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This is not the post-BEPS era, it is the BEPS era
The OECD has agreed a new framework that will allow all interested countries to work for the implementation of the package of measures Base Erosion Profit Shifting (BEPS). Now the BEPS action plan has been published, countries are entering into implementation phase. Today at Taxand’s Global Conference in Dublin, Shane Wallace, Partner at Taxand Ireland, Andrew Hickman, Head of the Transfer Pricing Unit at the OECD and Philip Baker QC, Field Court Tax Chambers, discussed policy perspectives in the new BEPS era.
It is clear that the OECD and others do not view this as a post-BEPS era. This is the BEPS era, even though we are not fully clear on what that era will bring in terms of international tax. What is clear, is that we are into the period of national adoption and implementation of BEPS, something the OECD is working hard to ensure is within the spirit and goals of the initiative.
BEPS recommendations, which have the endorsement of G20 finance leaders, are the first effort where a large number of countries have come together to make international tax law more coherent and provide greater transparency for corporates. BEPS aims to provide a holistic fix to international tax issues, underpinned by greater disclosure requirements.
It has led to an international discussion about tax law and ultimately is likely to lead to huge shifts in the behaviour of both corporates and authorities. However, uncertainties remain and further work is needed in this implementation phase.
Following the BEPS action plan, so far approximately half of the transfer pricing guidelines have been re-written. The result of this work has been to refocus the first stage of any transfer pricing analysis where there is a rigorous determination of what is actually happening, accurately outlining the individual transaction. In addition an analytical framework has been introduced to determine where value is created.
A key focus of the BEPS initiative has been to reduce or eliminate instances of double non-taxation. One trigger for this has been inefficiencies in tax treaties and as a result there are a number of BEPS recommendations for tax treaties across several OECD reports.
The new rules will include specific anti-abuse rules such as the proposed principal purpose test (PPT) and limitation of benefits test (LOB). But while such specific rules can, in some ways provide taxpayers and tax administrators with greater certainty, they can also create “collateral damage”. One example would be the potential impact of the LOB or PPT on collective investment vehicles such as private equity and hedge funds and on cross-border investments by pension funds, many of which are being tapped by governments to be investors in badly needed infrastructure projects.
It is important to understand that the impact of these recommendations are wider, proposals are not just limited to MNCs, but rather impact a broader agenda that affects all tax payers whether it is an MNC, SME, a trust or a partnership.
A very important aspect of BEPS is the multilateral instrument, a new methodology for amending a large number of treaty agreements rapidly. The instrument is currently being developed and will be able to modify all existing treaties vastly improving efficiency.
For corporates and their advisers challenges remain. There is continued uncertainty over the future of treaty based planning as a result of the LOB and the PPT. In addition there is now greater reliance on non-legislative guidance and practice which ultimately limits the ability for firms to make key decisions around their tax practices and increasing the risk that there will be a tendency for revenue authorities to see any reduction in tax as abusive. Ultimately it is likely there will be an increase in disputes and an increased demand for dispute resolution services. Tax advisers therefore need to understand how the dispute resolution mechanisms will work and build teams to be able to assist clients as they navigate international taxation in this new BEPS era.
The main goal for BEPS now is implementation. In some ways BEPS will never be ‘complete’ as there will always be a need for the recommendations to be monitored, reviewed and amended to ensure they are delivering the desired outcome.
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