OECD’s BEPS: Tackling a behemoth or political marketing ?
Early this year, the Organization for Economic Cooperation and Development (OECD) released a largely anticipated report on the issue of base erosion and profit shifting (BEPS). The aim of the BEPS report (Report) was to present the issues related to BEPS, by describing studies, analysing available data and providing an overview of global developments that affect corporate tax matters.
During the annual WTS Alliance meeting in London last month, Nicolas Kypreos a partner with WTS Cyprus participated in a panel of experts discussing the BEPS Report. The event was covered by International Tax Review, the article of which can be found here
The Report supports the view that international tax standards have not kept pace with global business practices, especially intangibles and e-commerce. The following main issues have been identified as leading to BEPS:
1. Mismatches in entity and instrument characterization
2. Application of treaty concepts to profits derived from the delivery of digital goods and services.
3. Tax treatment of related-party debt-financing, captive insurance, and other intra-group financing.
4. Transfer pricing, in particular in relation to the shifting of risk and intangibles, the artificial splitting of ownership of assets between group legal entities, and group transactions that would rarely take place between independent entities.
5. The effectiveness of anti-avoidance measures such as GAARs, CFC regimes, thin capitalization rules, and rules to prevent treaty abuse.
6. The availability of harmful preferential regimes.
In July 2013, the OECD issued an Action Plan on BEPS, which acknowledges that in many cases, existing domestic law and treaties are applied in a correct manner. The main concern raised is that without a coordinated action on the Report’s identified issues, countries that wish to protect their tax base, may unilaterally take measures that could result in double or multiple taxation and therefore increasing global tax uncertainty.
The Plan contains the below 15 Actions, each of which is to be completed in 2014 or 2015:
1. Address the challenges of the digital economy
2. Neutralize the effects of hybrid mismatch arrangements
3. Strengthen CFC rules
4. Limit base erosion via interest deductions and other financial payments
5. Counter harmful tax practices more effectively, taking into account transparency and substance
6. Prevent treaty abuse
7. Prevent the artificial avoidance of permanent establishment status
8. Assure that transfer pricing outcomes are in line with value creation – Intangibles
9. Assure that transfer pricing outcomes are in line with value creation – Risks & Capital
10. Assure that transfer pricing outcomes are in line with value creation – Other high risk transactions
11. Establish methodologies to collect and analyze data on BEPS and actions to address it
12. Require taxpayers to disclose aggressive tax planning arrangements
13. Re-examine transfer pricing documentation
14. Make dispute resolution mechanisms more effective
15. Develop a multilateral instrument for amending bilateral treaties
The Plan appears as a very ambitious and dynamic project which however faces substantial difficulties in implementation. It proposes an enormous amount of work to be undertaken in a short period of time, including changes to OECD’s Model Treaty, Transfer Pricing guidelines and domestic law recommendations. The output of the Plan will then require additional work at each country's level in determining the timing and extend of implementation of OECD’s recommendations.
It is acknowledged that the political drive behind the BEPS Plan is significant, as both EU and G20 have expressed their support and willingness to see it to the end. Similar attempts of harmonising global taxation have been attempted in the past but without the expected results, namely the Common Corporate Tax Base proposed by EU and OECD’s Project on Harmful Tax Practices.