Overview of OECD Action Plan on Base Erosion and Profit Shifting (BEPS) Monia Naoum, IBFD Research Associate Emily Muyaa, IBFD Research Associate 18 June 2015 1
Introduction: Globalization and its impact on domestic economies Integration of national economies free movement of capital and labor shift of manufacturing bases from high-cost to low-cost locations gradual removal of trade barriers technological and telecommunication developments ever-increasing importance of managing risks and of developing, protecting and exploiting intellectual property 2
Introduction Cont d: Globalization and its impact on tax regimes substantial reduction of effective tax rates complex tax systems; compliance importance of the service (and digital) component of the economy 3
Introduction Cont d: Globalization and its impact on tax regimes How does this concern anyone? governments: less revenue and high costs to ensure compliance individual taxpayers: greater share of the tax burden businesses: reputational risk, reduced competitive advantage, hence fair competition is harmed 4
Background taxation as a way of asserting national sovereignty interaction of domestic tax rules; gaps (double non-taxation or less than single taxation) and frictions (double taxation) domestic scenario vs. international scenario international standards (bilateral tax treaties to eliminate double taxation) 5
Background (cont d) Weaknesses in the current rules; creating opportunities for BEPS) interaction of different domestic tax systems (opportunities, legally, to minimize effective tax) (artificial) dissociation of profits from activities that generate them digital economy (concept of residence/source taxation and characterization of income) 6
Background (cont d) As a result of these weaknesses consensus-based framework at risk what if nothing is done? loss of tax revenue emergence of competing sets of international standards or unilateral measures = double taxation 7
BEPS Action Plan G20/OECD; there s need to tackle concerns OECD BEPS Action Plan; 15 action points to address concerns by: establishing international coherence of corporate income tax systems ensuring transparency while promoting increased certainty and predictability restoring the full effects and benefits of international standards establishing a multilateral instrument to implement the responses to BEPS swiftly 8
Roadmap Guidance/Report Discussion draft Comments (and public consultation). Stakeholders include; supranational bodies (e.g., IMF, UN); business community etc.) Revised discussion draft Further public consultation? Final draft, etc. Timing - varying, up to December 2016 9
Action 1 Action 1 Address the Tax Challenges of the Digital Economy Main challenges Significant presence: Lack of nexus under current international standards Attribution of Value Characterization of income: Application of source rules Collection of VAT/GST 10
Action 1 Action 1 Address the Tax Challenges of the Digital Economy Options proposed Modifications to the exemption list for PEs A new nexus based on significant digital presence Virtual PE Creation of a withholding tax on digital transactions Consumption tax options 11
Action 2 Action 2 Neutralise the effect of hybrid mismatch arrangements Main challenges Double deduction of payments Long-term deferral Double non-taxation Recommendations Treaty rules Amend Article 1 of the OECD MC (2010) Add 14 paragraphs to commentary of Art.1 of the OECD MC (2010) 12
Action 2 (cont d) Domestic Rules Category of hybrid arrangements Hybrid Financial Instruments & Transfers Hybrid Entity Payments Reverse Hybrids Imported mismatches Recommendations 1. Primary response: Payer jurisdiction denies deduction of payments 2. Secondary rule: Payee jurisdictions includes payments as income 1. Primary response: Payer / investor's jurisdiction denies deduction of payments 2. Secondary rule: In case of D/NI Payee jurisdictions includes payment as income; and in case of DD: Subsidiary jurisdiction denies deduction 1. Primary response: investor to include income / intermediate jurisdiction to follow tax treatment of controlling investor if no inclusion by that investor 2. Secondary rule: Payer jurisdiction denies deduction Introduce anti-hybrid rules 13
Action 3 Action 3 Strengthen CFC rules 14
Action 3 Definition of a CFC Rules to prevent or eliminate double taxation Rules for attributing income Threshold requirements Strenghen CFC rules Rules for computing income Definition Definition of of control control Definition of CFC income 15
Action 4 Action 4 Interest deductions and other Financial payments Recommendations what is interest and what are payments economically equivalent to interest who a rule should apply to whether a rule should apply to the level of debt or interest expense, and to a gross or net position whether a small entity exception or threshold should apply whether interest deductions should be limited with reference to the position of an entity's group / a fixed ratio 16
Action 4 (cont d) Action 4 Interest deductions and other Financial payments Recommendations whether a combined approach could be applied the role of targeted rules the treatment of non-deductible interest expense and double taxation considerations for groups in specific sectors interaction with other areas of the BEPS Action Plan 17
Action 5 Action 5 Counter harmful tax practices more effectively, taking into account transparency and substance Action 5 = refocus the work of the Forum on Harmful Tax Practices (FHTP) on: Requiring substantial activity for any preferential regime improving transparency through compulsory spontaneous exchange on rulings related to preferential regimes reviews of member and associate country regimes 18
Action 6 Action 6 Preventing the granting of treaty benefits in inappropriate circumstances 19
Action 6 Tax Policy clarification Amend preamble OECD MC 2010 Prevention of treaty abuse Abuse of treaty provisions Abuse of domestic rules LOB clause GAAR SAARS Amend Commentary OECD MC 2010 Renvoi to BEPS AP: 2,3,4,8,9,10 Saving Clause 20
Action 7 Action 7 Preventing the artificial avoidance of PE status 21
Action 7 Profit attributions to PEs Commissionnaire arrangements Splitting-up of contracts Artificial Avoidance of PE Status Specific activity exemptions Insurance 22
Action 8 Intangibles prior work by OECD: revised discussion draft on transfer pricing aspects of intangibles rules to prevent BEPS from transfers of intangibles among group members how? definition of intangibles align profits allocation with value creation transfer pricing rules (TP)/special measures for transfers of hard-to-value intangibles updating guidance on cost contribution arrangements 23
Action 8 Intangibles (cont d) Progress so far: final revisions to Chapters I, II and VI of the OECD Transfer Pricing (TP) Guidelines: clarify definition of intangibles under the Guidelines; marketing intangible guidance on identifying transactions involving intangibles; legal vs. economic ownership; others supplemental guidance for determining arm's length conditions for transactions involving intangibles exploitation of intangibles ex-post returns valuation techniques; part of methods/useful tool 24
Action 9 Risk and capital rules to prevent BEPS occurring as a result of: transfer of risks excessive capitalization how? adopting transfer pricing rules or special measures to limit returns for contractual assumption of risk or provision of capital aligning returns with value creation work co-ordinated with work on interest expense deductions and other financial payments 25
Action 10 Other high-risk transactions rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between unrelated parties how? transfer pricing rules or special measures recharacterization of transactions TP methods - profit splits management fees and head office expenses 26
Action 10 Other high-risk transactions (cont d) Progress modifications to Chapter VII of the OECD TP Guidelines; lowvalue adding intra-group services: supportive in nature not core business no use or creation of unique and valuable intangibles no assumption, or creation, of significant risk control management fees and head office expenses: limited profit mark-up on for common intra-group services consistent allocation key for all recipients specific reporting requirements 27
Action 10 Other high-risk transactions (cont d) cross-border commodity transactions currently, unilateral measures by countries additional guidance in Chapter II TP Guidelines: Comparable Uncontrolled Price (CUP) can be an appropriate method quoted or publicly available prices; under CUP/ as reference to determine price deemed pricing date potential additional guidance on comparability adjustments 28
Action 12 - Require taxpayers to disclose their aggressive tax planning arrangements mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures; modular design; maximum consistency allowing for country-specific needs and risks wide definition of tax benefit co-ordinated with the work on co-operative compliance enhanced models of information sharing for international tax schemes; between tax administrations 29
Action 13 - Re-examine transfer pricing documentation enhance transparency for tax administration compliance costs for business certainty and predictability information on MNE group s global; allocation of income economic activity taxes paid among countries (common template) 30
Action 13 - Re-examine transfer pricing documentation Progress revised standards for TP documentation three-tier approach to TP documentation master file; high level local file; specific jurisdiction Country-by-Country (CbC) report; template and implementation package model legislation three Model Competent Authority Agreements to facilitate the exchange of CbC reports among tax administrations 31
Action 13 - Re-examine transfer pricing documentation a new Chapter V of the TP Guidelines informed TP risk assessment proper TP analysis in reporting MNE income thorough tax audits Some unresolved issues: interest, royalties and service fees (OECD review and see if possible to include by 2020) 32
Action 14 - Make dispute resolution mechanisms more effective current Mutual Agreement Procedures (MAP) - obstacles absence of arbitration provisions in most treaties access to MAP and arbitration may be denied in certain cases Progress approach: political commitments to effectively eliminate taxation not in accordance with OECD MTC provide new measures to improve access to the MAP and improved procedures establish a monitoring mechanism to check the proper implementation of (these) political commitments 33
Action 15 - Develop a multilateral instrument implement measures developed amend bilateral tax treaties multilateral instrument: innovative approach reflects the rapidly evolving nature of the global economy and the need to adapt quickly to its evolution 34
Action 15 - Develop a multilateral instrument Highlights Public international law, tax law and political issues Desirable and feasible Targeted: multilateral MAP dual-residence structures hybrid mismatch arrangements triangular cases involving PEs in third states treaty abuse Inclusive - OECD, G20 and beyond All interested parties on an equal footing Scoping - 2016 35
Action 11 Action 11 Improving the Analysis of BEPS BEPS project Continuous Improvement Process Assess the existing data on BEPS analysis Identify new types of key indicators to be collected Develop a methodology for analysis of the scale and impact of BEPS 36
Conclusion ONE question How Would affect / apply? 37
Many thanks! M.Naoum@ibfd.org & E.Muyaa@ibfd.org 38