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OECD Proposes Fixes To Global Tax Rules

by Ulrika Lomas,, Brussels

17 September 2014

The Organisation for Economic Cooperation and Development (OECD), on September 16, 2014, released its first recommendations for "a co-ordinated international response to base erosion and profit shifting (BEPS)."

OECD Secretary-General Angel Gurría said: "The G-20 has identified base erosion and profit shifting as a serious risk to tax revenues, sovereignty, and fair tax systems worldwide. Our recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment."

Seven "deliverables" have been released, of a total of 15 that will be finalized by December 2015, which aim to:

  • Ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralize hybrid mismatch arrangements (Action 2);
  • Realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties (Action 6);
  • Assure 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);
  • Improve transparency for tax administrations and increase certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting (Action 13);
  • Address the tax challenges of the digital economy (Action 1);
  • Facilitate swift implementation of the BEPS actions through the development of a multilateral instrument to amend bilateral tax treaties (Action 15); and
  • Counter harmful tax practices (Action 5).

It was announced that the OECD's Committee on Fiscal Affairs will consider, in January 2015, a draft mandate for an international conference for the negotiation of a multilateral convention to streamline the implementation of the BEPS Action Plan. This responds to frequently aired concerns that unilateral policies from nations acting in their domestic self-interest could de-rail the success of the BEPS plan.

In an emailed information brief on the proposals, the OECD said implementation of the measures will go a long way in addressing some of the key BEPS challenges. It said that model rules to neutralize hybrid mismatches will put an end to costly multiple deductions for a single expense or deduction in one country without corresponding taxation in another.

Meanwhile, the OECD's proposed response to harmful tax practices would focus on the "distortionary influence" of tax on the location of service activities, with progress to be sought on the transparency of tax rulings and also the development of a methodology to assess substantial activity in intellectual property regimes and other preferential regimes.

Treaty shopping and other forms of treaty abuse will be countered by a global agreement that anti-treaty abuse provisions should be included in tax treaties.

Further, Action 8 (on ensuring transfer pricing outcomes are in line with value creation) will seek to apply tax to value creation activities under transfer pricing rules, beginning with a focus on intangibles. A consensus was reached among nations that the artificial shifting of profits to no- or low-tax jurisdictions, for example through cash boxes, "can no longer be tolerated."

The OECD said work on transfer pricing rules will continue, including under Actions 9 and 10, in 2015.

"These measures across seven areas of the Action Plan are an important step forward in fighting BEPS. Viewed together with the 2015 deliverables, and once implemented to double tax treaties and domestic laws, the measures will ensure the coherence of corporate tax systems in a cross-border environment, introduce substance requirements in the area of tax treaties and transfer pricing, and ensure transparency while promoting certainty and predictability," the OECD said.

The BEPS recommendations will be a key item on the agenda when G-20 Finance Ministers next convene on September 20-21, 2014, in Cairns, Australia.

OECD working groups will now focus on the eight remaining Action points, which the OECD has confirmed will be released in September and December, 2014:

  • Action 3: on the design of effective controlled foreign company (CFC) rules, to provide countries with tools to tackle the large amounts of untaxed profits booked offshore;
  • Action 4: regarding rules that limit base erosion via interest deductions and other financial payments;
  • Action 5: to continue work on preventing harmful tax practices, with a specific focus on preferential intellectual property regimes;
  • Action 7: on preventing the artificial avoidance of permanent establishment (PE) status – an issue highlighted by the OECD as of particular importance for developing and emerging economies;
  • Actions 8-10: on ensuring outcomes from transfer pricing rules are in line with value creation, relating to intangibles, risks and capital, and other high-risk transactions;
  • Action 11: on methodologies to collect data and carry out economic analysis on BEPS, including its spillover effects across countries;
  • Action 12: on domestic rules requiring the disclosure of aggressive tax planning arrangements; and
  • Action 14: to enhance the effectiveness of dispute resolution mechanisms among tax administrations.

TAGS: compliance | tax | investment | business | double tax agreement (DTA) | tax compliance | tax avoidance | commerce | law | intellectual property | accounting | Organisation for Economic Co-operation and Development (OECD) | Australia | enforcement | offshore | e-commerce | multinationals | legislation | tax planning | transfer pricing | G20 | tax reform | standards | regulation | Legislative Scrutiny | legislation amendments | trade | European Union (EU) | Europe | Economy | Tax | Tax Evasion

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