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On October 5, 2015, the OECD released its highly anticipated final set of reports under its base erosion and profit shifting (BEPS) project, containing measures which, if implemented fully, would represent the largest shift in international tax principles in history. This feature provides a summary of the project to date, and what individual nations are doing, or intend to do, to make it a reality.
On February 12, 2013, the OECD released its preliminary report on the problem of BEPS, which contained a series of observations about current shortcomings in the international tax system, and reaffirmed its view that current international tax standards have been left behind by changes in global business practices, especially with regards to companies which have a large presence on the internet, but a small "physical" presence on the ground and in the area of intangibles generally. The fact that it is possible to be heavily involved in the economic life of another country, for example by doing business with customers located in that country via the internet, without having a taxable presence there or in another country that levies tax on profits, was noted repeatedly throughout report.
Although the "Addressing BEPS" report acknowledged that cross-border businesses may suffer as a result of badly constructed international tax rules which can result in the double taxation of income, the BEPS Action Plan produced by the OECD in July 2013 for the G20 dealt more with the question of how to stop the double non-taxation of multinationals' income occurring in the future.
The Action Plan contained 15 specific actions designed to give governments the domestic and international mechanisms to prevent corporations from paying little or no taxes, as follows:
OECD Secretary-General Angel Gurría said that the Action Plan "marks a turning point in the history of international tax co-operation. It will allow countries to draw up the coordinated, comprehensive and transparent standards they need to prevent BEPS. International tax rules, many of them dating from the 1920s, ensure that businesses don't pay taxes in two countries - double taxation. This is laudable, but unfortunately these rules are now being abused to permit double non-taxation. The Action Plan aims to remedy this, so multinationals also pay their fair share of taxes."
The Final Package
Between the OECD publishing the initial Action Plan, and releasing its final recommendations, extensive consultations took place involving governments, regional tax organizations, NGOs and business associations. Indeed, all told, the consultative phase saw 60 countries directly involved in the technical groups and others participating through regional structured dialogues, while businesses and NGOs contributed more than 12,000 pages of comments on the 23 discussion drafts published and discussed at 11 public consultations.
This work culminated in the final BEPS package, announced by the OECD with much fanfare on October 5, which includes new minimum standards on: country-by-country reporting, to provide tax administrations with a global picture of the operations of multinationals; 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 the automatic exchange of information on tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.
In addition, guidance on the application of transfer pricing rules will be updated, including to prevent taxpayers from using so-called "cash box" entities and to redefine the concept of permanent establishment. The OECD is also encouraging governments to adopt stronger rules covering Controlled Foreign Corporations, interest deductibility, and hybrid mismatch arrangements (which enable double non-taxation).
Finally, the OECD is continuing to lead talks between nearly 90 countries on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016, and Pascal Saint-Amans, Director of the Center for Tax Policy and Administration at the OECD, disclosed that it will likely take just over a year for the changes to be introduced, subject to an agreement between states.
The package will repaint the tax landscape globally and, according to Saint-Amans, such fundamental changes would have not been possible before the financial crisis and the advent of tax information exchange. He said recent international cooperation on tax matters has opened the door to extensive reforms previously thought impossible, such as during the work it attempted ten years ago to close the door on aggressive tax planning.
During the webcast, Saint-Amans was upbeat when asked whether the OECD is concerned countries will act unilaterally or reject some measures. He admitted countries are unlikely to move to implement the recommendations all at the same time, but said the OECD has developed a flexible package, containing minimum standards, with recommendations that have been drafted to specifically complement one another, such that a country that adopts them won't be disadvantaged or left unprotected should another territory decide not to adopt a particular recommendation.
The final package was endorsed by G-20 finance ministers at their on October 8, 2015, in Lima, Peru, where they stressed their commitment to the rapid, widespread, and consistent implementation of the BEPS recommendations, and reiterated the need for the OECD to prepare an inclusive monitoring framework by early-2016. The ministers agreed to discuss practical steps towards implementation during their next summit on November 15-16 in Antalya, Turkey.
However, in the days since the final package was announced, it is becoming apparent that some countries are keener than others to begin the process of implementing some of the proposed measures. A summary of responses to the final recommendations in certain key jurisdictions is provided in the following sections.
Australia has been an early mover in the area of BEPS, having adopted some measures even before the final recommendations became known. Indeed, Assistant Treasurer Kelly O'Dwyer said on October 6 that the fallout for Australian firms from the BEPS project "won't be radical in Australia, as we have already moved pre-emptively to strengthen our laws."
Commenting on the release of the OECD's final BEPS reports, O'Dwyer said: "The Coalition Government's measures line up with the OECD recommendations to deliver tax laws that will combat tax avoidance and ensure our system is robust and equitable. We are already ahead of the game internationally, and we are working within the G20 and the OECD to promote transparency, integrity, and that quintessentially Australian virtue – fairness – in the global tax landscape."
"Legislation is before Parliament to level the playing field and ensure multinationals pay their fair share of tax. This includes the multinational anti-avoidance legislation, which will encourage entities to book their revenue in Australia when they have significant sales activity here, and stronger penalties to combat tax avoidance and profit shifting," the Assistant Treasurer explained.
She added that the Government is also legislating for the introduction of country-by-country reporting and has asked the Board of Taxation to consult with taxpayers on the OECD's recommendations on hybrid mismatches.
The Government has also "taken action on harmful tax practices and pursued rules to prevent tax treaty abuse … [and] doubled the penalties for those who choose to break the rules through transfer pricing and profit shifting schemes," she said.
O'Dwyer did nevertheless confirm that the Government "will look closely at the final BEPS recommendations and consider what further steps need to be taken to strengthen Australia's laws."
The UK is another country which was accused of undermining the BEPS project by being a little too enthusiastic to embrace the OECD's ideas before they were fully formed. It's diverted profits tax on profits shifted "artificially" from the UK to low- or no-tax jurisdictions has attracted a great deal of criticism from business groups in particular, and even the OECD itself has suggested that the measure was unhelpful to its cause.
Nevertheless, the UK certainly wishes to remain in the BEPS fast lane. In an update on the UK response to the BEPS package, David Gauke, the Financial Secretary to the Treasury, said the UK is "moving swiftly on a number of fronts." He disclosed that the country is part of a group of 20 countries committed to mandatory and binding arbitration as a way of resolving tax treaty disputes and spoke of the Government's plans to implement country-by-country reporting requirements. The UK has also consulted on the introduction of new rules to counter hybrid mismatch arrangements.
Gauke also took the opportunity to explain the rationale behind the introduction of the Diverted Profits Tax. He said: "Its objective was simple, and chimes with the BEPS objective: to ensure that when economic activities giving rise to profits take place in the UK, then that is where those profits are taxed."
"It is a targeted measure, designed to counter the use of aggressive tax planning techniques used by some multinationals to divert profits from the UK. These contrived arrangements have to be between related parties – that is, companies within a group. They must create a tax mismatch whereby a group pays less than 80 percent of the tax that would have been due in the UK without these arrangements. And they must be designed to reduce tax and the tax benefits created must outweigh the non-tax or commercial benefits," Gauke said.
According to Gauke, the DPT ensures that profits are taxed where they are made and sends a "powerful worldwide signal that we take this seriously."
As a country which is regularly accused of facilitating BEPS with its special tax regimes for intellectual property and headquarters operations, the Netherlands has also been considering its response to the OECD's proposals.
A report to the legislature on the impact of the BEPS project on Dutch tax rules by Secretary for Finance Eric Wiebes, splits measures into those that concern domestic legislation; those that require international efforts; and those that will lead to an ongoing change in Dutch policies. Wiebes commented: "The Government believes that combating international tax avoidance and abuse is socially desirable and that measures are unavoidable. At the same time, we must ensure that fair competition and employment in the Netherlands are safeguarded."
However, the Finance Secretary went on to add that: "Our system has always taken account of companies that operate internationally, and ensures that national and multinational companies are treated equally. The participation exemption, the absence of withholding tax on interest and royalties, our extensive treaty network, and providing certainty in advance are therefore not in themselves up for discussion."
On proposals to amend domestic law, he said the Government sees transparency and automatic exchange of tax information as a key weapon against tax avoidance. The BEPS reports contain a minimum standard for the mandatory spontaneous exchange of information on rulings (action 5), and the Netherlands aims to play a leading role in this regard, he said.
Dutch legislation on country-by-country reporting will enter into force on January 1, 2016. In addition, the tax administration will already start exchanging information on rulings on the basis of this OECD standard in 2016. In addition, on July 14, 2015 the Netherlands and Germany signed an agreement to begin the spontaneous exchange of information on rulings as soon as possible. The Netherlands also supports the European Commission's initiative on the automatic exchange of information on tax rulings.
He said the Netherlands already meets the minimum standard for dispute resolution (action 14) and changes will be made to the nation's patent box regime to bring it into line with international standards.
Finally, he said the Government will promote Dutch policy and strengthen it where necessary: "I list the main strengths of the Dutch tax system. While these strengths entail a – limited – risk of abuse, unfocused, and disproportionate countermeasures could have major consequences for the Dutch tax climate for businesses. The Netherlands has promoted these features of its tax system during discussions within the OECD and the EU, and will continue to do so in the future. The Government considers the main strong points of our tax system to be our extensive treaty network, the participation exemption, absence of withholding tax on interest and royalties, our efficient tax administration, and our efficient dispute resolution procedures."
"These elements help to create a transparent, clear, and attractive tax climate for international businesses. Where the BEPS reports touch on these advantages, the Government is prepared to make them more robust to prevent abuses," he concluded.
Ireland is another country which, along with the Netherlands, is often held accountable for a facilitating a large proportion of corporate tax avoidance (the infamous "double Irish, Dutch sandwich" being a supposedly popular tax avoidance mechanism), particularly by US firms with large amounts of IP income. Nevertheless, Finance Minister Michael Noonan has said that Ireland is committed to the BEPS project and will play a full part in its implementation.
In his official response to the publication of the final BEPS package, Noonan outlined the Irish Government's plans: "I welcome the publication of the OECD reports which set out a comprehensive multilateral approach to tackling aggressive and harmful tax planning. As a first step we will legislate for country-by-country reporting and introduce a Knowledge Development Box, which will be the first and only such box in the world that complies with the OECD's new standards."
The Finance Department said that the BEPS reports do not affect Ireland's low corporate tax rate, which it has defended doggedly in recent years. "The OECD has explicitly stated that taxation is at the core of countries' sovereignty, and each country is free to set up its corporate tax system as it chooses, including charging the rate it chooses," the Department stated.
Ireland has also announced that it would amend its corporate residency rules, thereby scheduling an end to the possibility to apply the 'double Irish' tax scheme.
In fact, there are quite a lot of BEPS-inspired changes that have already taken place behind the scenes. Many of these are summarized in the European Commission's Tax Reforms in EU Member States 2015 report, which notes that member states have implemented various measures, including introducing strict interest limitation rules and legislating to close opportunities for the use of hybrid mismatch arrangements that lead to double non-taxation.
The report states that four states – the Czech Republic, Spain, Poland, and Slovakia – have made considerable improvements to their transfer pricing rules, in particular by extending reporting requirements.
Several member states have introduced or strengthened general or specific anti-avoidance provisions. Denmark announced the introduction of a general anti-abuse provision, while Ireland tightened its general anti-avoidance rule and its mandatory disclosure regime. Poland introduced new legislation on controlled foreign companies, and Spain broadened the scope of its existing legislation in this area. Spain also introduced new laws addressing hybrid mismatches. Slovakia introduced thin capitalization rules and a few member states (including Spain and Poland) have tightened the criteria for benefiting from interest deductibility, the report says.
As part of a broader review of its tax system, Italy issued draft legislation that redefines the concepts of abuse of law and tax avoidance, with the aim of increasing legal certainty for taxpayers.
In addition, some member states have also taken action to ensure that specific tax regimes are less vulnerable to tax avoidance, and have addressed mismatches that arose as a result of the interaction between different countries' tax rules. Examples include two sets of measures introduced by the UK, the first preventing contrived loss arrangements and the second restricting loss relief for banks.
Last, a number of reforms have also been introduced or announced with the aim of improving transparency. In the UK, for example, a clause was introduced in the 2015 Finance Bill that gives HM Treasury power to set regulations introducing country-by-country reporting, as defined in guidance published by the OECD. Spain introduced a similar reform. Luxembourg adopted a Grand-Ducal Regulation that formalizes the practice of advance tax rulings and provides amongst others for the rulings to be publicized, in an anonymized form.
Last, but certainly not least in this country round-up, is the United States. As the world's largest economy, the US was always going to have a major bearing on the outcome of the BEPS project. But judging by the comments of senior Government figures and members of Congress, the American attitude to the project can be best summed up as one of caution.
Speaking at the G-20 BEPS Press Conference, US Treasury Secretary Jack Lew said that while there is wide agreement on the OECD's recommendations, countries should also be cognizant of the economic risks the project poses to economic growth if it is not implemented correctly. "As we turn to this work of implementation and monitoring, we must ensure that we are building fair and efficient tax administration regimes around the world to implement the new rules and ensure that tax administration is not inhibiting foreign direct investment and global growth," he said.
Lew said the US "is proud to have played a leading role in developing the BEPS recommendations. We were able to advance our ideas in key areas such as limiting interest deductions and pushing for improved dispute resolution among countries. We are already engaged in the process of BEPS implementation, including country-by-country reporting by large multinational firms, and will continue to work to advance this important agenda."
Lew reiterated the G-20's joint "commitment to find a constructive way to have more inclusive tax discussions which incorporate the concerns and policy positions of both developing and developed countries."
However, concerns are still being expressed over the possible targeting of US multinationals in the BEPS proposals, particularly the plans for country-by-country reporting. House of Representatives Ways and Means Committee Chairman Paul Ryan (R – Wisconsin) commented that "trillions of dollars of American capital are locked out of the United States and, as a result, US companies are being targeted by governments eager to tax away their earnings." He added that, "while the details still require close review, [the BEPS proposals] will only increase the pressure for American businesses to move overseas. And could put huge new burdens on American job creators."
Ryan also said that he is troubled there has been no reply to questions on BEPS that he and the Senate Finance Committee Chairman Orrin Hatch (R – Utah) raised with the Treasury Department in both June and August this year. "We are not convinced that Treasury has the authority to require CbC reporting by certain US companies (including sharing the information with foreign governments)," they had written. "In addition, the benefits to the US Government, businesses, and workers from providing sensitive information in the CbC reports is unclear, at best." They were also concerned about the OECD's interest-deductibility limitation proposals.
Hatch has been a particularly outspoken critic of the BEPS project, and in a joint statement released with Ryan's predecessor Dave Camp (R – Michigan) last year, he expressed his concern that the project is "being used as a way for other countries to simply increase taxes on American taxpayers."
Outspoken on this issue Hatch may be, but his views probably aren't that controversial among his Republican colleagues in Congress, who have resisted any attempts to raise taxes over the last couple of years to tackle the federal deficit. And given that the US Government will be reliant on Congress's cooperation when the time comes to start implementing BEPS measures (if that time comes), and that Republicans are currently in the majority, the OECD would be wise to contemplate a US-shaped hole in the BEPS implementation phase, and the consequences this has for the project's outcomes overall.
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