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Delivering a new world order in tax – the dawning BEPS puzzle

Delivering a new world order in tax – the dawning BEPS puzzle
15 May 2014

The OECD’s Base Erosion and Profit Shifting (BEPS) initiative is predominantly being driven by concerns over aggressive tax planning by corporates. The changes that have occurred within the global business environment and the way in which it operates have necessitated a re-think of the traditional tax principles that have historically governed the international tax system. Taxand discussed the BEPS initiative and its implications for multinationals, at the Taxand Global Conference hosted Taxand China in Shanghai today.

Frédéric Donnedieu de Vabres, Chairman of Taxand, the world's largest global organisation of tax advisors to multinational businesses, provides an overview of the session presented by Keith O’Donnell, Taxand Luxembourg, Frank Tao, Taxand China, Mukesh Butani, Taxand India and Ernie Perez, Taxand USA:

“BEPS is no minor development. It is the first international tax reform that cuts across both OECD and non-OECD countries, which will re-establish the framework for global taxation and set new standards that taxpayers will need to follow. Whilst BEPS is made up of a somewhat overwhelming 15 point action plan, the key themes can be broken down into three main areas:

1)    Establishing international coherence of corporate income tax
2)    Restoring the full effects and benefits of international standards
3)    Ensuring transparency while promoting increased certainty and predictability

“Interestingly, some of the specific points look at technical issues around a specific area of corporate taxation, whereas others identify broader, less specific concerns where a practical global solution appears less obvious.

“As widely reported across global media, a key point of focus within the BEPS plan is to address the challenges associated with the digital economy. The rapid growth of the internet and online activity within business has raised a number of taxation issues, perhaps the most important of which is how to determine the location of a business’s commercial activity, or Permanent Establishment (PE). The implementation of a ‘virtual’ PE, based purely on sales, for example, could be incredibly dangerous, particularly when a number of companies involved in the digital economy have as many employees as large companies in other sectors. Other key objectives within the plan are to prevent treaty abuse and re-examine the documentation associated with transfer pricing.

“Whilst the premise and overall ambition of the BEPS initiative are to be commended, there are a number of challenges associated with both the shape and implementation of the action plan. A fundamental question centres on the authority needed to revamp the international tax system – to ensure consistency of domestic laws, for example, does the OECD have the requisite power? The scale of implementation is also a concern and could potentially require the renegotiation of over 3000 treaties, causing a monumental administrative and cost burden. The enforcement of the principles once implemented a few years down the line is another question altogether. Whilst billed as a global harmonisation initiative, BEPS could end up being enforced through local rules, at local level.

“The shape of today’s global economy also raises queries around the implementation of the initiative and the list of expanded country participants now includes both OECD and non-OECD countries – it will no doubt be a challenge to align the interests of both Western and BRICs countries. The overall and un-spoken question of ‘Who holds the authority to determine taxation rights?’ remains an unanswered one, and one which must be faced head on, to ensure fundamental tax reform takes place effectively.  

“Whilst there is inevitably a temptation for multinationals to take a ‘wait and see’ approach in relation to BEPS, it would be prudent for them to explore fact gathering as well as preliminary screening of the potential impact on their businesses. More proactive management is encouraged including a full review of group strategy to ensure responsive action can be taken once further clarity on the action plan is provided."

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Taxand's Take

“What is clear is that BEPS is set to make a significant change to the way in which the international tax system operates. By 2020, we still expect a healthy level of tax competition between countries, but with fewer hybrid structures, a greater emphasis on substance, and a lesser number of jurisdictions involved in company structures. Encouragingly, we should also see tax planning more closely aligned with multinationals’ overall business strategy.”

Taxand's Take Author