The Organization for Economic Co-operation and Development has released its ambitious action plan to address base-erosion and profit-shifting. Whilst the action plan leaves many questions unanswered and may fall at the first hurdle if the assumed political support for change turns out to be lacking, multinationals need to be aware of its content and should be monitoring developments closely 


In February 2013, the Organization for Economic Co-operation and Development (OECD) released its long-awaited report on base-erosion and profit-shifting (BEPS). The topic had become high on the political agenda in the preceding months owing to intense media scrutiny of the current principles of international taxation. Please see our previous coverage on the BEPS Report on the Transfer Pricing 360 blog.

Key Findings in the BEPS Report

The BEPS Report concluded that there was no empirical evidence that proved either the existence of BEPS or how BEPS could be affecting the tax-take of any given country. It also recognized that multinationals have a duty to their shareholders to minimize their tax bills, and it conceded that the planning strategies being castigated in the press simply involved multinationals legitimately using the current rules made available to them, such as the principle of separate legal personality.

The report concluded, however, that the current rules on international tax are outmoded because they have failed to keep pace with the way multinationals now do business. It recommended the development of an action plan to address BEPS and the underlying legal and tax bases that facilitate it. That action plan was released on 19 July 2013.

The Action Plan: Overview

The action plan can be found by following this link. In a preview meeting about its content on 17 July 2013, Pascal Saint-Amans (Director of the OECD’s Centre for Tax Policy and Administration) stated that the action plan “represents a unique opportunity that comes along once in a century to rewrite the principles of international taxation” and said the OECD’s vision is to facilitate the creation, via the action plan, of a set of principles “that will last for the next 100 years”. Viewed against that background, it is clear that the OECD has high hopes for this initiative and the action plan itself certainly does not disappoint in terms of ambition from a content or timing perspective.

The Action Plan: Contents and Proposed Steps

The action plan identifies an extensive list of international tax principles for overhaul, ranging from the transfer pricing policies applicable to intangibles, to the introduction of model “controlled foreign company” codes and changes to the “permanent establishment” definition. It also contains a timetable for the envisaged reform, with proposed deadlines for each action point. Most of these fall within the next 12 to 24 months, with the OECD playing a facilitative role in the process.

Viewed in isolation, the ambitious content of the action plan does not particularly set it apart from similar initiatives that have gone before, including, for example, the OECD’s previous work on “Harmful Tax Practices”. What does make the action plan arguably unique (and certainly deserving of serious and considered thought) is the apparent political will behind it. For example, the action plan has already received approval in principle from the G20 Finance Ministers, who gave their public approbation in a communiqué dated 20 July 2013. Moreover we understand from comments made by OECD representatives at the 17 July 2013 preview meeting mentioned above that many of the “source” states, including the BRICS (Brazil, Russia, India, China and South Africa), have also adopted the action plan in principle.

This is remarkable given the short passage of time since the BEPS Report was published in February this year. Indeed, at the preview meeting, the OECD commented that it had been “amazed at the speed of progress and the fact that we are reaching international consensus at the political level so quickly”. However, in spite of the public enthusing over the action plan, it should be kept in mind that reaching high level political agreement to a plan of action is a far cry from subscribing to, and implementing, the more granular proposals that may be forthcoming in due course.

Moreover, it is well-known that the BRICS countries have generally been outspoken critics of the OECD Model Treaty and its transfer pricing guidelines for many years now; as the action plan itself makes clear that it is “not directly aimed at changing the existing international standards on the allocation of taxing rights on cross-border income”, multinationals can therefore expect the BRICS countries to continue pursuing their own respective agendas outside the context of the OECD’s BEPS project.


It is tempting to get carried-away by the grand overtones in the action plan. However, the OECD itself has no mandate to change the law, so it has to rely on the take-up from interested sovereign states. And therein lies the fundamental problem for an initiative such as this: it relies on domestic implementation on a country-by-country basis. As there will inevitably be variation in how states adopt the ultimate proposals from the OECD, there will never be a perfectly co-ordinated, supra-national action on BEPS. In practical terms, this means that the process envisioned by the action plan will not be a panacea for all the perceived shortcomings of the current principles of international taxation.

Take for example the United Kingdom’s newly-introduced Patent Box, which from one perspective could be interpreted as a base-eroding tactic in favour of the UK Exchequer. The OECD cannot force the United Kingdom to abandon the regime and, given its relatively recent appearance on the statute books, it seems highly unlikely that the United Kingdom would voluntarily remove the regime. In addition, it simply cannot have been enacted without due thought or consideration having already been given to the public and prominent work of the OECD in the BEPS space.

This basic example shows that in real terms, perfect alignment on international issues of such complexity and importance is simply unfeasible. There can never be a truly global solution; principles are easier to agree in broad terms at an international policy level than they are to implement on the ground.

But this is simply a function of the existence of national sovereignty in tax policy. There is only so far that states can go in order to fetter their neighbors’ abilities to utilise tax policy-making as a generator of inward economic investment (and this is particularly true in the context of states pursuing a policy of capital import neutrality). Notwithstanding the impossibility of achieving a perfect international consensus, the action plan raises points that multinational enterprises operating in a global environment cannot afford to ignore.

The Action Plan: Deliverables

The action plan is arranged around four core areas, namely: (i) transfer pricing (actions 8, 9, 10 and 13); (ii) treaty matters (actions 6, 7, 14 and 15); (iii) backstop matters (actions 1 to 4 and action 5 in the context of requiring substantial activity for any preferential regime); and (iv) information exchange and documentation (action 5 in the context of disclosing rulings on preferential regimes and actions 11 and 12). Each action has its own deadline and proposed next steps. There is also a general theme running through the action plan of the alignment of economic activity and the right to tax.

Particular areas on which the action plan has stated deliverables of interest include the following:

  • Changes to the transfer pricing rules to clarify their application in the context of: (i) “global value chains” with particular emphasis on the use of profit splits (two-sided methodologies versus the normal one-sided methodology of transaction net margin method or others); (ii) base erosion payments, including management fees and head office expenses; (iii) “hard-to-value” intangibles (which may perhaps include items such as so-called “super royalties”); (iv) risk-taker arrangements; and (v) clarifying “the circumstances in which transactions can be recharacterized”. In our view, the confirmation that “moving to a system of formulary apportionment of profits is not a viable way forward” is welcome, although we note with some unease the reference on page 20 of the action plan to the possible exploration of “special measures, either within or beyond the arm’s length principle”. See actions 8, 9 and 10. These are all areas in which tax authorities around the world are already focused, producing a continuous stream of controversies to be resolved.  
  • Exploring the development of a multilateral instrument so that states wishing to participate can amend their existing double taxation treaties. The action plan is relatively thin on the detail of what such an instrument would contain, but does expressly mention “anti-treaty abuse” provisions. See action 15. 
  • Establishing a taskforce to identify the main difficulties posed by the taxation of the digital economy and to report back with a proposed “holistic approach” for applying the international tax rules to this particular business sector. See action 1. Interestingly, the action plan also proposes that indirect taxes such as VAT should be included in this exercise. We find this surprising, as there is ostensibly less of an issue around the collection of VAT than the perceived issues relating to direct taxation. Moreover, there is arguably less that can be done with an indirect tax such as VAT beyond moving between the origin and the destination principle; and in any event, the reverse charge facility has already been explored. It will be interesting to watch developments in the OECD’s thinking in the VAT space in particular.  
  • Developing proposals for a limited and confidential form of country-by-country reporting, whereby multinationals would report which jurisdictions they operate in (and the amount of tax they pay in each jurisdiction) on a confidential basis to their domestic tax authorities. Such data would be used to additionally monitor the effectiveness of the action plan. See action 11.
  • Designing mandatory disclosure regimes requiring taxpayers to disclose to their domestic tax authorities the details of any aggressive tax planning arrangements in which they participate. See action 12.
  • Developing changes to the definition of a “permanent establishment” in order to “prevent the artificial avoidance of PE status in relation to BEPS, including through the use of Commissionaire arrangements” (commonly used in civil law jurisdictions to prevent the creation of a “permanent establishment” and akin to an agent with an undisclosed principal from a common law perspective). See action 7.
  • Revamping the OECD’s previous work on “Harmful Tax Practices”, which will include proposals on compulsory spontaneous exchange of information concerning rulings on preferential regimes, and on requiring substantial activity for preferential regimes. See action 5.
  • Developing model treaty provisions and recommendations to “neutralize” the effects of hybrid instruments and hybrid vehicles in intended cross-border tax arbitrage. This may include commonly-utilised hybrid instruments such as PECs and CPECs. See action 2.
  • Supporting the OECD’s long-running intangibles project so as to deliver a “broad and clearly delineated definition of intangibles”. See action 8.
  • An improvement to existing Mutual Agreement Procedures – possibly by the introduction of mandatory arbitration rights – in an effort to enhance taxpayer protection and guard against the possibility that a state delivering on the action plan inadvertently visits double taxation upon a given taxpayer. See action 14.

An additional issue that will need to be considered in-depth as the process evolves is the transition from the status quo in the case of specific action by one or more countries. The action plan seems to be trying to discourage this (calling in several places for concerted and coordinated action), but the possibility that some states will wish to move faster and more comprehensively than others is almost inevitable.


As noted above, the ultimate value of the action plan will be determined by its implementation. Given that the current opportunities for international tax planning and BEPS are simply a consequence of the rules on international tax enacted by states (rather than anything multinationals have created of their own accord), it is possible that little may come of the action plan if those states ultimately feel more inclined to guard their national interests when the cards are on the table.

That being said, it seems possible that tackling BEPS has gained sufficient political momentum for some form of change to occur in due course. Certainly one would think it achievable in the automatic information exchange space and in the context of an amended permanent establishment concept that seeks to align taxing rights more closely with economic activity.

Next Steps for Multinationals

If there is enough political will to push-through even some of the changes envisaged by the action plan, then in view of the proposed timeframe multinationals need to proactively engage with the principles and policies underlying the action plan’s stated aims. All multinationals should be keeping fully abreast of developments in this sphere and should be actively considering the potential implications of the action plan on their global value supply chains, particularly their global effective tax rate.

In practice, our experience is that modelling effective tax rate strategies is relatively straightforward in the scheme of things: it is a process that is regularly undertaken in the process of evaluating and resolving transfer pricing disputes, either administratively, in Competent Authority, Advance Pricing Agreement, or litigation contexts. However, legacy structures may need to be revisited, especially where anticipated tax benefits are accruing annually and existing planning falls within the scope of a deliverable under the action plan, and new approaches may also need to be developed.

We are entering an exciting and challenging time for multinationals. The OECD has made it very clear that it wants to drive a fundamental re-write of the principles of international taxation that were laid down almost a century ago. The challenge for multinationals will be to ensure that their existing structures evolve in parallel and are fit for purpose for the next century. The challenge for each of the sovereign states involved will be putting the stated principles into practice in a way that balances tax revenue and political considerations with each country’s presumed desire to remain competitive as both a source country and a residence country with respect to multinational direct investment.