Base Erosion and Profit Shifting

Published 22 January 2016

As Governments around the world have been desperately trying to reduce large fiscal deficits against a backdrop of international fiscal turmoil, tax planning by large multinational corporations in compliance with current legislation, has been denounced as immoral and unpatriotic. Complex tax issues are often reduced to sound bites and facts are used selectively by politicians to make their case against perceived aggressive tax planning.

The Organisation for Economic Cooperation and Development (“OECD”) initiated the Base Erosion and Profit Sharing (“BEPS”) project with the approval of the G20 to identify ways of providing a more standardised set of tax rules globally that prevent tax avoidance practices.

BEPS is a term used to describe tax planning strategies that rely on mismatches and gaps that exist between the tax rules of different jurisdictions, to minimise the corporation tax that is payable overall, by either making tax profits “disappear” or shift profits to low tax jurisdictions where there is little or no genuine activity. In general BEPS strategies are not illegal; rather they take advantage of different tax rules operating in different jurisdictions, which may not be suited to the current global and digital business environment.

The OECD released its first BEPS report in 2013 which provided a comprehensive analysis of the tax environment and considered how BEPS could be addressed. The report did not prescribe specific measures to deal with BEPS, but it suggested that changes to established tax principles are required that could have significant implications for international taxation. The report acknowledged that multinationals engage in entirely legal and legitimate tax planning and comply with the tax laws of the countries in which they do business. The report stated that current international tax principles and approaches were no longer adequate to ensure a fair tax system in the current era of globalisation and e-commerce.

The report issued an Action Plan which would address corporate income tax at an international level and suggest new transfer pricing rules. The Action Plan detailed work to be done in 15 areas of law and tax practice.
The 15 BEPS action areas include:

1) tax challenges of the digital economy;

2) hybrid mismatch arrangements;

3) Controlled Foreign Company rules;

4) the deductibility of interest and other financial payments;

5) harmful tax practices of countries;

6) tax treaty abuse;

7) artificial avoidance of permanent establishment (PE) status;

8) transfer pricing for intangibles;

9) transfer pricing for risks and capital;

10) transfer pricing for other high-risk transactions;

11) development of data on BEPS and actions addressing it;

12) additional disclosure of aggressive tax planning arrangements;

13) country-by-country transfer pricing documentation;

14) effectiveness of tax treaty dispute resolution mechanisms; and

15) the development of a multilateral instrument for amending bilateral tax treaties to implement measures developed in the course of the work on BEPS.

The individual projects have significant interdependencies that will require skilled coordination, and so the deliverables to date need further work. Sometimes, this extra work reflects a need to gain greater consensus among the high number of countries involved. Despite scepticism that such consensus can be achieved, there are signs the process may yet be successful. No participating country has decided to opt out of the process. And while the degree of flexibility and optionality within some of the Action Plan items leaves room for inconsistent implementation, it will enable the project to move forward.

At a Summit in Turkey the G20 Leaders committed to the impletion of the BEPS project which will start designing and putting in place a framework for monitoring BEPS. It will support the implementation of the fifteen Action items. A number of the Action items will require treaties between the almost 90 countries which support the BEPS project. The OECD is working on its new Treaty template which will be adopted by many of its members.

So what can business owners do to prepare for the coming wave of change? They should look at five specific areas when considering the impact of the changes in legislation which will come:
1. They should consider impacts on any existing entities and structures to investigate potential alternatives.
2. They should ensure there is sufficient business substance in any offshore business structures, especially those involving low or no tax jurisdictions.
3. They should review the extent and nature of their business presence in foreign jurisdictions in light of potential changes to existing permanent establishment concepts.
4. Develop a central approach to transfer pricing and prepare processes and tools to enable country-by-country tax reporting.
5. Prepare a strategy for communicating their tax position to their various stakeholders and decide what to communicate, to whom, where and when.
Whilst the aim of BEPS is to fundamentally change the international tax landscape, few believe it will be entirely successful. Many think it could have a significant impact on their businesses but everyone agrees it’s going to be difficult to implement. However, all appear to be in agreement that it is vital international businesses are fully geared up for the more onerous demands ahead.

For more information about BEPS, please contact Basil Bielich on bbielich@burleigh.co.im or call +44 (0) 1624 626586.
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