The OECD releases first seven elements of BEPS action plan
TAX ALERT |
On Sept. 16, 2014, the Organisation for Economic Co-operation and Development (OECD) released the first seven deliverables of its 15-item Base Erosion and Profit Shifting (BEPS) action plan. Since all international operating businesses could be affected by the implementation of BEPS, it is crucial for international companies and their owners to monitor developments in this area.
With the growth of the digital economy and an increase in cross-border activity, the OECD has focused its efforts on stopping taxpayers seeking to avoid taxation by transferring profit to low- or no-tax jurisdictions and taking advantage of inconsistencies among global tax regimes. To this end, member countries of the OECD, together with all non-OECD G20 nations and the OECD Accession Countries (Latvia and Columbia), launched the BEPS Committee in September 2013, promising to deliver an action plan consisting of 15 deliverables. The goal of the action plan is to create a single set of consensus-based international tax rules to address BEPS that will in turn protect the corporate tax base while offering increased certainty and predictability to taxpayers. Developed with significant input from developing nations, industry groups and trade unions, the first seven elements of the action plan focus on:
- Addressing the challenges of the digital economy (Action 1)
- Ensuring the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralize hybrid mismatch arrangements (Action 2)
- Countering harmful tax practices with a priority on improving transparency, including requiring substantial activity for participation in any preferential regime (Action 5)
- Realigning taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties (Action 6)
- Assuring that transfer pricing outcomes are in line with value creation, through actions to address transfer pricing issues in the key area of intangibles (Action 8)
- Improving transparency for tax administrators and increasing certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting (Action 13)
- Facilitating swift implementation of the BEPS actions through a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties (Action 15)
In line with the above action items, the seven deliverables released on Sept. 16, 2014, include three reports and four instruments. These deliverables consist of two final reports on the digital economy (Action 1) and the feasibility of a multilateral instrument (Action 15), one interim report on harmful tax competition (Action 5), and four draft instrument proposals (Actions 2, 6, 8 and 13).
While the OECD's BEPS recommendations will not be presented in their entirety for final approval until September 2015, the action items recently released will be presented at the next G20 Finance Ministers meeting in Australia on Sept. 20 and 21, 2014, and then at the G20 leaders meeting in Australia on Nov. 15 and 16, 2014. Reports on the final eight action items will be released within the next year and will focus on:
- Strengthening rules regarding controlled foreign corporations (Action 3)
- Limiting base erosion via interest deductions and other financial payments (Action 4)
- Preventing the artificial avoidance of permanent establishment status (Action 7)
- Assuring that transfer pricing outcomes are in line with value creation (Action 9 and 10)
- Streamlining processes to counter harmful tax practices more effectively (Action 11)
- Requiring taxpayers to disclose their aggressive tax planning arrangements (Action 12)
- Making dispute resolution mechanisms more effective (Action 14)
- Developing a multilateral instrument to incorporate tax-treaty-related BEPS measures (Action 15)
Work on the reports to be delivered in 2015 has already begun, and the OECD will continue to strengthen the proposals released on Sept. 16. The impact of these proposals on international tax planning and the potential timeline for member countries to implement the proposals is, at this stage, still unclear.
While the recommendations of the OECD BEPS initiative are broadly supported by the G20 nations, the recommendations are not binding. However, all taxpayers with international operations could be affected by the implementation of parts of the BEPS initiative. In particular, Action 13 could impose significant new reporting obligations and could increase the cost, complexity and burden of international tax compliance, if and when countries incorporate it into their domestic law. Companies that are active internationally should monitor these developments in order to effectively plan for the impact of these potentially significant proposals.