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A&S|BEPSCenter

Launched officially in July 2013 with the publication of a 15-step Action Plan, the OECD BEPS (Base Erosion and Profit Shifting) project aims to develop a new set of standards to prevent the allocation of taxable profits to locations different from those where the actual business activity takes place, resulting in double non-taxation.

This special A&S|BEPSCenter website has been created with the aim to provide a quick overview of the current status of the project and provide tools for the key individuals of multinational corporations to observe the development and prepare for the upcoming changes, in terms of both compliance and planning. Presented below are the statuses of each of the 15 BEPS Action Plan steps, in addition to the timeline of the key developments and deliverables in the project so far and the status of national implementation across the globe.

The final reports for the project were published in October 2015 and are further addressed below under each Action step. In addition, the OECD published the following supporting documents:

We hope you find this special website useful and relevant for your informational needs. Should you have any additional questions related to BEPS, please do not hesitate to contact us.

BEPS status per Action Plan step

Action 1: Tax challenges of the digital economy
Final report / guidance published

A&S analysis on the current state of Action 1

Action 1 of the BEPS Action Plan deals with the tax challenges of the digital economy. As the work under the Action is strongly connected and in many ways (inter)dependent with other Action steps of the BEPS project, the key message in the interim report published in September 2014 focused on underlining the importance of the topic with respect to all development work in the field of international taxation.

According to the final report on Action 1, the digital economy is the result of a transformative process brought by information and communication technology (ICT), which has made technologies cheaper, more powerful, and widely standardized, improving business processes and bolstering innovation across all sectors of the economy. Because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes. The digital economy and its business models present however some key features which are potentially relevant from a tax perspective. These features include

  • mobility, reliance on data;
  • network effects;
  • the spread of multi-sided business models; and
  • a tendency toward monopoly or oligopoly and volatility.

The types of business models include several varieties of e-commerce, app stores, online advertising, cloud computing, participative networked platforms, high speed trading, and online payment services. The digital economy has also accelerated and changed the spread of global value chains in which multinational enterprises (or MNEs) integrate their worldwide operations.

While the report states that the digital economy and its business models do not generate unique BEPS issues, some of its key features exacerbate BEPS risks. These BEPS risks were identified during the project and the work on the relevant actions of the BEPS Project was informed by these findings and took these issues into account to ensure that the proposed solutions fully address BEPS in the digital economy. As a result, it was agreed to modify the list of exceptions to the definition of PE to ensure that each of the exceptions included therein is restricted to activities that are otherwise of a “preparatory or auxiliary” character, and to introduce a new anti- fragmentation rule to ensure that it is not possible to benefit from these exceptions through the fragmentation of business activities among closely related enterprises. For example, the maintenance of a very large local warehouse for purposes of storing and delivering goods sold online to customers by an online seller of physical products would constitute a permanent establishment for that seller under the new standard.

In addition, according to the final report, it was also agreed to modify the definition of PE to address circumstances in which artificial arrangements relating to the sales of goods or services of one company in a multinational group effectively result in the conclusion of contracts, such that the sales should be treated as if they had been made by that company. For example, where the sales force of a local subsidiary of an online seller of tangible products or an online provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective large clients for those products or services, and these contracts are routinely concluded without material modification by the parent company, this activity would result in a permanent establishment for the parent company. The recommendations on the design of effective CFC include also definitions of CFC income that would subject income that is typically earned in the digital economy to taxation in the jurisdiction of the ultimate parent company.

It is expected that the implementation of the measures presented in the final report, as well as the other measures developed in the BEPS Project (e.g. minimum standard to address treaty shopping arrangements, best practices in the design of domestic rules on interest and other deductible financial payments, application to IP regimes of a substantial activity requirement with a “nexus approach”), will substantially address the BEPS issues exacerbated by the digital economy at the level of both the market jurisdiction and the jurisdiction of the ultimate parent company.

Some of the options analyzed by the OECD working party responsible for Action 1, namely (i) a new nexus in the form of a significant economic presence, (ii) a withholding tax on certain types of digital transactions, and (iii) an equalization levy, were not recommended at this stage. Individual countries could, however, introduce any of these three options in their domestic laws as additional safeguards against BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties.

The work on digital economy is expected to continue following the completion of the other follow-up work on the BEPS Project. It is also stated that a report reflecting the outcome of the continued work in relation to the digital economy should be produced by 2020.

Action 2: Neutralise the effects of hybrid mismatch arrangements
Final report / guidance published

A&S analysis on the current state of Action 2

The final report on Action 2 was published in October 2015.

Hybrid mismatch arrangements, as defined by the OECD, exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral.

With a view to increasing the coherence of corporate income taxation at the international level, the OECD BEPS project called for recommendations regarding the design of domestic rules and the development of model treaty provisions that would neutralize the tax effects of hybrid mismatch arrangements. The final report sets out those recommendations: Part I contains recommendations for changes to domestic law and Part II sets out recommended changes to the OECD Model Tax Convention.

In comparison to previous work published under the Action, further work has been undertaken on asset transfer transactions (such as stock-lending and repo transactions), imported hybrid mismatches, and the treatment of a payment that is included as income under a controlled foreign company (CFC) regime. The final report contains also more detailed and more practical description of the potential issues and possible solutions related to hybrid mismatch arrangements. As indicated already in the September 2014 interim report, countries remain free in their policy choices as to whether the hybrid mismatch rules should be applied to mismatches that arise under intra-group hybrid regulatory capital.

Action 3: Strengthen CFC rules
Final report / guidance published

A&S analysis on the current state of Action 3

The final report on Action 3 was published in October 2015.

Controlled foreign company (CFC) rules respond to the risk that taxpayers with a controlling interest in a foreign subsidiary can strip the base of their country of residence and, in some cases, other countries by shifting income into a CFC.

In response to the numerous challenges faced by existing CFC rules, the BEPS Action Plan called for the development of recommendations regarding the design of CFC rules. The final report sets out recommendations in the form of six building blocks, namely:

  • Definition of a CFC;
  • CFC exemptions and threshold requirements;
  • Definition of income;
  • Computation of income;
  • Attribution of income; and
  • Prevention and elimination of double taxation.

The recommendations presented under the building blocks are not minimum standards but are designed to ensure that jurisdictions that choose to implement them will have rules that effectively prevent taxpayers from shifting income into foreign subsidiaries.

Action 4: Limit base erosion via interest deductions and other financial payments
Final report / guidance published

A&S analysis on the current state of Action 4

The final report on Action 4 was published in October 2015.

Action 4 of the BEPS Action Plan called for recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense.

The discussion draft on Action 4 (published on December 18, 2014) focused on best practices in the design of rules to prevent base erosion and profit shifting using interest and other financial payments economically equivalent to interest, and stresses the need to address base erosion and profit shifting using deductible payments such as interest that can give rise to double non-taxation in both inbound and outbound investment scenarios. It examined existing approaches to tackling these issues and sets out different options for approaches that may be included in a best practice recommendation. The discussion draft also identified specific questions where input was required in order to advance this work.

The final report on Action 4 analyses several best practices and recommends an approach based on a fixed ratio rule which limits an entity’s net deductions for interest and payments economically equivalent to interest to a percentage of its earnings before interest, taxes, depreciation and amortization (EBITDA).

To ensure that countries apply a fixed interest/EBITDA ratio that is low enough to tackle BEPS, while recognizing that not all countries are in the same position, the approach recommended in the final report includes a corridor of possible ratios of between 10% and 30%. The approach can be supplemented by a worldwide group ratio rule which allows an entity to exceed this limit in certain circumstances. Countries may also apply an uplift of up to 10% to the group’s net third party interest expense to prevent double taxation.

The earnings-based worldwide group ratio rule can also be replaced by different group ratio rules, such as the “equity escape” rule (which compares an entity’s level of equity and assets to those held by its group) currently in place in some countries.

The approach recommended by the final report will mainly impact entities with both a high level of net interest expense and a high net interest/EBITDA ratio, in particular where the entity’s ratio is higher than that of its worldwide group. An important feature of the fixed ratio rule is that it only limits an entity’s net interest deductions (i.e. interest expense in excess of interest income) and, thus, the rule does not restrict the ability of multinational groups to raise third party debt centrally in the country and entity which is most efficient taking into account non-tax factors and then on-lend the borrowed funds within the group to where it is used to fund the group’s economic activities.

The approach recommended by the final report also allows countries to supplement the fixed ratio rule and group ratio rule with other provisions, such as:

  • A de minimis threshold which carves-out entities which have a low level of net interest expense;
  • An exclusion for interest paid to third party lenders on loans used to fund public-benefit projects, subject to conditions; and
  • The carry forward of disallowed interest expense and/or unused interest capacity for use in future years.

The final report also recommends that the approach be supported by targeted rules to prevent its circumvention, for example by artificially reducing the level of net interest expense. It also recommends that countries consider introducing rules to tackle specific BEPS risks not addressed by the recommended approach, such as where an entity without net interest expense shelters interest income.

According to the final report, further technical work will be conducted on specific areas of the recommended approach, including the detailed operation of the worldwide group ratio rule and the specific rules to address risks posed by banking and insurance groups. This work is expected to be completed in 2016.

Further work on the transfer pricing aspects of financial transactions will be undertaken during 2016 and 2017.

Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance
Final report / guidance published

A&S analysis on the current state of Action 5

The final report on Action 5 was published in October 2015.

The continued importance of the work on harmful tax practices was highlighted by the inclusion of this work in the BEPS Action Plan where Action 5 committed to revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime.

The work on Action 5 has already resulted in an agreement on “The Modified Nexus Approach for IP regimes” (published on February 6, 2015), which allows a taxpayer to receive benefits on Intellectual Property income in line with the expenditures linked to generating the income. The approach has been endorsed by all OECD and G20 countries and transitional provisions for existing regimes, including a limit on accepting new entrants after June 2016, have been agreed.

Further work for the final report has focused on improving transparency through the compulsory spontaneous exchange of certain rulings that could give rise to BEPS concerns in the absence of such exchanges. The framework covers six categories of rulings: (i) rulings related to preferential regimes; (ii) cross border unilateral advance pricing arrangements (APAs) or other unilateral transfer pricing rulings; (iii) rulings giving a downward adjustment to profits; (iv) permanent establishment (PE) rulings; (v) conduit rulings; and (vi) any other type of ruling where the FHTP agrees in the future that the absence of exchange would give rise to BEPS concerns. An ongoing monitoring and review mechanism covering preferential regimes, including IP regimes, and the transparency framework has also been agreed and will now be put in place.

Consensus was also reached on the “nexus approach” that allows a taxpayer to benefit from an IP regime only to the extent that the taxpayer itself incurred qualifying research and development (R&D) expenditures that gave rise to the IP income.

Action 6: Prevent treaty abuse
Final report / guidance published

A&S analysis on the current state of Action 6

The final report on Action 6 was published in October 2015.

Action 6 of the OECD BEPS project identifies treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns. Accordingly, the final report states that countries have agreed to include anti-abuse provisions in their tax treaties, including a minimum standard to counter treaty shopping.

Section A of the report includes new treaty anti-abuse rules that provide safeguards against the abuse of treaty provisions and offer a certain degree of flexibility regarding how to do so. These new treaty anti-abuse rules first address treaty shopping. The following approach is recommended by the report to deal with these strategies:

  • First, a clear statement that the states that enter into a tax treaty intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements will be included in tax treaties (this recommendation is included in Section B of the report).
  • Second, a specific anti-abuse rule, the limitation-on-benefits (LOB) rule that limits the availability of treaty benefits to entities that meet certain conditions will be included in the OECD Model Tax Convention. These conditions, which are based on the legal nature, ownership in, and general activities of the entity, seek to ensure that there is a sufficient link between the entity and its state of residence. Such limitation-on-benefits provisions are currently found in treaties concluded by a few countries and have proven to be effective in preventing many forms of treaty shopping strategies.
  • Third, in order to address other forms of treaty abuse, including treaty shopping situations that would not be covered by the LOB rule described above, a more general anti-abuse rule based on the principal purposes of transactions or arrangements (the principal purposes test or “PPT” rule) will be included in the OECD Model Tax Convention. Under that rule, if one of the principal purposes of transactions or arrangements is to obtain treaty benefits, these benefits would be denied unless it is established that granting these benefits would be in accordance with the object and purpose of the provisions of the treaty.

The updated guidance is effective from the signing of updated bilateral tax treaties (or the multilateral instrument intented to carry out such changes simultaneously), thus in 2016 at the earliest.

Action 7: Prevent the artificial avoidance of PE status
Final report / guidance published

A&S analysis on the current state of Action 7

The final report on Action 7 was published in October 2015.

Tax treaties generally provide that the business profits of a foreign enterprise are taxable in a state only to the extent that the enterprise has in that state a permanent establishment (PE) to which the profits are attributable. The definition of PE included in tax treaties is therefore crucial in determining whether a non-resident enterprise must pay income tax in another state.

Action 13 of the BEPS Action Plan called for a review of that definition to prevent the use of certain common tax avoidance strategies that are currently used to circumvent the existing PE definition, such as arrangements through which taxpayers replace subsidiaries that traditionally acted as distributors by commissionaire arrangements, with a resulting shift of profits out of the country where the sales took place without a substantive change in the functions performed in that country. Changes to the PE definition were also seen necessary to prevent the exploitation of the specific exceptions to the PE definition currently provided for by Art. 5(4) of the OECD Model Tax Convention (2014), an issue which is particularly relevant in the digital economy.

The final report includes the changes that will be made to the definition of PE in Article 5 of the OECD Model Tax Convention:

  • Artificial avoidance of PE status through commissionaire arrangements and similar strategies: As a matter of policy, where the activities that an intermediary exercises in a country are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise, that enterprise should be considered to have a taxable presence in that country unless the intermediary is performing these activities in the course of an independent business. The changes to Art. 5(5) and 5(6) and the detailed Commentary thereon that are included in section A of the final report address commissionaire arrangements and similar strategies by ensuring that the wording of these provisions better reflect this underlying policy.
  • Artificial avoidance of PE status through the specific exceptions in Art. 5(4): When the exceptions to the definition of permanent establishment that are found in Art. 5(4) of the OECD Model Tax Convention were first introduced, the activities covered by these exceptions were generally considered to be of a preparatory or auxiliary nature. Since the introduction of these exceptions, however, there have been dramatic changes in the way that business is conducted. Therefore, in order to ensure that profits derived from core activities performed in a country can be taxed in that country, Article 5(4) is modified to ensure that each of the exceptions included therein is restricted to activities that are otherwise of a “preparatory or auxiliary” character. The modifications are found in section B of the final report.
  • Other strategies for the artificial avoidance of PE status: The exception in Art. 5(3), which applies to construction sites, has given rise to abuses through the practice of splitting-up contracts between closely related enterprises. The Principal Purposes Test (PPT) rule will address the BEPS concerns related to such abuses.

In addition to the above-mentioned, some BEPS concerns related to Art. 5(4) also arise from what is typically referred to as the “fragmentation of activities”. With this respect, it is stated in the final report that it is not possible to avoid PE status by fragmenting a cohesive operating business into several small operations in order to argue that each part is merely engaged in preparatory or auxiliary activities that benefit from the exceptions of Art. 5(4).

The changes to the definition of PE that are included in the final report will be among the changes proposed for inclusion in the multilateral instrument that will implement the results of the work on treaty issues mandated by the BEPS Action Plan. Also, in order to provide greater certainty about the determination of profits to be attributed to the PEs that will result from the changes included in this report and to take account of the need for additional guidance on the issue of attribution of profits to PEs, follow-up work on attribution of profits issues related to Action 7 will be carried on with a view to providing the necessary guidance before the end of 2016, which is the deadline for the negotiation of the multilateral instrument.

Action 8: (Assure that transfer pricing outcomes are in line with value creation) – Intangibles
Final report / guidance published

A&S analysis on the current state of Action 8

The combined final report on Actions 8-10 (Aligning Transfer Pricing Outcomes with Value Creation) was published in October 2015.

The work under Actions 8-10 of the BEPS Action Plan has been targeted to ensure that transfer pricing outcomes are aligned with value creation.

The final report contains revised guidance which is intended to ensure that the transfer pricing rules secure outcomes that see operational profits allocated to the economic activities which generate them. The revised guidance includes two important clarifications relating to risks and intangibles:

  • Risks are defined in the report as the effect of uncertainty on the objectives of the business. In order to address certain tax planning strategies involving contractual reallocation of risks, the final determines that risks contractually assumed by a party that cannot in fact exercise meaningful and specifically defined control over the risks, or does not have the financial capacity to assume the risks, will be allocated to the party that does exercise such control and does have the financial capacity to assume the risks.
  • For intangibles, the guidance clarifies that legal ownership alone does not necessarily generate a right to all (or indeed any) of the return that is generated by the exploitation of the intangible. The group companies performing important functions, controlling economically significant risks and contributing assets, as determined through the accurate delineation of the actual transaction, will be entitled to an appropriate return reflecting the value of their contributions. Specific guidance is also presented to ensure that the analysis is not weakened by information asymmetries between the tax administration and the taxpayer in relation to hard-to-value intangibles, or by using special contractual relationships, such as a cost contribution arrangement.

The revised guidance also addresses the situation where a capital-rich member of the group provides funding but performs few activities. According to the report, if this associated enterprise does not in fact control the financial risks associated with its funding (for example because it just provides the money when it is asked to do so, without any assessment of whether the party receiving the money is creditworthy), then it will not be allocated the profits associated with the financial risks and will be entitled to no more than a risk-free return, or less if, for example, the transaction is not commercially rational and therefore the guidance on non-recognition applies.

Finally, the revised guidance aims to ensure that pricing methods will allocate profits to the most important economic activities. As a result, it will no longer be possible to allocate the synergistic benefits of operating as a group to members other than the ones contributing to such synergistic benefits.

As a part of the final report, a mandate is included for follow-up work to be done on the transactional profit split method, which will be carried out during 2016 and finalized in the first half of 2017. As stated in the report, this work should lead to detailed guidance on the ways in which this method can usefully and appropriately be applied to align transfer pricing outcomes with value creation, including in the circumstances of integrated global value chains.

Action 9: (Assure that transfer pricing outcomes are in line with value creation ) – Risks and capital
Final report / guidance published

A&S analysis on the current state of Action 9

The combined final report on Actions 8-10 (Aligning Transfer Pricing Outcomes with Value Creation) was published in October 2015.

The work under Actions 8-10 of the BEPS Action Plan has been targeted to ensure that transfer pricing outcomes are aligned with value creation.

The final report contains revised guidance which is intended to ensure that the transfer pricing rules secure outcomes that see operational profits allocated to the economic activities which generate them. The revised guidance includes two important clarifications relating to risks and intangibles:

  • Risks are defined in the report as the effect of uncertainty on the objectives of the business. In order to address certain tax planning strategies involving contractual reallocation of risks, the final determines that risks contractually assumed by a party that cannot in fact exercise meaningful and specifically defined control over the risks, or does not have the financial capacity to assume the risks, will be allocated to the party that does exercise such control and does have the financial capacity to assume the risks.
  • For intangibles, the guidance clarifies that legal ownership alone does not necessarily generate a right to all (or indeed any) of the return that is generated by the exploitation of the intangible. The group companies performing important functions, controlling economically significant risks and contributing assets, as determined through the accurate delineation of the actual transaction, will be entitled to an appropriate return reflecting the value of their contributions. Specific guidance is also presented to ensure that the analysis is not weakened by information asymmetries between the tax administration and the taxpayer in relation to hard-to-value intangibles, or by using special contractual relationships, such as a cost contribution arrangement.

The revised guidance also addresses the situation where a capital-rich member of the group provides funding but performs few activities. According to the report, if this associated enterprise does not in fact control the financial risks associated with its funding (for example because it just provides the money when it is asked to do so, without any assessment of whether the party receiving the money is creditworthy), then it will not be allocated the profits associated with the financial risks and will be entitled to no more than a risk-free return, or less if, for example, the transaction is not commercially rational and therefore the guidance on non-recognition applies.

Finally, the revised guidance aims to ensure that pricing methods will allocate profits to the most important economic activities. As a result, it will no longer be possible to allocate the synergistic benefits of operating as a group to members other than the ones contributing to such synergistic benefits.

As a part of the final report, a mandate is included for follow-up work to be done on the transactional profit split method, which will be carried out during 2016 and finalized in the first half of 2017. As stated in the report, this work should lead to detailed guidance on the ways in which this method can usefully and appropriately be applied to align transfer pricing outcomes with value creation, including in the circumstances of integrated global value chains.

Action 10: (Assure that transfer pricing outcomes are in line with value creation ) – Other high-risk transactions
Final report / guidance published

A&S analysis on the current state of Action 10

The combined final report on Actions 8-10 (Aligning Transfer Pricing Outcomes with Value Creation) was published in October 2015.

The work under Actions 8-10 of the BEPS Action Plan has been targeted to ensure that transfer pricing outcomes are aligned with value creation.

The final report contains revised guidance which is intended to ensure that the transfer pricing rules secure outcomes that see operational profits allocated to the economic activities which generate them. The revised guidance includes two important clarifications relating to risks and intangibles:

  • Risks are defined in the report as the effect of uncertainty on the objectives of the business. In order to address certain tax planning strategies involving contractual reallocation of risks, the final determines that risks contractually assumed by a party that cannot in fact exercise meaningful and specifically defined control over the risks, or does not have the financial capacity to assume the risks, will be allocated to the party that does exercise such control and does have the financial capacity to assume the risks.
  • For intangibles, the guidance clarifies that legal ownership alone does not necessarily generate a right to all (or indeed any) of the return that is generated by the exploitation of the intangible. The group companies performing important functions, controlling economically significant risks and contributing assets, as determined through the accurate delineation of the actual transaction, will be entitled to an appropriate return reflecting the value of their contributions. Specific guidance is also presented to ensure that the analysis is not weakened by information asymmetries between the tax administration and the taxpayer in relation to hard-to-value intangibles, or by using special contractual relationships, such as a cost contribution arrangement.

The revised guidance also addresses the situation where a capital-rich member of the group provides funding but performs few activities. According to the report, if this associated enterprise does not in fact control the financial risks associated with its funding (for example because it just provides the money when it is asked to do so, without any assessment of whether the party receiving the money is creditworthy), then it will not be allocated the profits associated with the financial risks and will be entitled to no more than a risk-free return, or less if, for example, the transaction is not commercially rational and therefore the guidance on non-recognition applies.

Finally, the revised guidance aims to ensure that pricing methods will allocate profits to the most important economic activities. As a result, it will no longer be possible to allocate the synergistic benefits of operating as a group to members other than the ones contributing to such synergistic benefits.

As a part of the final report, a mandate is included for follow-up work to be done on the transactional profit split method, which will be carried out during 2016 and finalized in the first half of 2017. As stated in the report, this work should lead to detailed guidance on the ways in which this method can usefully and appropriately be applied to align transfer pricing outcomes with value creation, including in the circumstances of integrated global value chains.

Action 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it
Final report / guidance published

A&S analysis on the current state of Action 11

The final report on Action 11 was published in October 2015.

The adverse fiscal and economic impacts of BEPS have been the focus of the project since its inception. The final report of Action 11 states that, although measuring the scale of BEPS proves challenging given the complexity of BEPS and the serious data limitations, the global corporate income tax (CIT) revenue losses are estimated to range between 4% and 10% of global CIT revenues, i.e. USD 100 to 240 billion annually.

In the final report, the following evidence of increased BEPS activity is presented:

  • The profit rates of MNE affiliates located in lower-tax countries are higher than their group’s average worldwide profit rate.
  • The effective tax rates paid by large MNE entities are estimated to be 4 to 8.5 percentage points lower than similar enterprises with domestic-only operations, tilting the playing-field against local businesses and non-tax aggressive MNEs, although some of this may be due to MNEs’ greater utilization of available country tax preferences.
  • Foreign direct investment (FDI) is increasingly concentrated. FDI in countries with net FDI to GDP ratios of more than 200% increased from 38 times higher than all other countries in 2005 to 99 times higher in 2012.
  • The separation of taxable profits from the location of the value creating activity is particularly clear with respect to intangible assets, and the phenomenon has grown rapidly.
  • Debt from both related and third-parties is more concentrated in MNE affiliates in higher statutory tax-rate countries. The interest-to-income ratio for affiliates of the largest global MNEs in higher-tax rate countries is almost three times higher than their MNE’s worldwide third-party interest-to-income ratio.

However, as stated in the report, all analyses of BEPS are severely constrained by the limitations of the currently available data. The available data is not comprehensive across countries or companies, and often does not include actual taxes paid. In addition to this, the analyses of profit shifting to date have found it difficult to separate the effects of BEPS from real economic factors and the effects of deliberate government tax policy choices.

The final report on Action 11 recommends that the OECD work with governments to report and analyze more corporate tax statistics and to present them in an internationally consistent way. For example, statistical analyses based upon Country-by-Country (CbC) reporting data have the potential to significantly enhance the economic analysis of BEPS.

Action 12: Require taxpayers to disclose their aggressive tax planning arrangements
Final report / guidance published

A&S analysis on the current state of Action 12

The final report on Action 12 was published in October 2015.

Action 12 of the BEPS Action Plan recognized the benefits of tools designed to increase the information flow on tax risks to tax administrations and tax policy makers and, therefore, called for recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules.

The final report provides a modular framework that enables countries without mandatory disclosure rules to design a regime that fits their need to obtain early information on potentially aggressive or abusive tax planning schemes and their users. According to the framework, mandatory disclosure regimes should be clear and easy to understand, should balance additional compliance costs to taxpayers with the benefits obtained by the tax administration, should be effective in achieving their objectives, should accurately identify the schemes to be disclosed, should be flexible and dynamic enough to allow the tax administration to adjust the system to respond to new risks (or carve-out obsolete risks), and should ensure that information collected is used effectively.

The main objective of mandatory disclosure regimes recommended by the report is to increase transparency by providing the tax administration with early information regarding potentially aggressive or abusive tax planning schemes and to identify the promoters and users of those schemes. Another objective of mandatory disclosure regimes is deterrence.

As transparency is one of the three pillars of the OECD BEPS project and a number of measures developed in the course of the project will give rise to additional information being shared with, or between, tax administrations, the report states that expanded Joint International Tax Shelter Information and Collaboration Network (JITSIC Network) of the OECD Forum on Tax Administration provides an international platform for an enhanced cooperation and collaboration between tax administrations, based on existing legal instruments, which could include cooperation on information obtained by participating countries under mandatory disclosure regimes.

Action 13: Re-examine transfer pricing documentation
Final report / guidance published

A&S analysis on the current state of Action 13

The final guidance, modifying Chapter V (Documentation) of the Transfer Pricing Guidelines, was published in September 2014. The updated guidance included revised standards for transfer pricing documentation as well as a template for country-by-country reporting.

The report also introduced a three-tiered approach in the preparation of transfer pricing documentation:

  1. a master file designed to provide an overview of the multinational group;
  2. a local file to provide details specific to a local taxpayer’s business, intercompany transactions and supporting analysis; and
  3. a country-by-country (CbC) report to provide insight into aggregate tax jurisdiction-wide information relating to revenues, taxes paid and indicators of economic activity.

According to the final report, the specific content of the various documents reflects an effort to balance tax administration information needs, concerns about inappropriate use of the information, and the compliance costs and burdens imposed on business. Some countries would strike that balance in a different way by requiring reporting in the CbC report of additional transactional data (beyond that available in the master file and local file for transactions of entities operating in their jurisdictions) regarding related party interest payments, royalty payments and especially related party service fees. Countries expressing this view are primarily those from emerging markets (Argentina, Brazil, China, Colombia, India, Mexico, South Africa, and Turkey) who state they need such information to perform risk assessment and who find it challenging to obtain information on the global operations of an MNE group headquartered elsewhere.

The updated documentation guidance is expected to be applied as soon as national legislative implementation has been carried out (i.e. most likely for the reporting of 2015 intra-group transactions in 2016). Additional guidance on the implementation of country-by-country reporting was published on February 6, 2015, requiring CbC reporting by multinationals with turnover above EUR 750 million in their countries of residence starting in 2016.

Tax administrations, in turn, will begin exchanging the first CbC reports in 2017. The primary method for sharing such reports between tax administrations is through the automatic exchange of information, pursuant to government-to-government mechanisms such as bilateral tax treaties, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, or Tax Information Exchange Agreements (TIEAS). In certain exceptional cases, secondary methods, including local filing, can be used. It is recognized that the need for more effective dispute resolution may increase as a result of the enhanced risk assessment capability following the adoption and implementation of a CbC reporting requirement.

Participating countries will also review the implementation of the standards resulting from Action 13 and reassess whether modifications should be made by the end of 2020.

Action 14: Make dispute resolution mechanisms more effective
Final report / guidance published

A&S analysis on the current state of Action 14

The final report on Action 14 was published in October 2015.

The measures developed under Action 14 of the BEPS Action Plan aim to strengthen the effectiveness and efficiency of the MAP process, a mechanism contained in the Article 25 of the OECD Model Tax Convention that is independent from the ordinary legal remedies available under domestic law and through which the competent authorities of the contracting states may resolve differences or difficulties regarding the interpretation or application of the tax treaty on a mutually-agreed basis.

Through the adoption of this final report, countries have agreed to important changes in their approach to dispute resolution, in particular by having developed a minimum standard with respect to the resolution of treaty-related disputes, committed to its rapid implementation and agreed to ensure its effective implementation through the establishment of a robust peer-based monitoring mechanism. The minimum standard will:

  • Ensure that treaty obligations related to the mutual agreement procedure are fully implemented in good faith and that MAP cases are resolved in a timely manner;
  • Ensure the implementation of administrative processes that promote the prevention and timely resolution of treaty-related disputes; and
  • Ensure that taxpayers can access the MAP when eligible.

The minimum standard is complemented by a set of best practices presented in the report.

In addition to the commitment to implement the minimum standard by all countries adhering to the outcomes of the BEPS Project, the following countries, which were involved in over 90 % of open MAP cases at the end of 2013, have declared their commitment to provide for mandatory binding MAP arbitration in their bilateral tax treaties as a mechanism to guarantee that treaty-related disputes will be resolved within a specified timeframe: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the United States.

Action 15: Develop a multilateral instrument
Final report / guidance published; further work ongoing

A&S analysis on the current state of Action 15

The goal of Action 15 is to streamline the implementation of the tax treaty-related BEPS measures. This is an innovative approach with no exact precedent in the tax world.

The discussion draft published in September 2014 addressed the importance of developing a multilateral instrument that modifies bilateral tax treaties to tackle BEPS and ensure the sustainability of the consensual framework to eliminate double taxation. This was seen to be supported by the fact that changes to model tax conventions only widen the gap between the content of the models as well as the content of the actual treaties.

A significant step towards developing the multilateral instrument was taken on February 6, 2015 when the OECD published a mandate authorizing the formation of an ad-hoc negotiating group, open to participation from all states and hosted by the OECD. The negotiation group will hold its first meeting by July 2015, with an aim to conclude the drafting of the multilateral instrument by December 31, 2016, with included BEPS changes to the bilateral treaty network taking effect from the signing. The final report, published on October 5, 2015, confirmed this schedule.

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