BEPS Final Reports issued on October 5, 2015
On October 5, the OECD presented a wide-ranging set of final reports under fifteen “Action Items” that are intended to be a foundation for the reform of worldwide international tax rules. These reports, under the common heading of the BEPS project, had their origin in a request of the OECD in 2013 by the leaders of the G20 countries to focus on tax reform recommendations to prevent tax avoidance practices. The final BEPS reports provide governments with recommendations for addressing “gaps” in existing international rules that have resulted in the shifting of large amounts of income to low-tax jurisdictions. Although the OECD is not a legislative body, its guidelines on international taxation and transfer pricing have been followed or adopted in many countries, so that the BEPS reports likely will, over time, translate into changes in tax legislation in individual countries around the globe, including the US.
Background on BEPS
The OECD has estimated that the various “tax avoidance” practices that the BEPS reports are intended to address have resulted in tax revenue losses of USD 100-240 billion annually, or anywhere from 4 to 10% of global corporate income tax (CIT) revenues. The impact is particularly large on developing countries that derive a relatively larger portion of revenues from CIT.
The OECD’s task to address BEPS was built around three pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards, to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency as well as certainty for businesses and governments.
What do the BEPS reports address?
The final package of BEPS measures includes recommendations on:
- Country-by-country reporting for transfer pricing purpose, which will give tax administrations a global picture of the operations of multinational enterprises;
- Curbing “treaty shopping,” to put an end to the use of “conduit” companies to channel investments;
- Curbing “harmful tax practices,” in particular in the area of intellectual property, and through automatic exchange of tax rulings;
- Effective mutual agreement procedures between tax administrations of different countries, to ensure that the fight against double non-taxation does not result in double taxation;
- Ending the use of “Cash box” entities that shelter profits in low or no-tax jurisdictions;
- The key concept of Permanent Establishment (under income tax treaties,) to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition;
- Strengthened rules on Controlled Foreign Corporations;
- A common approach to limiting base erosion through interest deductibility, and
- New guidelines to prevent “hybrid mismatch arrangements” from making profits “disappear” for tax purposes through the use of complex financial instruments.
What happens next?
After the reporting out of the BEPS Action Plans to the G20 Leaders during their annual summit on November 15-16 in Turkey, the OECD will shift its focus to designing and putting in place a framework for monitoring BEPS, as well as supporting implementation of the fifteen Actions items. Since many of the Action items will need to operate in the context of income tax treaties (that are bilateral in nature,) nearly 90 countries are working together on the development of a multilateral instrument that will be capable of incorporating the tax treaty-related BEPS measures into the existing network of over 3000 bilateral income tax treaties.
In the meantime, with the guidelines in place, various countries have begun to adopt portions of the BEPS recommendations into their domestic laws. In particular, a number of countries are moving forward on the adoption of the Country-by-Country Reporting transfer pricing documentation recommendation, which will increase materially the workload for companies that are affected by this recommendation.
Although it may take relatively longer for the United States to adopt BEPS recommendations than other countries, particularly those in the OECD, any company with multinational operations will eventually be impacted by the scope of the BEPS recommendations as these are incorporated into domestic tax rules around the world. Corporate tax directors, CFO’s and controllers have begun the process of assessing their international structure and transactions to determine whether and how the BEPS recommendations may affect them.
For a conversation about BEPS and how it may impact your multinational company’s operations, please contact Fuad Saba, Managing Director.
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