OECD Base Erosion and Profit Shifting Action Plan
Amid growing global concern regarding tax evasion, the OECD has developed a report on national tax laws that have not kept pace with the globalization of corporations and the digital economy, leaving gaps that can be exploited by multinational corporations to reduce their taxes artificially. The report, which was produced at the request of the G20, concludes that current rules provide opportunities to associate more profits with legal constructs and intangible rights and obligations, and to shift risk intra-group legally.
On July 19, 2013, the OECD subsequently introduced an Action Plan on Base Erosion and Profit Shifting to address the concerns raised by the report, presenting the findings at a meeting of G20 Ministers of Finance and Governors of Central Banks in Moscow. Quickly known as BEPS (Base Erosion and Profit Shifting), the ambitious plan sets out to amend domestic legislation, tax treaties and transfer pricing rules, identifying 15 specific actions that will give governments the domestic and international instruments to prevent corporations from paying little or no taxes. It aims to provide comprehensive strategies for countries concerned that current tax rules in some locations allow for the allocation of taxable profits to locations different from those where the actual business activity takes place.
The actions outlined in the plan will be delivered in the coming 18 to 24 months by the joint OECD/G20 BEPS Project, which involves all OECD members and G20 countries on an equal footing. To ensure that the actions can be implemented quickly, a multilateral instrument will also be developed for interested countries to amend their existing network of bilateral treaties.
The OECD notes the following:
- The action plan has four central tenets: to establish international coherence of corporate income taxation; to restore the full effects and benefits of international standards; to ensure transparency while promoting increased certainty and predictability; and to agree on policies and subsequent tax rules in order to implement the measures swiftly.
- The Action Plan recognizes the importance of addressing the digital economy, which offers a borderless world of products and services that too often do not fall within the tax regime of any specific country, leaving loopholes that allow profits to go untaxed.
- The Action Plan will develop a new set of standards to prevent double non-taxation. Closer international co-operation will close gaps that, on paper, allow income to ‘disappear’ for tax purposes by using multiple deductions for the same expense and “treaty-shopping”. Stronger rules on controlled foreign companies would allow countries to tax profits stashed in offshore subsidiaries.
- Domestic and international tax rules should relate to both income and the economic activity that generates it. Existing tax treaty and transfer pricing rules can, in some cases, facilitate the separation of taxable profits from the value-creating activities that generate them. The Action Plan will restore the intended effects of these standards by aligning tax with substance – ensuring that taxable profits cannot be artificially shifted, through the transfer of intangibles (eg patents or copyrights), risks or capital, away from countries where the value is created.
- Greater transparency and improved data are needed to evaluate, and stop, the growing disconnect between the location where financial assets are created and investments take place and where MNEs report profits for tax purposes. Requiring taxpayers to report their aggressive tax planning arrangements and rules about transfer pricing documentation, breaking-down the information on a country-by-country basis, will help governments identify risk areas and focus their audit strategies. And making dispute resolution mechanisms more effective will provide businesses with greater certainty and predictability.
The 15 Point Plan, with target completion dates, is summarized below. Full detail is available in Table A.1 of the OECD BEPS Plan.
1. Address the tax challenges of the digital economy (to be completed by September 2014)
2. Neutralize the effects of hybrid mismatch arrangements (to be completed by September 2014)
3. Strengthen controlled foreign company (CFC) rules (to be implemented as of September 2015)
4. Limit base erosion via interest deductions and other financial payments (to be implemented by September/December 2015)
5. Counter harmful tax practices more effectively, taking into account transparency and substance (to be completed by September 2014/December 2015)
6. Prevent treaty abuse (to be completed by September 2014)
7. Prevent the artificial avoidance of permanent establishment (PE) status (to be implemented by September 2015)
8. Develop rules to prevent BEPS by moving intangibles among group members (to be completed by September 2014/2015)
9. Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members (to be completed by September 2014/2015)
10. Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties (to be completed by September 2015)
11. Establish methodologies to collect and analyze data on BEPS and the actions to address it (to be completed by September 2015)
12. Require taxpayers to disclose their aggressive tax planning arrangements (to be completed by September 2015)
13. Re-examine transfer pricing documentation (to be completed by September 2014)
14. Make dispute resolution mechanisms more effective (to be completed by September 2015)
15. Develop a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.
As this highly ambitious effort develops, it will have obvious impact on the tax planning efforts of multinationals, so we will keep you informed of necessary actions. If you’d like further information on the OECD’s work on Base Erosion and Profit Shifting, please see BEPS Frequently Asked Questions and the OECD BEPS website.