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OECD BEPS Action Plan: What does 2014 hold?
The plan identified specific actions to equip governments with the necessary domestic and international BEPS prevention instruments. Following the endorsement of this action plan, a panel of OECD’s senior members1 provided a BEPS project update during a webcast meeting on 23 January 2014.
General reminder of the BEPS project
Historically, the OECD has focused on the development of one common set of rules to eliminate double taxation for cross-border investments. The OECD emphasised that its tax model of convention has served as a basis for 3000 bilateral tax treaties and its transfer pricing guidelines is accepted and considered as a common standard for allocating income among members of multinationals. . However, there are still some instances of double taxation due to gaps in the interaction between different tax systems and the application of bilateral tax treaties.
The OECD has chosen the term “BEPS” to illustrate the current practices of MNEs which are able, under existing rules, to separate the allocation of their taxable profit from the jurisdictions where those profits arise, and benefit from tax advantages of local tax shelters. Consequently, these practices may give rise to a non-taxation of income from cross-border activities and a significant reduction of the taxable income paid by the MNEs in the jurisdictions where they operate. The OECD considers that these practices affect competition, distorting investment decisions and reducing overall trust in the tax system.
The OECD has emphasised that a unilateral approach will not efficiently address BEPS given the international environment that multinationals operate within. A multilateral initiative is therefore required to ensure the success of the BEPS project. As a result, The BEPS project is not limited to OECD member countries but also addresses all G20 countries, and Colombia and Latvia.
The OECD has also obtained input from developing countries through several mechanisms, such as Task Force on Tax and Development, OECD Global Relations Program, Global Forum on Tax Treaties, on Transfer Pricing and on VAT and the UN. In the same way, non-governmental stakeholders will also continue to have opportunities to participate in the BEPS action.
The BEPS project contains 15 actions organised around three main pillars which are likely to maintain the coherence of corporate tax at international level:
- To realign taxation and substance
- Improve the transparency,
- Improve certainty and predictability
Following this general background, the OECD provided an update on the timeline for its action plan.
The digital economy
The first meeting of the Task Force in October 2013 was focused on the analysis of business models and identification of special features of digital economy players (such as mobility, reliance on data, network effects and cross-border business models). The group reviewed the effects of these features on BEPS strategies, the actions to tackle BEPS in the digital economy and the broader, systemic issues raised by the digital economy and options to address them. The next steps for the OECD are:
- Second meeting in February 2014
- Discussion Draft out for comments in March 2014
- Public Consultation in April 2014
- Report finalised in 2014
Prevent treaty abuse
The aim of this action item is to restore the full effects and benefits of the international standard of tax conventions. To this end, the BEPS project aims to (a) clarify policy considerations before entering into a bilateral tax treaty, (b) clarify tax treaties not intended to generate double non-taxation and (c) use anti treaty abuse provisions in treaty and domestic law.
- Next meeting and Discussion Draft in March 2014
- Public Consultation in April or May 2014
Neutralise the effects of Hybrid Mismatch Arrangements (HMA)
The OECD argued that neutralising the effects of HMA is a key component of the BEPS action plan. The solution requires changes to both domestic law and OECD model treaty provisions. The next steps for this item are the following:
- Discussion Draft in April 2014
- Public Consultation in May 2014
Intangibles and transfer pricing
Currently, there is a major public and media debate around transfer pricing (in particular, regarding intangible assets). The OECD acknowledged that the current transfer pricing system leads to serious BEPS concerns but argued that replacing the arm’s length principle is not the solution – special measures may be necessary. The action plan provides four items aiming to better align transfer pricing outcomes with value creation in the areas of intellectual property, risks and capital. The report will be finalised during the Working Party 6 meetings in March and May 2014.
Harmful tax practices
The BEPS project aims to review member regimes, with a priority on transparency, including compulsory exchange of information on rulings, and on the requirement of substantial activity for preferential regimes. The next steps for this project element are:
- Next meeting in February 2014
- Review of member country regimes in September 2014
- Review of G20, non-OECD member country regimes in September 2014
- Report finalised in September 2014
Transfer pricing documentation
The OECD provided that transfer pricing documentation allows for tax administrations to have “the bigger picture” on the global value chain of MNEs. However, these mandatory rules can create a huge compliance burden for companies. In order to achieve consensus on these issues, the action points for this project element include a country-by-country reporting of income, economic activity and taxes to governments with next steps as follows:
- Discussion Draft in February 2014
- Public Consultation in March 2014
- Report finalised in May 2014
Multilateral instrument report
The OECD proposes adoption of multilateral instruments to implement BEPS measures more quickly and to amend bilateral tax treaties. The OECD emphasised that there are “several difficult issues with this approach, but none are insurmountable”. The report will be finalised in September 2014.
More generally, all discussion drafts released will be subject to public consultation in order to achieve a mutual consensus between companies and governments on the future changes arising from BEPS action.
1 Pascal Saint-Amans, Director, Centre for Tax Policy and Administration (hereafter “CTPA”); Raffaele Russo, Head of BEPS Project, CTPA, Marlies de Ruiter, Head of Tax Treaty, Transfer Pricing and Financial Transactions Division, CTPA; Achim Pross, Head of the International CO-operation and Tax Administration Division CTPA.
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The plan identified specific actions to equip governments with the necessary domestic and international BEPS prevention instruments. Following the endorsement of this action plan, a panel of OECD’s senior members provided a BEPS project update during a webcast meeting on 23 January 2014.As part of the OECD’s update on the ongoing BEPS project, it has reiterated its commitment to the initiation and development of specific measures. These measures are designed to equip governments with the necessary instruments to protect their tax base. To achieve this goal, the OECD’s strategy is focused on the co-operation of governments and MNEs and a commitment to a mutually beneficial outcome.
To date, the BEPS project has initiated changes in a number of countries. For example, the French government through the draft of the 2014 Finance Bill tried to introduce an obligation to also impose taxes on cross-border transfer of functions and risks. Moreover, Australian authorities have implemented a new transfer pricing legislation which draws the consequence of the BEPS project.
For multinationals, there is currently no specific short-term action needed, but companies should be prepared for a wave of tough local regulations in the coming years.
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