BEPS Action Plan - The Ambitious Programme

BEPS Action Plan – The Ambitious Programme

Tue 26 Aug 2014

This September will be a very exciting period for the international tax world and it is expected that the BEPS project marks its first turning point in the history of international co-operation on taxation.

Pascal Saint-Amans, Director of OECD Centre for Tax Policy & Administration, confirmed at the OECD’s annual tax conference in Washington DC on 2-3 June 2014 that OECD follows the timeline and will publish outputs in all seven of the Action Points with September 2014 target delivery dates.  It would be difficult to deny that the timeline of the BEPS Project is extremely ambitious, with the first outputs expected for September 2014 and the completion of the project by the end of 2015.

Background

The OECD launched a project on base erosion and profit shifting (BEPS) in response to growing concerns among both OECD and non-OECD countries about the risks to tax revenues, tax sovereignty and tax fairness that BEPS poses. The Action Plan on BEPS was endorsed by G20 leaders on 5-6 September 2013.

Globalisation has had an important impact on the way multinational enterprises (MNEs) are structured and managed. The increasing mobility of capital and people and the rapid adoption of communication and other technologies have resulted in restructuring of MNEs business models and operations. These are often based on centralised functions at a regional or global level, rather than operations being managed within individual countries. Moreover, digital economy created an environment for businesses where it possible to supply goods and services from different geographic locations that are distant from the physical location of their customers. The UK endorsement document listed the following problematic issues:

  • The application of corporate structures or financial instruments to exploit asymmetries in the tax rules of different countries to create a hybrid mismatch. The result is that transactions are treated as taxable in one country but not in another, or give rise to a deduction in both countries. As a result the MNE can end up paying no tax in either country, or gain a tax deduction in one country but no matching taxable receipt in the other.
  • Manipulation of transfer pricing. Transfer pricing is used to determine how profits should be allocated to companies in different jurisdictions within a MNE, and is based on the “arms length principle” (which states that these transactions should be priced as if they were transactions between unrelated parties). MNEs can seek to manipulate transfer pricing to artificially separate their assets, capital and risk, so that profit can be declared in a low tax jurisdiction;
  • The application of structures or new technologies to minimise the need for a physical presence within a tax jurisdiction, or to deliver certain functions from another geographical location. This enables a business to ensure that the level of its activities does not create a permanent establishment and therefore a taxable presence in a jurisdiction where it is not resident;
  • Using contrived transactions that exploit countries’ double taxation agreements, a MNE is able to “treaty shop” and attempt to reap the benefits of a lower tax rate. For instance, a resident of a low tax jurisdiction that does not have a tax treaty with the UK may attempt to limit the tax that the UK levies at source on interest, by setting up a subsidiary in a country that has a treaty with the UK and routing the transaction through that subsidiary; and
  • Incorporation and application of Special Purpose Entities (SPEs). A SPE is defined as a legal entity that has little or no employment, operations, or physical presence, located in a separate jurisdiction to its parent company. Within the EU there are countries that act as conduits for investments, with significant in and outflows travelling through SPEs.

The Action Plan pointed out “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. A number of actions can be undertaken in order to address the weaknesses in the current rules in an effective and efficient manner. This Action Plan calls for fundamental changes to the current mechanisms and the adoption of new consensus-based approaches, including anti-abuse provisions, designed to prevent and counter base erosion and profit shifting.”

The ultimate goal of the Action plan is to deliver a reform of global taxation through the 15 action points. The development of the 15 actions in the Action Plan serves as a framework and will result in significant changes to the rules for the taxation of cross-border profits. The Action points are:

*Source: OECD (http://www.oecd.org/ctp/beps.htm)

Accomplishing the envisaged outcome of Action Plan, the 15 action points require an effective and comprehensive process that equally involves input from all relevant stakeholders. In the last 12 months, OECD published several discussion drafts and requested input from stakeholders. The following diagram analyses the stakeholders’ participation:

*Source: OECD (http://www.oecd.org/ctp/beps.htm)

The BEPS Action Plan provides for 15 actions scheduled to be finalised in three phases:

 

BEPS Deliverables are expected:  
September 2014
 Topic
Action 1Report identifying tax   challenges raised by the digital economy and the necessary actions to address   them
Action   2Recommendations regarding the   design of domestic and tax treaty measures to neutralise the effects of   hybrid mismatch arrangements
Action   5Finalise the review of Member   country regimes in order to counter harmful tax practices more effectively
Action   6Recommendations regarding the   design of domestic and tax treaty measures to prevent abuse of tax treaties
Action   8Changes to the transfer   pricing rules in relation to intangibles – phase 1
Action   13Changes to the transfer   pricing documentation and country-by-country reporting template
Action   15Report on the feasibility of a   multilateral instrument to implement BEPS measures
September 2015
 Topic
Action 3Recommendations regarding the design   of CFC rules
Action   4Recommendations regarding the   design of domestic rules to limit base erosion via interest deductions and   other financial payments
Action   5Strategy to expand   participation in the Forum on Harmful Tax Practices to non-OECD Members
Action   7Tax treaty measures to prevent   the artificial avoidance of permanent establishment status
Action   8Changes to the transfer   pricing rules in relation to intangibles – phase 2
Actions   9 and 10Changes to the transfer   pricing rules in relation to risks and capital, and other high-risk   transactions
Action   11BEPS economic analyses and   Recommendations regarding data collection on BEPS
Action   12Recommendations regarding the   design of domestic rules to require taxpayers to disclose their aggressive   tax planning arrangements
Action   14Tax treaty measures to make   dispute resolution mechanisms more effective
 
December 2015
 Topic
Action 4Changes to the transfer   pricing rules to limit base erosion via interest deductions and other financial   payments
Action   5Revision of existing criteria   to counter harmful tax practices more effectively
Action   15Development of a Multilateral   instrument

We will publish a further summary on the seven action points in September.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *