Base Erosion and Profit Shifting (BEPS) Deliverables - Update September 2014: OECD/G20
In September the OECD provided updates on seven of the fifteen action points in the Base Erosion and Profit Shifting Project (‘BEPS’). The aim of the project is to bring to an end the practice of BEPS by international corporations. Of the seven reports, five are developments on the existing action points and are subject to future deliverables in the course of 2015. Only two action point reports have been finalised and it is these two final reports which we consider first.
Action Point 1 addressed the BEPS issues of the digital economy. The finalised report concluded that it raised no specific BEPS concerns that are any different those relevant to the existing economy and that need to be addressed separately. The report does, however, acknowledge that in certain key areas the digital economy intensifies BEPS concerns. In conclusion, it was considered that other Actions would adequately address the BEPS concerns in a digital economy.
Action Point 15 considers the feasibility of a multilateral agreement developed with the aim of modifying existing bilateral tax treaties. Such a multilateral agreement would aim to speed and streamline the current process for the adoption of BEPS tax treaties and, as such, the report concludes that it would be a desirable means to address BEPS concerns internationally and would be feasible in practice. It is suggested that a multilateral agreement could have the same effect as the negotiation of 3,000 or more bilateral tax treaties.
The interim reports consider Action Points 2, 5, 6, 8 and 13 which we consider in summary as follows.
Action Point 2: Hybrid entities and structures. Recommendations were made to ensure domestic laws are linked to address BEPS issues and the OECD Model Tax Convention is revised to ensure hybrids do not unduly benefit from the treaties.
Action Point 5: Harmful tax practices. The report addressed steps that should be taken to stop or reduce harmful tax practices and the progress that has so far been made against this problem. Recommendations were made to increase transparency and action that should be taken to enhance compulsory exchange of information in connection with preferential tax regimes.
Action Point 6: Treaty Abuse. Consideration was given to impose a clause to limit benefits. The proposed clause would act in conjunction with a test of principal purpose as it appears in the OECD Model Tax Convention. A further report is expected before September 2015 to consider ‘real business substance’ for international tax planning structures.
Action Points 8 and 13: Transfer Pricing. The report on transfer pricing of intangibles contains both interim and final revisions with the final report due in the course of next year, though no major changes are expected. The report on documentation and reporting by country of transfer pricing, recommends that multinational companies be obliged to maintain a transfer pricing master file accompanied by local files for each jurisdiction and impose a local annual filing requirement. If adopted, this proposal will impose a significant administrative burden on multinational companies.