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BEPS – Progress made but uncertainty remains

BEPS – Progress made but uncertainty remains
Global
17 Sep 2014

The complexities of attempting to change the global tax regime to make it suitable for modern day business were exposed in yesterday’s announcement by the OECD. The multitude of factors involved in the BEPS initiative seemed to have rendered the OECD powerless to deliver the first set of finalised recommendations that will dictate the future of international tax policy.  Instead we wait with bated breath until 2015.

The OECD should be congratulated for its work to date - reaching consensus across all countries should not be undervalued - but it is not yet clear how measures will be implemented. Nevertheless, the agreement achieved across all seven actions marks a fundamental shift in the mindset of governments across the globe to tackle the issues associated with BEPS.

Whilst it is clear that things will not change dramatically short term, BEPS has already impacted multinationals. With public discussions focusing on tax driven structures, authorities are permitted to threaten taxpayers with aggressive consequences.  Over the next 15 months, the OECD will need to work on finding the right balance between enforcement, whilst also limiting uncertainty and providing a fair tax environment for business that doesn’t hinder growth.

Country by country reporting adds compliance burden to multinationals

Country-by-country reporting remains the most widely contested area of the BEPS initiative, raising concerns around confidentiality of information, the potential for an increase in disputes, and the huge annual compliance burden it will create for multinationals. The three tiered approach (Master File; Local File; and Country-by-Country Report) recommended underlines its burdensome nature and it’s still not clear whether this reporting mechanism will be applied unilaterally across all businesses, or only those above a specified size.  A uniform reporting approach to global information in such complex matters does not make sense as it raises more questions than it provides answers.  It is also likely that these reporting requirements will, over time, be modified to disclose more commercially sensitive information. 

Renewed focus on intangibles

In a report released in 2012, the OECD addressed the issues of intangibles and valuations.  The latest announcement appears to be a compilation of the previous report with more explicit recommendations to address contentious issues that remain.  Whilst we anticipate that these recommendations will enable tax authorities to more vigorously enforce new regulation, as well as strengthen existing, the world of intangibles is unlikely to fundamentally change in the short term.  Greater emphasis should be applied to valuation assumptions as practice shows that, at least in developed countries, most discussions between tax authorities or taxpayers are focused on this issue. 

Taxing the digital economy

There is now a consensus at the highest levels that there is no separate digital economy - but rather a digitising economy, which isn’t possible to ring fence.  This is an unsurprising outcome as any recommendation to tax digital businesses differently from its physical equivalents would be viewed as illegal within the EU.  An EU State aid issue could also potentially arise in respect of any regime whereby a digital transaction were to be taxed more harshly than the equivalent physical transaction.

The most challenging aspect is perhaps around whether data which businesses hold has value or not. Going down this route creates a whole new way of measuring and taxing business activities. This seems to be an attempt to find a way to tax the monetisation of business activities where that monetisation comes from someone other than the apparent consumer.  However, the location where value is created was addressed, with the OECD’s endorsement to collect VAT in destination country where the customer is located which is due to be implemented in 2015.

Eradicating double taxation and treaty abuse

The OECD believes a multilateral instrument is feasible and desirable to implement to ensure the sustainability of consensual framework to eliminate double taxation.  For this reason, governments have agreed to explore the feasibility of a multilateral instrument that would have the same effects as a simultaneous renegotiation of thousands of bilateral treaties, a highly burdensome task to undertake.  If it proves possible to develop an appropriate instrument, each country would have to go through a process of adopting it, and that may not be straightforward, particularly if the country believes in their sovereign right to tax.

Next steps

The OECD recommendations are currently in the ‘middle of the road’.  We have some idea of what the new environment will look like, with more specific information being revealed next year.  Whilst the OECD aims to achieve safer, sounder, more sustainable rules, the lack of clarity on key issues will mean multinationals remain unclear on how the initiative will impact their business operations.   

Frederic Donnedieu, Chairman, Taxand, the world’s largest independent global organisation of specialist tax advisors to multinational businesses.


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Taxand's Take

The OECD recommendations are currently in the ‘middle of the road’.  We have some idea of what the new environment will look like, with more specific information being revealed next year.  Whilst the OECD aims to achieve safer, sounder, more sustainable rules, the lack of clarity on key issues will mean multinationals remain unclear on how the initiative will impact their business operations.    

Taxand's Take Author