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OECD Presents BEPS Action Plan

by Ulrika Lomas,, Brussels

05 October 2015

After two and a half years of preparation and consultation, the OECD has released its final reports on how to bring global tax rules into the modern age and tackle base erosion and profit shifting.

Immediately ahead of two webcasts that took place on October 5, the OECD released recommendations for "a comprehensive, coherent, and co-ordinated reform of international tax rules," to close loopholes said to cost nations up to USD240bn in corporate tax revenues each year.

The OECD's work centers on the taxation of profits where economic activities take place, to close gaps in existing international tax rules that allow corporate profits to "disappear" or to be artificially shifted to low or no tax territories.

According to Pascal Saint-Amans, speaking at the first of two webcasts on the matter, there is consensus among countries on the package as a whole and in particular on those Actions covering transfer pricing-related topics.

The BEPS package 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 Saint-Amans has newly 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. In particular, he noted the convergence between the OECD's recommendations in the area of transfer pricing and those recommendations concerning cash boxes, CFC rules, and interest deductibility, among others.

Asked about the heightened risk of double taxation, Saint-Amans said there would "unambigiously" be an increase in double taxation and therefore disputes. However, he said rules as they stand aren't fit for purpose. As a result, there have been numerous disputes concerning both double taxation and double non-taxation (statistics newly released by the OECD show the number of Mutual Agreement Procedure (MAP) cases increased from 1,341 in 2010 to 1,910 in 2013), but the OECD believes newfound international cooperation in tax matters will eventually lead to fewer disputes and more collaboration on tax administration and collection. Double tax issues will continue be resolved through the MAP, and taxing rights determined and enforced through domestic legislation, he said.

Saint-Amans disclosed that the USD750m threshold for the new transfer pricing documentation standards is indeed arbitrary. It will be in place until 2020 to allow for a few years of testing, after the first automatic exchanges in 2018. These requirements currently cover 90 percent of MNEs by activity and there is an expectation that the threshold will be revised downward, he said. It was agreed that groups should disclose eight pieces of information for each territory in which they have operations, to provide an appropriate amount of information as a risk assessment tool, without overburdening tax authorities.

Last, he discussed why the OECD had not pursued proposals for unitary taxation under the so-called the formulary apportionment approach. He said that while there are theoretical arguments as to why unitary taxation would be more effective than the existing arm's length principle (ALP), unitary taxation is untested and not without its own deficiencies. While not ruling out such a move in the future, he said upgrading TP rules under the ALP is the only feasible approach for now, highlighting that the EU has been discussing a common consolidated corporate tax base and unitary taxation with little progress for almost two decades.

He concluded that the adoption of the BEPS recommendations will usher in a return to a common-sense approach to taxing multinationals, where tax authorities will be newly equipped to tackle transfer mispricing under the ALP and he expressed hope that companies will recognize the tax risk involved – as well as the reduced benefits – with structuring their tax affairs without the underlying economic substance to back up their positions.

TAGS: environment | tax | investment | property tax | interest | law | intellectual property | multinationals | legislation | tax planning | transfer pricing | G20 | standards | BEPS

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