On 16 September 2014, the OECD released its first set of recommendations under seven topics of the base erosion and profit shifting (BEPS) project.  The first seven elements of the Action Plan focus on helping countries to:

  • address the tax challenges of the digital economy (Action 1). The key conclusion to date is that the digital economy does not create unique BEPS issues and it would be difficult, if not impossible, to ring fence the digital economy and apply distinct tax rules to it.  However, the risks posed by the digital economy are to be considered as part of the work on other BEPS actions and, therefore, there is likely to be considerable impact on both digital businesses and those with a digital element to their business;  
  • ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralise hybrid mismatch arrangements (Action 2).  The recommendations in this Action relate to both changes to domestic rules to be introduced by countries as well as changes to the OECD Model Tax Convention, albeit that the OECD recognises that not all jurisdictions will implement the proposals. The proposals will particularly impact US headed multinational groups relying on "check-the-box" entity classification, and IP holding structures or treasury/financing structures which have hybrid entities in the structure or hybrid instruments;  
  • counter harmful tax practices (Action 5).  This Action aims to counter preferential tax regimes in respect of income from mobile financial and services activities which are considered harmful. The outcome from this project involves giving greater prevalence to the requirement that, to avoid "harmful" status, a preferential taxing regime must require substantial activity.  Initial focus has been on preferential IP regimes and, as part of this, the Forum on Harmful Tax Practices is reviewing all IP regimes in the OECD member countries (including the UK's patent box regime) to determine whether benefits are conditional on and referable to the extent of R&D activities undertaken by the taxpayer. In addition, a deliverable under this Action is the introduction of effective and compulsory information exchange obligations in respect of taxpayer-specific rulings relating to that preferential regime. The proposals could impact on multinational groups with IP held by group companies benefitting from preferential tax rates where R&D is not undertaken by the group or the individual IP holding company;  
  • realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties (Action 6).  This Action deals with recommendations to combat treaty shopping. The recommendations recognise the need for flexibility in approach and would require:
    • the inclusion, in the preamble to each treaty, of a clear statement that the Contracting States, when entering into a treaty, intend to avoid creating opportunities for reduced taxation through tax evasion or avoidance, including through treaty shopping and clarify that treaties are not intended to be used to generate double non-taxation; and either:
      • a specific anti-abuse limitation of benefits ("LOB") provision based on the US treaty LOB (which only focusses on treaty shopping and does not deal with other treaty abuses) together with a more general anti-abuse rule based on the principal purposes of transactions or arrangements (the "principal purpose test" or "PPT") to deal with conduit type arrangements; or
      • a more general anti-abuse rule based on the principal purposes of transactions or arrangements ("PPT") only; or
      • the LOB rule but supplemented either by a restricted PPT rule applicable to conduit financing arrangements or by domestic anti abuse rules or judicial doctrines achieving the same result.

The recommendations also include a proposal to deal with dual residence by including a provision stating that residence under the treaty would be determined by the competent authorities of the states on a case by case basis, although states may agree to use the current tie-breaker provisions. Depending on how states choose to implement these recommendations, this Action will have significant impact on multinational groups with cross border payments and, to the extent that states introduce LOB provisions in their treaties, could have a significant impact on the ability of ultimate beneficial owners in non-treaty states to benefit from the application of double tax treaties even in non-abusive situations unless they obtain clearance from the competent authorities in the relevant state.  

  • ensure that transfer pricing outcomes are in line with value creation, through actions to address transfer pricing issues in the key area of intangibles (Action 8).  The draft recommendations (which will be impacted by other BEPS actions) relate to revising the OECD's existing transfer pricing guidelines as regards determining arm's length conditions for transactions involving intangibles. In addition, it is considered that the methods most likely to be useful in valuing intangibles are the comparable uncontrolled price and transactional profit split methods, rather than traditional one-sided methods such as resale price methods. Any implementation of draft proposals (which will not be finalised until 2015), is likely to impact on the allocation of profits arising from the exploitation of intangibles, particularly among multinational groups where other group members have performed functions, used assets or assumed risks which contribute to the value of the intangibles;  
  • improve transparency for tax administrations and increase certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting (Action 13).  The recommended approach is for large enterprises to create a master file (containing high level global information regarding business operation and transfer pricing policies), a local file (identifying transactions relevant to the local taxpayer) and a report for country by country reporting of income, earnings, taxes paid and certain economic activities. Guidance is to be developed in 2015; and  
  • facilitate swift implementation of the BEPS actions through a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties (Action 15).  The proposal is for countries to enter into a multilateral instrument to avoid renegotiation of a large number of bilateral double tax treaties in order to implement the BEPS recommendations. This Action concludes that a multilateral instrument is legally feasible, would be legally binding and would coexist with bilateral treaties. In particular, this instrument is being considered to implement changes to treaties relating to mutual agreement procedures, dual residence, hybrid mismatches, permanent establishments in third states and treaty shopping (as per Action 6). However, it is recognised that the relationship of the multilateral instrument with EU law and other multilateral agreements would need to be considered.  It is recommended that such multilateral instrument should be negotiated through a G20 conference convened in 2015.  

These recommendations have been published in draft and are expected to be further refined to address any outstanding technical issues including interaction with the remaining elements of the BEPS Action Plan, which are scheduled to be delivered in September and December 2015.  At that point, Governments will also address implementation measures for the Action Plan as a whole.

> The recommendations are available here

They were a key item on the agenda at the G20 finance ministers' meeting on 20-21 September, where the UK and 43 other countries committed to implementing the new country-by-country reporting template by next year.