OECD initiative on Base Erosion and Profit Shifting (BEPS)
At Cayman Finance’s International Tax Initiatives seminar Jan. 23rd 2014 the Organisation for Economic Cooperation and Development (OECD) 15-point action plan is based on the assumption that corporate tax bases of governments are at risk.
The risk is real because according to speakers tax rules have not kept pace with changes in global business and tax practices of some multinational companies.
Tim Ridley, former Monetary Authority Chairman, said, “If you thought FATCA was bad, you probably need to put BEPS next on the list.”
FACTA is the ‘notorious’ Fair and Accurate Credit Transactions Act whilst BEPS is Base Erosion and Profit Shifting.
James Tobin, global director, International Tax, with Ernst & Young in New York, said, “BEPS is going to result in major changes to the tax landscape. A good number of the action plan items will have application to Cayman.”
The following bulletin addresses the Base Erosion and Profit Shifting work-stream of the Organisation for OECD and the OECD’s progress report on the topic for the G20. The OECD refers to this as BEPS and it is, in some respects, a wider reinstatement of the work done which began under the banner
of Harmful Tax Practices in the 1990s and many of the subsequent projects which have followed it.
From pwc
Excerpt from pwc bulletin
This bulletin addresses the Base Erosion and Profit Shifting work‑stream of the Organisation for Economic Cooperation and Development (OECD) and the OECD’s progress report on that topic for the G20. The OECD refers to this as BEPS and it is, in some respects, a wider reinstatement of the work done which began under the banner of Harmful Tax Practices in the 1990s and many of the subsequent projects which have followed it.
The report seeks to address issues which have come to a head as a result of government pressure. That has, in turn, resulted from the need for austerity measures in the light of the global economic crisis and the increased attention from the public, non governmental organisations (NGOs)/civil society organisations (CSOs) and the media on where the burden of those austerity measures falls. The globalisation of business, the particular issues presented by cross border digital commerce and shifts in economic power given the increased importance of developing states are all changes that underlie the current tax debate, particularly for corporates.
We consider here the main themes of the debate, analyse the OECD’s progress and assess the way forward.
Will the OECD’s action plan provide a solution?
The OECD’s timeframe, partly specified in its report and partly implicit, may not yet be fully clear to governments. If the (lengthy) period required for fundamental reform is seen as unacceptable, we are likely to see more interim measures carried out domestically and perhaps by other organisations such as the European Commission. Indeed, there may even be questions as to whether the political momentum to support fundamental change can be maintained over such a long timeframe.
There remains too an issue as to whether solutions will be feasible without broad co‑operation and support from the business sector. In the event of no such support (or only limited support) the pressure on individual governments may mount and some may be tempted to step back from the OECD initiative.
To download the whole report go to:
From OECD Forum
What the BEPS are we talking about?
“Recently more and more enterprises organised abroad by American firms have arranged their corporate structures aided by artificial arrangements between parent and subsidiary regarding intercompany pricing, the transfer of patent licensing rights, the shifting of management fees, and similar practices […] in order to reduce sharply or eliminate completely their tax liabilities both at home and abroad.”
These words were not uttered recently in reaction to the many stories of tax avoidance currently in the media. Rather, they are the words of President Kennedy in a statement made in 1961. Yet they have an uncanny relevance today as the list of global tax controversies lengthens, often concerning household names of the new transparent, “flat-management” global economy. The newspapers are full of stories, with Bloomberg’s “The Great Corporate Tax Dodge”, the New York Times’ “But Nobody Pays That”, The Times’ “Secrets of Tax Avoiders” and the Guardian’s “Tax Gap” as only some examples of the increased media attention to corporations’ tax affairs. Civil society and NGOs have been even more vocal, sometimes addressing very complex tax issues in a simplistic manner and pointing fingers at the arm’s length principle (based on which different entities with a multinational enterprise, or MNE group, are required to transact as if they were independent, for tax purposes) as the cause of all these problems.
This increased media attention and the inherent challenge of dealing comprehensively with such a complex subject has encouraged the perception that the rules for the taxation of cross-border activities are regularly broken and that taxes are paid only by the naive. MNEs stand accused of dodging taxes all around the world and in particular in developing countries, where tax revenue is critical to foster long-term development. Little wonder demonstrations by angry taxpayers have taken place in several global locations recently.
Of course, businesses have a responsibility towards their shareholders to maximise their profits, which means legally reducing the taxes their companies pay. They consider most of the accusations to be unjustified and point out that their multinationals are subject to double taxation on their profits from cross-border activities, with speedy agreements among governments on which country should tax what as utopia.
The debate over base erosion and profit shifting (BEPS) has reached the highest political level and has become an issue on the agenda of several OECD and non-OECD countries. Governments are responsible for designing their tax systems. The G20 leaders’ meeting in Los Cabos on 18-19 June 2012 explicitly referred to “the need to prevent base erosion and profit shifting” in their final declaration. G20 finance ministers, triggered by a joint statement of United Kingdom Chancellor George Osborne and German Finance Minister Wolfgang Shaüble, have asked the OECD to report on this issue by their meeting in February 2013. Such a concern was also voiced by US President Barack Obama in his Framework for Business Tax Reform, where it is stated that “the empirical evidence suggests that income-shifting behaviour by multinational corporations is a significant concern that should be addressed through tax reform”.
The OECD is acting on this call. After all, helping to develop rules that support the efficient operation of global markets is one of our key objectives . This involves providing a policy framework that achieves a fair allocation of taxing rights between countries. The arm’s length principle and the elimination of double taxation are essential elements of that framework, but so is the elimination of inappropriate double nontaxation, whether that arises from borderline strategies put in place by aggressive taxpayers or from tax policies introduced by national governments.
It is easier said than done. The first step was to carry out an in-depth analysis of BEPS issues to identify what the problems are and the different factors that have determined them. For years the OECD has promoted dialogue and co-operation between governments on tax matters. There is the Model Tax Convention on Income and on Capital which forms the basis for negotiation of the more than 3,000 existing bilateral tax treaties in the world. There are the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which embody the international standard to allocate profits among different parts of an MNE group. Several studies have been carried out on aggressive tax planning to help governments respond more quickly to tax risks. The Forum on Harmful Tax Practices has built support for fair competition and minimised tax-induced distortions, with more than 40 regimes identified over time as potentially harmful, all of which have been abolished or modified. And, of course, the work on tax policy and statistics, which has dealt with the effects of taxation on foreign direct investment and how to implement sensible corporate tax reforms.
The OECD published Addressing Base Erosion and Profit Shifting in February 2013. The report analyses the root causes of BEPS and identifies six key pressure areas: (1) hybrids and mismatches which generate arbitrage opportunities; (2) the residence-source tax balance, in the context in particular of the digital economy; (3) intragroup financing, with companies in high-tax countries being loaded with debt; (4) transfer pricing issues, such as the treatment of group synergies, location savings; (5) the effectiveness of anti-avoidance rules, which are often watered down because of heavy lobbying and competitive pressure; (6) the existence of preferential regimes. The report was discussed at the Moscow G20 meeting of finance ministers who expressed strong support for the work done and urged the development of a comprehensive action plan to be presented at the G20 meeting in July. The action plan will provide comprehensive, coordinated strategies for countries concerned with BEPS, while at the same time ensuring a certain and predictable environment for business.
Corporate tax policy, and in particular its international side, may need another look. Some rules and their underlying policy were built on the assumption that one country would forgo taxation because another country would be imposing tax. In the modern global economy, this assumption is not always correct, as planning opportunities may result in profits ending up untaxed anywhere. Also, the world has changed. Many rules are grounded in an economic environment characterised by fixed assets, plants and machinery and a lower degree of economic integration across borders, rather than today’s digital economy where much of the profit lies in risk-taking and intangible assets, such as patents and trademarks.
Not all issues are new, though, as our opening quote from President Kennedy shows. The aim of BEPS is to support countries’ efforts to shape fair, effective and efficient tax systems. Given its wide range of expertise, the OECD is in a position to deliver and meet the expectations of those committed to building better policies for better lives.
For more on this story go to:
http://www.oecd.org/forum/what-the-beps-are-we-talking-about.htm
The OECD Base Erosion and Profit Shifting project was fully endorsed by the G20 at the St. Petersburg summit in September 2013.
G20 leaders endorse BEPS action plan, promise to tackle tax avoidance
From Sutherland Asbill & Brennan LLP – Mikka Gee Conway
September 9 2013
In a declaration issued at the end of last week’s St. Petersburg summit, G20 leaders stated that they “fully endorse” the Organisation for Economic Cooperation and Development’s (OECD) ambitious action plan for tackling base erosion and profit shifting (BEPS) and reforming the international tax system. G20 leaders called on members to examine how their own tax systems contribute to BEPS—asserting that “profits should be taxed where economic activities deriving the profits are performed and value is created” and “international and our own tax rules [should] not allow or encourage multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions.”
In a “Tax Annex” to the declaration, the G20 reiterated the general and specific action steps set forth in the OECD plan, including the neutralization of hybrid mismatch arrangements, increased use of controlled foreign company rules, modification of treaty rules, and greater transparency and disclosure among and by governments and taxpayers.
Read the G20 declaration at: https://www.g20.org/sites/default/files/g20_resources/library/Saint_Petersburg_Declaration_ENG.pdf
Read the G20 tax annex at:
Read the White House fact sheet at:
http://www.whitehouse.gov/the-press-office/2013/09/06/fact-sheet-g-20-st-petersburg-summit
IMAGE: www.pearse-trust.ie/www.oecd.org
