As the OECD’s Base Erosion and Profit Shifting (BEPS) process begins to move from consultation to implementation, it brings to an end a 2 year project which ultimately aimed to introduce a system better aligned to business substance with taxable profits.
BEPS is the most significant development ever in the history of international tax rules and has been necessitated by the need to reform a dysfunctional and ailing global tax system which isn’t fit for purpose in 21st century business.
The changes BEPS will bring will be profound, but fundamental to its success will be the challenge to piece together the jigsaw of various elements into the clarity of actions which reduce unfair outcomes, doesn’t lead to double taxation and increases transparency without leading to excessive reporting requirements that harm international trade.
However, the varying perspectives and interests of the countries involved has severely hampered agreement to implement simultaneously – a key component for the initiative to truly work. We have already witnessed 30 unilateral measures implemented by 19 countries, illustrating the varying impetus of each country involved. It is important that there is time for companies to adjust, and for co-ordinated introduction across jurisdictions. If measures are introduced on an à la carte basis, allowing countries to select the actions most pertinent to them, it will create a high level of complexity and uncertainty, deterring international businesses from taking action.
The OECD made it clear that its aim was to close loopholes and tighten and extend existing rules. However, the fundamental framework which underpinned the system would be unaltered. Time will tell whether the framework is truly suited to the realities of a modern and global multinational company, where it is almost impossible to determine where profit is earned with an array of activities taking place across its global constituents.
There are a number of key points still listed as needing further work, notably the multilateral instrument which is crucial to make the changes actionable on a global level. Keith O’Donnell, Taxand Luxembourg, says we seem closer to the ‘end of the beginning‘ than the ‘beginning of the end‘, so we may not see an immediate impact.
It seems likely that, irrespective of the actual outcome, politicians will hail the BEPS project a success. The G20 meeting in Antalya in November, where the proposals will be considered, will provide a clear signal to multinationals of the gravity and momentum the initiative will generate and whether they’ll approach BEPS in a prix fixe or a la carte way.