2014 BEPS Deliverables | Developing Countries | Next steps | Background
2014 BEPS Deliverables
1. What are the 2014 deliverables about?
The 2014 deliverables include measures that will help ensure the coherence of corporate income taxation at the international level, restore the intended effects and benefits of international standards, and ensure better transparency and promote increased certainty and predictability. Specifically, they include 3 reports:
- two final reports on the Digital Economy (Action 1) and the Feasibility of a Multilateral Instrument (Action 15);
- one interim report on Harmful Tax Practices (Action 5); and
Draft Rules in 4 areas:
- Hybrid mismatch arrangements (Action 2)
- Treaty abuse (Action 6)
- Transfer pricing of intangibles (Action 8)
- Transfer pricing documentation and a country-by-country reporting template (Action 13)
2. How will the 2014 deliverables tackle base erosion and profit shifting?
The first set of measures and reports released today represent substantial progress towards eliminating double non-taxation due to base erosion and profit shifting. These measures, combined with the work to be completed in 2015, will give countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, while giving business greater certainty by reducing disputes over the application of international tax rules.
3. When do these measures become applicable?
The measures will apply once they are implemented, either in domestic laws or in the network of bilateral tax treaties. In that respect, we are developing a mandate to call an international conference to develop a multilateral convention that would amend the network of existing bilateral tax treaties at one time. Further guidance and work with respect to implementation has already begun, and will be completed during the course of 2015.
4. Why won’t some of the measures be finalised until later?
Except for some pending technical issues where further work is required in order to reach consensus, all countries have agreed to the proposed measures contained in the 2014 reports. Because the BEPS Project takes a comprehensive and holistic approach to solving the problem of base erosion and profit shifting, consideration shall be given to the interactions between the 2014 measures and the 2015 ones. For this reason the 2014 measures are agreed but will formally remain in draft form.
5. How much revenue will these 2014 measures produce for governments?
Implementation of these measures, combined with the measures to be completed in 2015, will level the playing field and restore fairness and common sense to the international tax system by ensuring that businesses that operate cross-border and have access to sophisticated tax expertise will not have unintended competitive advantages relative to businesses operating at the domestic level. The work is therefore about aligning taxation with economic activities and value creation, rather than about increasing overall tax burden. The work under Action 11 of the BEPS Action Plan, to be finalised in 2015, will help us better understand the total impact of base erosion and profit shifting, and will also help us monitor the impact of the measures implemented to address it.
Action 1 - Address the tax challenges of the digital economy
6. How will this report address tax avoidance by digital companies?
The report provides a detailed analysis of the digital economy, its business models, and its key features. There is now agreement that, because information and communication technology has spread across the economy, it is not possible to “ring fence” the digital economy for special tax treatment. There is also agreement that while the digital economy does not create unique BEPS issues, some of its features exacerbate existing issues. The report identifies these key features so that the work under the rest of the Action Plan can address them effectively. In the context of VAT, the report concludes that VAT collection in the business-to-consumer context urgently needs to be addressed, and work in this area will be completed by the end of 2015. This work will realign taxation of the digital economy with economic activities and value creation.
7. What types of new business models does the report analyse?
The report examines a number of new business models, as well as old business models that have changed in scale because of the digital revolution, including e-commerce, payment services, app stores, cloud computing, high frequency trading, participative network platforms and online advertising. The report also contains an examination of the tax structures that these business models allow (Annex 2).
8. Do we need more fundamental changes to the international tax system to deal with the digital economy?
The report recognises that the changes brought about by the digital economy raise systemic challenges regarding the ability of the current international tax framework to ensure that profits are taxed where economic activities occur and where value is created. The report discusses a number of potential options to address these challenges and concludes that more technical work needs to be done to develop those options. In addition, the fact that the other work to address BEPS is ongoing makes it difficult to evaluate both the extent of these systemic challenges and the impact of the potential options to address them. The impact of that other work will be evaluated during 2015, and the evaluation of options will be completed by the end of the project in 2015.
9. Is the report proposing a virtual permanent establishment? Why?
The report is not recommending the adoption of a virtual permanent establishment standard. The report does outline potential options to address the broader tax challenges of the digital economy including a new threshold for taxation based on a Significant Digital Presence. Under such a proposal, an enterprise engaged in a ‘fully dematerialised digital activities’ could be deemed to have a taxable presence in a country if it maintained a ‘significant digital presence’. The report recognises that further work needs to be done to explore these options, particularly in relation to their technical details, and in light of the Action Plan as a whole. The Task Force on the Digital Economy will continue to work on the options in order to flesh them out, provide more detail and evaluate them according to an agreed framework.
For further information, please read the report Addressing the Tax Challenges of the Digital Economy.
Action 2 - Neutralise the effects of hybrid mismatch arrangements
10. What are hybrid mismatches?
Hybrid mismatches are cross-border arrangements that take advantage of differences in the tax treatment of financial instruments, asset transfers and entities to achieve “double non-taxation” or long term deferral outcomes which may not have been intended by either country. The work on Action 2 of the BEPS Action Plan has focused on those hybrid mismatch arrangements that lower the total tax burden of the parties by exploiting differences in the tax treatment of an entity or instrument under the laws of different jurisdictions to produce multiple deductions for the same economic expense (double deduction), or a deduction without any symmetrical taxation (deduction/non-inclusion). A common example of a hybrid financial instrument would be an instrument that is considered a debt in one country and a share in another so that a payment under the instrument is deductible when it is paid but is treated as a tax-exempt dividend in the country of receipt.
11. How do the 2014 rules tackle hybrid mismatches?
The work sets out general and specific recommendations for domestic hybrid mismatch rules and model treaty provisions which will put an end to multiple deductions for a single expense and deductions in one country without corresponding taxation in another. Once translated into domestic law and tax treaties, the recommended rules will neutralise the effect of hybrid mismatch without disturbing any other tax, commercial or regulatory outcomes. The domestic rules recommended in the report are self-executing and are designed to co-ordinate with the rules in the other jurisdiction. Work will now be undertaken on the development of guidance, in the form of a commentary to the rules, which explains how the rules should operate in practice. Careful consideration will be given to the implementation of the rules.
12. Do you expect difficulties in the implementation of the domestic law rules?
The recommended rules have been designed to be clear and precise to facilitate implementation and administration. The commentary to the rules will provide taxpayers and tax administrations with practical examples illustrating how the rules should be applied. Once implemented, the rules should apply to taxpayers and arrangements automatically without the need for further intervention by the tax authority.
13. How will countries and taxpayers co-ordinate the application of the hybrid mismatch rules?
The recommendations also include an ordering rule which prevents more than one country applying their domestic hybrid mismatch rules to the same arrangement. The combination of automatic application and rule ordering avoids the risk of double taxation by ensuring that domestic rules in different jurisdictions do not overlap. The examples included in the commentary will further illustrate the co-ordination elements of the rule and the consistent implementation and application of the same rules in each jurisdiction should result in more predictable outcomes for taxpayers than is presently the case.
14. What happens if countries do not introduce the rules?
The recommendations include a defensive rule that a country can apply to neutralise a hybrid mismatch that arises within its jurisdiction when the counterparty jurisdiction does not have its own domestic hybrid mismatch rules. The effect of having both a primary and a defensive rule is that a country does not need to rely on the domestic laws of another country in order to neutralise hybrid mismatches.
15. Will these rules address structures that use the US Check the Box Regulations?
Yes, when these rules are used to create hybrid entities. The rules are in fact designed to neutralise the effect of hybrid entities. Therefore, once implemented by a country, they will neutralise the hybrid mismatch effects of check the box planning in those countries.
For further information, please read the report Neutralising the Effects of Hybrid Mismatch Arrangements.
Action 5 - Counter harmful tax practices more effectively, taking into account transparency and substance
16. How is the BEPS Project addressing harmful tax competition?
The work on harmful tax competition within the OECD began more than 15 years ago. The report Harmful Tax Competition: An Emerging Global Issue (OECD, 1998) laid the foundations for this work. To counter harmful tax practices more effectively, the BEPS Action Plan mandated a revamp of the work on harmful tax practices, with a priority and renewed focus on requiring substantial activity for any preferential regime and on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes.
17. Why is transparency important and how is the work under Action 5 addressing this?
The lack of transparency in the operation of a regime will make it harder for the home country to take defensive measures. One of the two key priorities for the revamp of the work on harmful tax practices mandated by the BEPS Action Plan is to improve transparency. The 2014 Interim Report describes the framework agreed by countries for compulsory spontaneous exchange on rulings related to preferential regimes. Where countries have the legal framework to start exchanging the information covered by the framework, the intention would be to start to apply it from the end of 2014. Further work on improving transparency will include the review of actual ruling regimes in Member and Associate Countries.
18. Does the BEPS Project address rulings?
Taxpayer-specific rulings, i.e. rulings that are specific to an individual taxpayer and on which that taxpayer is entitled to rely, are addressed. Where they relate to preferential regimes, there will be an obligation on countries to spontaneously exchange information on those rulings under the framework on transparency. Taxpayer-specific rulings can be given both pre-transaction (this includes advance tax rulings or clearances and advance pricing agreements) and post transaction. General rulings, i.e. rulings that apply to groups or types of taxpayers or may be given in relation to a defined set of circumstances or activities, will be considered alongside taxpayer-specific rulings in the context of the further work on transparency which will consider the actual ruling regimes of Member countries and Associate countries against the factors in the 1998 Report.
19. What are “patent boxes”?
A “patent box” is a preferential tax regime offered by a country to support growth and innovation. A country will offer a tax incentive, such as a lower rate of corporate tax, to encourage companies to locate activities associated with the development, manufacture and exploitation of patents in that country.
20. Are patent boxes useful or harmful?
Fostering innovation is an important element of growth strategies because intangibles such as patents have become one of the key value drivers of many business models. A preferential regime is useful in supporting growth and innovation in a country if it attracts real activity. It is not so if it merely encourages companies to shift profits from the location in which the value was actually created to another location where they may be taxed at a lower rate.
21. How does the OECD’s work affect patent boxes?
One of the key priorities of the BEPS Project has been to focus on whether or not there is substantial activity associated with any preferential regime. The initial focus of this work has been on preferential regimes related to intangible property (IP) and 15 of these regimes are identified in the interim report. Several approaches, with the common goal of ensuring that profits are taxed where substantial activities take place, have been explored. Much of the work has been on the nexus approach, which makes a link between the expenditure incurred in a country (essentially capturing the work or activity undertaken) and the amount of income that can benefit from a preferential regime. The next step is to reach consensus on the best approach to evaluate substantial activity so as to review the 15 IP regimes in the light of the newly elaborated substantial activity factor. The newly elaborated substantial activity factor will also be applied to other preferential regimes that fall within the Forum on Harmful Tax Practice’s remit. The other key priority of the revamp of the work on harmful tax practices is to improve transparency. Therefore regimes, including the IP regimes, may also subsequently need to be reconsidered in the light of the elaborated transparency factor.
For further information, please read the interim report Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance.
Action 6 - Prevent treaty abuse
22. What is “treaty shopping”?
“Treaty shopping” generally refers to arrangements through which a person who is not a resident of one of the two States that concluded a tax treaty may attempt to obtain benefits that the treaty grants to residents of these States.
23. What is the best way to address treaty shopping?
As part of the work on Action 6, OECD and G20 countries have all agreed to clearly reject treaty-shopping practices. Different anti-abuse rules can be used for that purpose and the work puts forward drafts of: (i) a specific anti-abuse rule based on a “limitation-on-benefits” provision, and (ii) a more general anti-abuse rule based on a “principal purpose test”.
24. Will countries be able to fight treaty shopping as they wish?
Yes, but OECD and G20 Countries have also agreed on a common minimum standard which will require the adoption, at a minimum, of either (1) a combination of the “limitation-on-benefits” rule and of the “principal purpose test” rule; (2) the inclusion of the “principal purpose test” rule, or (3) the inclusion of the “limitation-on-benefits” rule supplemented by a mechanism that would deal with conduit financing arrangements.
25. Why does the work on Action 6 propose so many different anti-abuse rules? Wouldn’t the general treaty-anti abuse rule have been sufficient?
Treaty abuse, like the abuse of domestic law, is best addressed through a combination of specific anti-abuse rules, which provide greater certainty but can only deal with known abusive strategies, and general anti-abuse rules or judicial doctrines, which are less certain but offer protection against abusive transactions that have not previously been identified or addressed.
26. When will the treaty-anti abuse rules that are included in the report be included in the OECD Model Tax Convention?
The rules included in the report are still in draft form and will be included in the next update to the Model. The report indicates that further work is needed with respect to the precise contents of the model provisions and related Commentary included in the report, in particular the limitation-on-benefits rule. Further work is also needed with respect to the implementation of the minimum standard adopted to address treaty shopping and with respect to the treaty entitlement of various investment funds. It will also be necessary to take account of the interaction between tax treaties and the recommendations for the design of new domestic anti-abuse rules that may result from the work on other parts of the Action Plan, in particular Action 2 (Neutralise the effects of hybrid mismatch arrangements), Action 3 (Strengthen CFC rules), Action 4 (Limit base erosion via interest deductions and other financial payments) and Actions 8, 9 and 10 dealing with Transfer Pricing.
For further information, please read the report Preventing the Granting of Treaty Benefits in Inappropriate Circumstances.
Action 8 - Assure that transfer pricing outcomes related to intangibles are in line with value creation
27. Why is the BEPS Project only considering the “arm’s length principle” for dealing with transfer pricing issues? Aren’t other approaches like “formulary apportionment” more appropriate?
In most cases, particularly in contexts where two countries with broadly similar tax systems are involved, the arm’s length principle effectively and efficiently allocates the income of multinationals among taxing jurisdictions. Problems start arising, however, when third countries, with no or very low tax rates, are interposed, particularly in cases involving transfers of intangibles, allocations of risks, and capital, and other high-risk transactions. In completing the transfer pricing work required by the end of 2015, consideration will be given to both the application of the arm’s length principle and special measures in order to identify effective responses to the concerns raised in the BEPS Action Plan. Work on those special transfer pricing measures is ongoing and will be co-ordinated with other BEPS work on the deductibility of interest, the permanent establishment definition, CFC rules, digital economy issues, and work on dispute resolution.
Conversely, the adoption of alternative transfer pricing methods like formulary apportionment would require development of an international consensus on a number of key issues (which countries do not believe to be attainable in the short or medium term) and could also raise systemic problems which could result in even more damaging problems for countries’ revenues. Accordingly, it is believed that it will be most productive to focus on directly addressing the specific issues arising under the current arm’s length system.
28. What issues does the work on Action 8 cover and what is the expected impact?
The work on the transfer pricing aspects of intangibles has resulted in revisions to the Transfer Pricing Guidelines. These revisions clarify among other things the definition of intangibles, provide guidance on identifying transactions involving intangibles, and provide supplemental guidance for determining arm’s length conditions for transactions involving intangibles. The guidance, in conjunction with further work to be completed in 2015, will ensure that profits associated with the transfer and use of intangibles are allocated in accordance with value creation, and will hinder BEPS structures based on the nominal allocation of intangibles to a low tax environment.
29. Does the new guidance address the issues related to corporate synergies and location savings?
Yes, it does. The guidance ascertains that the benefits from corporate synergies are allocated to the group members that have contributed to these synergetic benefits and makes sure that these benefits cannot be isolated and allocated to an entity in a low tax environment. The guidance on locational advantages secures that it is clearly ascertained whether such benefits exist and if so, leads to an allocation of these advantages in a way that reflects the market circumstances that exist in the specific situation.
30. Why are certain sections bracketed?
Guidance has also been developed in relation to the ownership of intangibles, intangibles whose valuation is uncertain at the time of the transaction, and the application of profit splits and other methods. However, a decision has been made not to finalise the work on this draft guidance due to the strong interactions with the work to be finalised by 2015, in particular in relation to the transfer pricing aspects of risk allocation and of re-characterisation of transactions. These issues, which constitute the core of BEPS concerns in the area of transfer pricing will, therefore, be addressed in an integrated manner to provide effective, coherent and consistent solutions. This will involve considering both the application of the arm’s length principle and of special measures in order to identify effective responses to the BEPS concerns.
For further information, please read the Guidance on Transfer Pricing Aspects of Intangibles.
Action 13 - Re-examine transfer pricing documentation
31. What is country-by-country reporting?
Country-by-country reporting is a tool intended to allow tax administrations to perform high-level transfer pricing risk assessments, or to evaluate other BEPS-related risks. The country-by-country reporting template will require multinational enterprises (MNEs) to provide annually for each jurisdiction in which they do business, aggregate information relating to the global allocation of the MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group, as well as information about which entities do business in a particular jurisdiction and the business activities each entity engages in.
32. What specific information will be included in the country-by-country report?
The country-by-country reporting template requires MNEs to report annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax, and income tax paid and accrued. It also requires MNEs to report their total employment, capital, retained earnings and tangible assets in each tax jurisdiction. Finally, the report also requires a listing of all entities within the doing business in a particular tax jurisdiction, as well as the nature of the main business activities carried out by each entity.
33. How will the information be used?
Taken together, the three documents (the country-by-country report, TP master file and TP local file) will require taxpayers to articulate consistent transfer pricing positions, and will provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, commence and target audit enquiries. This information will make it easier for tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments.
34. Will country-by-country report information be made public?
The information must be provided to the relevant governments; to protect the confidentiality of potentially sensitive information, it will not be made publically available. This is consistent with the treatment of most other taxpayer information.
35. When will this transfer pricing documentation requirement enter into force?
Effective implementation of the new reporting standards and reporting rules will be essential. Additional work will be undertaken over the next several months to identify the most appropriate means of filing the required information with and disseminating it to tax administrations. In that work, due regard will be given to considerations related to protection of the confidentiality of the information required by the reporting standards, the need for making the information available on a timely basis to all relevant countries, and other relevant factors. The country-by country reporting will not be implemented until these details are worked out.
For further information, please read the Guidance on Transfer Pricing Documentation and Country-by-Country Reporting.
Action 15 - Developing a multilateral instrument
36. What is the goal of a multilateral instrument?
In the context of the BEPS Project, the goal of a multilateral instrument is to expedite and streamline the implementation of the measures developed to address BEPS, in particular by modifying bilateral tax treaties. Developing such a mechanism is necessary not only to tackle BEPS, but also to ensure the sustainability of the consensual framework to eliminate double taxation.
37. Is it possible to amend the network of bilateral treaties via a multilateral instrument?
Yes, it is. Although there is no exact precedent in the international tax field, there are several precedents in various other areas of public international law where bilateral treaties have been modified via a multilateral instrument.
38. Would it be possible to use a multilateral instrument to implement other recommendations of the BEPS Project?
Yes, a multilateral instrument could in principle also be used to express commitments to implement certain domestic law measures or provide the basis for safe exchanges of country-by-country reporting template.
39. What is the timeline? Will an international conference be called upon to develop the multilateral instrument?
Drawing on the analysis of the tax and public international law issues related to the development of such an instrument, interested countries may wish to develop a multilateral instrument, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution. In January 2015, OECD and G20 countries will consider a draft mandate for an international conference for the negotiation of a multilateral convention to streamline the implementation of the BEPS Action Plan.
For further information, please read the report Developing a Multilateral Instrument to Modify Bilateral Tax Treaties.
2014 BEPS Deliverables and Developing Countries
40. How have developing countries been involved in the work?
Engagement with developing countries has been and will continue to be extensive. Accomplishing the actions set forth in the BEPS Action Plan requires an effective and comprehensive process that involves all relevant stakeholders, including both developed and developing countries. Developing countries have therefore been consulted extensively through a combination of regional and global high-level policy dialogues. Over 80 developing countries and other non-OECD/non-G20 economies have been consulted in the first year of the Project through four in-depth regional consultations and five thematic global fora, attended by more than 110 jurisdictions and a number of representatives from civil society and the business community.
41. How has the input from developing countries been used?
The input received from developing countries has been fed into the working groups carrying out the technical work on BEPS and reflected in the 2014 deliverables work (such as in relation to the template for Country-by-Country reporting, or to the work on treaty abuse and the considerations to enter into tax treaty relationships). Further, this engagement has also been crucial in identifying the specific challenges and priorities of low-income countries faced with BEPS issues. These priorities, and how the G20 can provide support to address them, was the subject of a dedicated two-part Report prepared by the OECD under a mandate from the G20 Development Working Group. The two-part Report was welcomed by the G20 Finance Ministers at their meeting in Cairns in September 2014. (Available on line at www.oecd.org/tax/tax-global/part-1-of-report-to-g20-dwg-on-the-impact-of-beps-in-low-income-countries.pdf).
42. What are the BEPS priorities for developing countries?
Developing countries have identified the BEPS actions which are of highest and most immediate priority for them. These include limiting base erosion via interest deductions and other financial payments (Action 4), preventing tax treaty abuse and the artificial avoidance of PE status (Actions 6 and 7), transfer pricing, in particular base eroding payments (Actions 8, 9 and 10), and transfer pricing documentation and country-by-country reporting (Action 13). The lack of transfer pricing comparables and the granting of wasteful tax incentives have also been identified as areas of particular concern. These issues have not been specifically included in the BEPS Project but are the subject of ongoing work, particularly through the Task Force on Tax and Development (see for example, Principles to Enhance the Transparency and Governance of Tax Incentives for Developing Countries at www.oecd.org/ctp/tax-global/transparency-and-governance-principles.pdf). Political support and capacity building have been identified as key challenges for developing countries, particularly as the implementation phase begins.
43. How will developing countries benefit from BEPS measures?
BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs). Therefore, the BEPS measures once implemented will benefit developing countries and provide them with tools to mobilise domestic resources.
Planned next steps
44. What are the next steps?
Work on the reports to be delivered in 2015 has already started, and this work will continue at a fast pace to ensure the rapid development of concrete measures that countries can use to end double non-taxation and the artificial shifting of profits. In parallel, work will continue to address remaining technical issues with the measures in the 2014 reports, and to ensure that implementation and practical guidance can be developed with respect to all measures.
45. Will the engagement with developing countries continue?
In September 2014 the G20 Finance Ministers asked the OECD to build on its current engagement with developing countries and develop a new structured dialogue process, with clear avenues for developing countries to work together and directly input into the G20/OECD BEPS Project. The OECD, working with other International Organisations and regional tax administration fora, has also been mandated to develop tools to translate the BEPS Action Plan into practical support for lower capacity developing countries, to be delivered in 2016.
Responding quickly to this call, the BEPS Project has developed a plan to strengthen the engagement of developing countries in the work and bring them closer to the heart of the BEPS technical work and decision-making process (see www.oecd.org/tax/developing-countries-and-beps.htm).
46. What are the 2015 deliverables?
The 2015 deliverables relate to strengthening CFC rules (Action 3), limiting base erosion via interest deductions and other financial payments (Action 4), countering harmful tax practices more effectively, taking into account transparency and substance (Action 5), preventing the artificial avoidance of PE status (Action 7), assuring that transfer pricing outcomes are in line with value creation (Actions 8-10), establishing methodologies to collect and analyse data on BEPS and the actions to address it (Action 11), requiring taxpayers to disclose their aggressive tax planning arrangements (Action 12), making dispute resolution mechanisms more effective (Action 14), and developing a multilateral instrument (Action 15). Work on the 2015 deliverables has already begun and it is expected to be completed on time. In line with the commitment of all OECD members and G20 countries, an overall package taking into account the need for a comprehensive approach to the BEPS Project will be delivered by the end of 2015.
Background on BEPS
47. What is BEPS?
Base erosion and profit shifting (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.
48. Are BEPS strategies illegal?
Although some schemes used are illegal, most are not. Largely they just take advantage of current rules that are still grounded in a bricks and mortar economic environment rather than today’s environment of global players which is characterised by the increasing importance of intangibles and risk management.
49. What causes BEPS?
Corporate tax is levied at a domestic level. When activities cross border, the interaction of domestic tax systems means that an item of income can be taxed by more than one jurisdiction, thus resulting in double taxation. The interaction can also leave gaps, which result in income not being taxed anywhere. BEPS strategies take advantage of these gaps between tax systems in order to achieve double non-taxation.
50. Why should we be worried about BEPS if it is legal?
First, because it distorts competition: businesses that operate cross-border may profit from BEPS opportunities, giving them a competitive advantage over enterprises that operate at the domestic level. Second, it may lead to inefficient allocation of resources by distorting investment decisions towards activities that have lower pre-tax rates of return, but higher after-tax returns. Finally, it is an issue of fairness: when taxpayers (including ordinary individuals) see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.
51. Why worry about BEPS now? Is public outcry about the tax affairs of corporate giants the driving force behind the OECD’s work on BEPS?
The OECD has been providing solutions to tackle aggressive tax planning for years. The debate over BEPS has now reached the highest political levels in many OECD and non-OECD countries. The OECD does not see BEPS as a problem created by one or more specific companies. Apart from some cases of egregious abuses, the issue lies with the tax rules themselves. Business cannot be faulted for using the rules that governments have put in place. It is therefore governments’ responsibility to revise the rules or introduce new rules.
52. How much revenue is lost because of BEPS?
There is widespread and abundant evidence of the use of base erosion and profit shifting strategies to achieve double non-taxation. Work under Action 11 of the BEPS Action Plan, to be finalised in 2015, will help us better understand the total impact of BEPS on tax revenues and other aspects of the economy, and will also help us monitor the impact of the measures implemented in response.
53. What is the OECD’s role in addressing BEPS?
Many BEPS strategies take advantage of the interaction between the tax rules of different countries, which means that unilateral action by individual countries will not fully address the problem. In addition, unilateral and uncoordinated actions by governments responding in isolation could result in double – and possibly multiple – taxation for business. This would have a negative impact on investment, growth and employment globally. There is therefore a need to provide an internationally coordinated approach which will facilitate and reinforce domestic actions to protect tax bases and provide comprehensive international solutions to respond to the issue. The BEPS Action Plan provides a consensus-based plan to address these issues and is part of the OECD’s ongoing efforts to ensure that the global tax architecture is equitable and fair.
54. What does the BEPS Action Plan say?
It sets forth 15 actions to address BEPS in a comprehensive and coordinated way. These actions will result in fundamental changes to the international tax standards and are based on three core principles: coherence, substance, and transparency. The Action Plan also calls for further work to address the challenges posed by the digital economy. Looking toward innovative approaches to deliver change quickly, the Action Plan calls for a multilateral instrument that countries can use to implement the measures developed in the course of the work. While the OECD steps up its efforts to address double non-taxation, it will also continue work to eliminate double taxation, including through increased efficiency of mutual agreement procedures and arbitration provisions.
55. What actions are being carried out in the context of BEPS?
Domestic tax systems are coherent – tax deductible payments by one person results in income inclusions by the recipient. We need international coherence in corporate income taxation to complement the standards that prevent double taxation with a new set of standards designed to avoid double non-taxation. Four actions in the BEPS Action Plan (Actions 2, 3, 4, and 5) focus on establishing this coherence.
Current rules work well in many cases, but must be modified to prevent instances of BEPS. The involvement of third countries in the bilateral framework established by treaty partners puts a strain on the existing rules, in particular when done via shell companies that have little or no economic substance: e.g. office space, tangible assets and employees. In the area of transfer pricing, rather than replacing the current system, the best course is to fix the flaws in it, in particular with respect to returns related to over-capitalisation, risk and intangible assets. Nevertheless, special rules, either within or beyond the arm’s length principle, may be required with respect to these flaws. Five actions in the BEPS Action Plan focus on aligning taxing rights with substance (Actions 6, 7, 8, 9, and 10).
Because preventing BEPS requires greater transparency at many levels, the Action Plan calls for: improved data collection and analysis regarding the impact of BEPS; taxpayers’ disclosure about their tax planning strategies; and less burdensome and more targeted transfer pricing documentation. Four actions in the BEPS Action Plan focus on improving transparency (actions 11, 12, 13, and 14).
56. Can BEPS be tackled without replacing the arm’s length principle with formulary apportionment?
The current transfer pricing rules do not always properly address the way modern businesses operate in a globalised environment, and taxpayers have thus been able to use/misuse the rules to artificially shift profits. In particular, the arm’s length principle faces challenges in addressing transfers of intangibles, risks, and capital, and other high-risk transactions. The Action plan includes three major actions to address these cases, which may include special measures either within or beyond the arm’s length principle. The Action Plan has been developed to fix the current system quickly and efficiently, without preconceptions regarding the precise nature of the changes that may be required to address these critical transfer pricing issues. However, adoption of alternative transfer pricing methods like formulary apportionment would require development of a consensus on a number of key issues (which countries do not believe to be attainable in the short or medium term) and could also raise systemic problems which could result in even more damaging problems for countries’ revenues. Accordingly, it is believed that it will be most productive to focus on addressing specific issues arising under the current arm’s length system at the present time.
57. How will the Actions be implemented?
The BEPS Action Plan calls for the development of tools that countries can use to shape fair, effective and efficient tax systems. Because BEPS strategies often rely on the interaction of countries’ different systems, these tools will have to address the gaps and frictions that arise from the interaction of these systems. Some actions, for example work on the OECD Transfer Pricing Guidelines and the Commentary to the OECD Model Tax Convention, will result in changes that are directly effective. Others will be implemented by countries through their domestic law, bilateral treaties, or a multilateral instrument.
58. How long will this take?
Addressing BEPS is critical for most countries and must be done in a timely manner so that concrete actions can be delivered quickly before the existing consensus-based framework unravels. At the same time, governments need time to complete the necessary technical work and achieve widespread consensus. Against this background, it is expected that the Action Plan will largely be completed within 2 years of its adoption. Indeed, the first set of measures and reports was released in September 2014, just 12 months after the launch of the BEPS project. Work on the reports to be delivered in 2015 has already started, and this work will continue at a fast pace to ensure the rapid development of concrete measures that countries can use to end double non-taxation and the artificial shifting of profits.
59. What is the role of the G20 in this project?
Since its launch by the OECD, the work on BEPS received strong and consistent support by the G20 and it is a key item on the Finance Ministers’ and Leaders’ agendas. Furthermore, all G20 countries have participated as equal partners in the development of the work. Their continued participation and endorsement at the highest levels of government have been critical to guarantee a level playing field and prevent inconsistent standards.
The delivery of the 2014 BEPS outputs is concrete evidence of how OECD and G20 members working together can achieve consensus on important reforms with a worldwide impact. Non-OECD G20 countries are Associates in the BEPS Project and participate on an equal footing in the decision making process, at the level of both the OECD Committee on Fiscal Affairs and of its subsidiary bodies carrying out the technical work. In addition, other countries and stakeholders have engaged in regular and fruitful dialogues throughout this process.
60. Is the BEPS Action Plan meant to stop tax competition?
Taxation is at the core of countries’ sovereignty, and each country is free to set up its corporate tax system as it chooses, including by charging the rate it chooses. The work is not aimed at restricting the sovereignty of countries over their own taxes; instead, it is aimed at restoring and strengthening sovereign taxing rights by ensuring that countries can protect their tax bases from the economic activities that generate it. It does so by addressing regimes that apply to mobile activities and that unfairly erode the tax bases of other countries, potentially distorting the location of capital and services.
61. What is the risk of not addressing harmful tax practices?
The dangers of not addressing harmful tax practices can be felt both by governments and business. Firstly, harmful tax competition can introduce distortions and an unlevel playing field between businesses operating at domestic level and those that operate globally and have access to preferential regimes. Secondly, countries have long recognised that a “race to the bottom” would ultimately drive applicable tax rates on certain sources of income to zero for all countries, whether or not this is the tax policy a country wishes to pursue.
62. How will the BEPS Action Plan affect “tax havens”?
The BEPS Action Plan aims to end the use of shell companies used to stash profits offshore or unduly claim tax treaty protection and neutralise all schemes that artificially shift profits offshore. Though the BEPS Action Plan is not about dictating whether countries should have a specific corporate income tax rate, it will have an impact on regimes that seek to attract foreign investors without requiring any economic substance.
63. Is this effectively a tax increase on multinationals?
The BEPS project is not about increasing corporate taxes. Non- or low-taxation is not itself the concern, but it becomes so when it is achieved through practices that artificially separate taxable income from the activities that generate it. These strategies may increase tax disputes as countries fight against tax strategies that defy common sense. Implementation of the recommendations coming out of the BEPS project will reduce those disputes, giving business greater certainty, and reinforcing the fairness and consistency of international tax system.
64. How are businesses and civil society involved in the work?
During the course of the work so far, stakeholders have been consulted at length. Discussion drafts released during the course of the work so far have generated more than 3 500 pages of comments, and have attracted a large number of participants at 5 public consultations. The OECD’s public webcasts of these consultations and our updates on the project have attracted more than 10 000 viewers. This transparent and inclusive consultation process will continue throughout the course of the work.
65. Will the BEPS Action Plan put an end to offshore tax evasion?
The work on BEPS focusses largely on legal tax planning techniques rather than offshore tax evasion, which is illegal. However, other work being carried out by the OECD and the OECD Global Forum on Transparency and the Exchange of Information is focused on combatting offshore tax evasion. More information about this work can be found on line at www.oecd.org/tax/exchange-of-tax-information/.
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