taxes are low resulting in little or no overall corporate tax being paid,” according the Centre for Tax Policy and Administration of the Organisation for Economic Co-operation and Development (OECD). In simplest terms, the project seeks to stop the erosion of the tax bases of member countries.

The project began when the global tax planning of companies like Starbucks and Apple came to light in Europe. European governments were up in arms that U.S. multinationals could arrange their businesses to have “stateless income” – income not taxed in any jurisdiction. U.S.-style tax planning was seen as highly objectionable and too complex to audit.

The global initiative isn’t limited to companies as big as Starbucks or Apple. It will change the record-keeping and tax reporting of all companies with non-U.S. operations, and it may have a direct bottom-line impact on the taxes of your company.

The BEPS project is being run by the OECD. In September 2014 final reports on four topics are due out. Those are:

  • Standard transfer-pricing documentation. The OECD action plan calls for countries to re-examine their requirements for multinationals’ transfer-pricing documentation. That includes providing information on the allocation of income, economic activity and taxes paid based on a common template for all counties (or country-by-country reporting). The documentation is intended to allow each country to determine where the multinational’s operations are located and where its profits are earned and taxed. If the United States adopts this, which appears likely, that may significantly increase the resources companies need dedicate to the collection and reporting of the information.
  • Managing hybrid mismatches. International companies often use hybrid instruments and hybrid entities in international tax planning to achieve tax savings. They do it by taking advantage of the disparate treatment of the instrument or entity among two or more countries. For example, a U.S. corporation might get an interest deduction on an instrument that’s treated as debt for U.S. tax purposes, while the payee company might be in a jurisdiction that considers the instrument equity. For the payee, the payment would be considered a dividend payment that can be excluded from income or taxed at a lower rate. Similarly, companies can now use the disparate tax treatment of entities to obtain double deductions or to take advantage of treaty benefits. The report is likely to propose common legislative changes to avoid taxpayers taking a deduction in one country and not having income in another, or using hybrid entities to achieve double deductions.
  • Addressing challenges of the digital income age. The concern is that while companies realize value from customers in outside countries via digital sales, they’re not subject to tax in that country if the company doesn’t have a physical presence there. While the issue is under review, it doesn’t appear the OECD report will recommend significant changes to the current standard for jurisdiction to tax. Some countries, however, appear to be getting ready to implement self-help solutions.
  • Treaty abuse Unlike the treaties the U.S. negotiates, many countries have treaties that don’t contain restraints on treaty shopping. The report is likely to recommend that a specific anti-abuse rule be included in new treaties.

Over the course of the next year, OECD will consider a bevvy of issues related to the project. They’re likely to include strengthening rules regarding controlled foreign corporations and limiting base erosion via the use of certain financial products. Transparency and transfer pricing are also likely to be on the docket.

The U.S. Response

Much of what is in the OECD action plan is already addressed in U.S. tax law, although not in a way that precludes stateless income. There are a number of legislative proposals aimed at addressing BEPS issues. For example, the federal government has become concerned about the trend for some U.S. multinationals to enter into “inversion” transactions to create new foreign corporate parents for their world-wide groups, including some recent widely publicized inversion transactions.

The Obama Administration has proposed provisions to prevent inversions, and Congress has proposed legislation in keeping with the administration’s proposal for creating substantial impediments for U.S. multinationals to invert. Although the proposed changes to U.S. tax law are aimed at preventing inversions, the effect of the legislation would be in keeping with many of the proposals in the BEPS action plan: to prevent profit-shifting-payments from a U.S. group to foreign affiliates.

Further, the Obama Administration’s 2015 Revenue Proposals contain a number of international tax reforms. One, for example, would broaden the definition of “intangibles” and tax excess profits from the transfer of intangibles outside the United States to a related foreign party. Another would limit interest deductions for U.S. groups with foreign parents.

Given the wide ideological divide between Republicans and Democratics in Congress, the prospect for broad-based international tax reform in the United States seems murky at best. That’s especially true in the short-term, with elections looming in the fall of 2014.

For its part, Ireland, heretofore a particularly attractive domicile for U.S.-based corporations seeking to reduce taxes on foreign-based income, has passed a law eliminating duel-resident structures. In such structures, a corporation could be incorporated in Ireland but managed and controlled in another country (such as the United States).

Under the new provision, a company incorporated in Ireland but managed and controlled in a treaty-partner country will be treated as an Irish resident corporation unless the corporation is resident in the other country for that country’s tax purposes.

Elsewhere, Switzerland is implementing significant international tax reforms in response to the BEPS action plan, Australia has made changes to its transfer-pricing rules, and France is looking at a plan to subject companies like Google and Facebook to a country’s taxing authority if its residents are using the Web sites within the country.


CFOs of U.S.-based multinationals need to understand their employers’ current international tax structures. Most important is the extent to which their current tax structures and strategies rely upon base-eroding payments of interest, rents, royalties, management fees and other inter-company payments to shift income to lower-tax jurisdictions.

They should also take note of how much their companies use hybrid instruments or hybrid entities to shift income to lower tax jurisdictions or reduce the effective tax rates on payments. That includes how the company’s intellectual property migrates to other countries. As part of their inventory, finance chiefs should learn how frequently their companies use transactions with controlled foreign corporations to shift income from high-tax to low-tax jurisdictions

Once they’ve made their assessments, finance chiefs should project the impact of pending international tax legislation and changes on the group’s worldwide tax structure and consider changing the structure in reaction to changes in international tax law.

In any event, they need to prepare for increased, and more significant, tax disputes with governments around the world with respect to transfer pricing, related-party interest payments and other issues identified in the BEPS action plan.

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.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.