BEPS: The Global Fight against Tax Avoidance Continues

BEPS: The Global Fight against Tax Avoidance Continues

Tue 17 Feb 2015

On 9-10 February 2015, the OECD presented the latest developments in the OECD/G20 project to combat BEPS by multinational enterprises during a G20 Finance Ministers and Central Bank Governors’ meeting in Istanbul, Turkey.

In their Communiqué, the G20 Ministers and Central Bank Governors announced: “We reiterate our full support to the G20/OECD Base Erosion and Profit Shifting (BEPS) Project, showing our resolve to tackle cross-border tax avoidance by modernizing international tax rules. We will finalize the deliverables under the BEPS Action Plan by year-end. We endorse the mandate to develop a multilateral instrument to streamline the implementation of the tax treaty-related BEPS measures. We also reaffirm our commitment to strengthen tax transparency to prevent cross-border evasion. With respect to the exchange of information on request, we urge all jurisdictions to fully comply with the Global Forum standards and join the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

We will work towards completing the necessary legislative procedures to begin the automatic exchange of information (AEoI) within the agreed timeframe. We look forward to the practical and full implementation of the new standard on a global scale and reiterate our commitment to making AEoI attainable by all countries, including all financial centers, and support the pilot projects. We welcome the direct engagement of developing countries in the BEPS Project ensuring that their concerns are addressed and acknowledge that their timing of application may differ from other countries. We will closely monitor progress in preparation of toolkits to assist developing countries in implementing the BEPS actions. We will continue to support developing countries in strengthening their capacity. We will implement the G20 High-Level Principles on Beneficial Ownership Transparency.” 

Implementation – Action 5, 13 and 15

On 6 February, the OECD published three key elements of the first part of implementation of the BEPS Project focusing on:-

Action 13 – Country-by-Country Reporting

  • Following the publication on 16 September of revised standards for TP documentation and a template for CbC reporting, key elements of the implementation package for Action 13 have now been agreed.
  • The Guidance on the implementation of TP documentation and CbC Reporting was published on 6 February 2015. This document sets out guidance on the following matters relating to the implementation of the CbC Report: (i) the timing of preparation and filing of the CbC Report, (ii) which MNE groups should be required to file the CbC Report, (iii) the necessary conditions underpinning the obtaining and the use of the CbC Report by jurisdictions such as confidentiality, consistency and appropriate use; and (iv) the framework for government-to-government mechanisms to exchange CbC Reports together with the work plan for developing an implementation package.
  • The CbC template requires multinationals to provide information on revenues, profits, taxes accrued and paid and some activity indicators.
  • To support implementation, the following elements have now been defined: preparation and filing for the CbC reporting by multinationals with a turnover above EUR 750 million is expected to start in 2016 so that the first pieces of information are obtained by tax administrations by 2017.
  • Information will be filed in the country of residence of the multinational and will further be automatically exchanged with countries fulfilling a number of conditions, in particular confidentiality and proper use of the information. Local filing will be deemed appropriate only in a limited number of enumerated cases.
  • Nest step: A work plan for an implementation package to support the exchange of CbC reporting information has also been approved, and will be developed by April 2015.

Action 15- Multilateral Instrument

  • A  Mandate for the Development of a Multilateral Instrument on Tax Treaty Measures to Tackle BEPS was published to launch negotiations on a multilateral instrument to streamline implementation of tax treaty-related BEPS measures. The multilateral instrument will be a tool that can modify existing bilateral tax treaties to reflect the outcomes of the BEPS Project, many of which concern issues relating to tax treaties. With more than 3000 tax treaties currently in force, a single instrument, that can effectively update this network is critical to ensure that implementation of BEPS measures is rapid and consistent. This was emphasised in the Action 15 report published in September, which confirmed the feasibility of a multilateral instrument.
  • Next step: An ad-hoc group hosted at the OECD, open to participation from all States, will undertake this work, and will hold their first meeting by July 2015, aiming to conclude the drafting of the instrument by 31 December 2016.

Action 5 – Agreement on patent box regimes

  • Among the seven 2014 deliverables presented to G20 Finance Ministers, the Action 5 report on harmful tax practices was an interim progress report, recognising that no consensus had yet been reached on the important issue of patent boxes. In particular, discussions were ongoing regarding the most appropriate approach to the substance requirement for classifying intellectual property (IP or “patent box”) regimes in the context of harmful tax practices.
  • In Brisbane, the G20 Leaders endorsed a compromise solution to address this issue, proposed by Germany and the UK. On 6 February, the OECD published an Explanatory paper Agreement on Modified Nexus Approach for IP Regimes. All OECD and G20 countries have now endorsed this compromise solution which provides for a required nexus between the location of the activities generating the income eligible to the preferential tax treatment and the jurisdiction offering this preferential regime. 
  • The agreed approach maintains the underlying principle of the nexus approach proposed in the September 2014 report but makes some amendments, which are briefly described i) a 30% increase in qualifying expenditures – the expenditures that a taxpayer incurs on IP and which can be taken into account in the nexus approach calculation can, in limited circumstances, be increased by 30%; ii) Closing old regimes to new entrants – countries that have IP regimes that are inconsistent with the nexus approach are expected to take steps to amend those regimes and the process to do this should commence in 2015. In addition there can be no new entrants to such IP regimes after 30 June 2016.; and iii) Grandfathering and transition – taxpayers benefitting from existing regimes that do not comply with the nexus approach will not be able to receive any additional tax benefits from those regimes after 30 June 2021.
  • Work has started on implementation of this measure, in particular to delineate the eligible income, trace the related expenses and limit the risk of abusive entries before grandfathering takes effect.
  • Implementation work has also started as regards transparency to ensure the comprehensive reporting of tax rulings through automatic exchange of information.

“These are important steps forward, which demonstrate that progress is being made toward a fairer international tax system,” OECD Secretary-General Angel Gurría said. “These decisions signal the unwavering commitment of the international community to put an end to base erosion and profit shifting, in line with the ambitious timeline endorsed by G20 leaders.”

Mr Gurría presented the OECD Report which consists of two parts i.e. Part I is a report by the OECD Secretary-General regarding (A) the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project; (B) Tax transparency through information exchange; and (C) Tax and Development; and Part II is a Progress Report to the G20 by the Global Forum on Transparency and Exchange of Information for Tax Purposes.

Looking Ahead
The Report highlight that completing the 2015 deliverables by the end of 2015 will require significant amount of technical work to be undertaken in the coming months. At the same time, high-level political leadership demonstrating a clear commitment to agreeing a holistic package of measures will be necessary. The full BEPS package will be circulated in time for the G20 Finance Ministers meeting in October, and delivered to the G20 Leaders at their Summit in November 2015. OECD will then start the actual implementation of the BEPS package which will be critical for their collective success.

Sources: OECD website and G20 website

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