2013 is the year of the intangibles. Why? Political pressure + 2014 OECD TP Guideline changes = Window of opportunity
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Action plan on base erosion and profit shifting
The Organisation for Economic Cooperation and Development (OECD) has recently issued a 15 point action plan on base erosion and profit shifting (BEPS). The plan aims to “effectively prevent double non-taxation” and to ensure that no or low tax jurisdictions will not be able to continue with practices that “artificially segregate taxable income from the activities that generate it”. Taxand South Africa explores what this means for worldwide transfer pricing, and the actions that must be carefully considered by MNCs.
Key issues to note within the plan are:
- Tax challenges of the digital economy: the growth of a digital economy is one of the major issues that have to be addressed, taking into account its impact on BEPS. It is important that an internationally consistent system has to be implemented to identify the profitability of digital activities. The intangible nature of digital activities makes it harder to control while clarity has to be obtained of what generates the value in this industry to determine to what activities the profits can be attributed.
- Neutralising the effects of hybrid mismatch arrangements: hybrid mismatch arrangements are used to achieve unintended double non-taxation or the long-term deferral of tax payments. The focus will most possibly be on changes to international conventions, domestic law provisions and treaty provisions to prevent the improper use of the hybrid mismatch arrangements to achieve tax benefits.
- Strengthening Controlled Foreign Corporation (CFC) rules: CFC rules will be reinforced to prevent abnormal tax deductions of expenses paid by group companies in high tax jurisdictions to other group companies in low tax jurisdictions. The current CFC and anti-deferral rules may not always counter BEPS in a comprehensive manner.
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The action plan addresses particular circumstances which have resulted in double non-taxation or the abnormally low taxation of corporate profits.
These circumstances may have resulted in major base erosion through profit shifting and may have caused a loss of revenue to governments across the world. It may even, indirectly, contribute to developing countries being unable to deliver on the basic needs of its population while stimulating the financial decline in developed countries.