Base Erosion and Profit Shifting (''BEPS'') refers to tax planning strategies that supposedly exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. Although some of the schemes that are used are illegal, it must be said that most of them are not.
It is said that base erosion undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level.
Developing countries suffer the most from the consequences of BEPS, due to their heavy reliance on corporate income tax, particularly from multinational businesses. In order to overcome the adverse consequences of BEPS, the OECD/G20 embarked on the BEPS project, which seeks to eliminate opportunities and close the loopholes for cross-border tax avoidance.
The project, which has participants of more than 100 countries (including South Africa) consists of the BEPS package, which includes 15 actions to tackle BEPS. These actions/ tools are aimed to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.
Some of the interesting provisions proposed to be implemented through the BEPS project include:
- Recommendations regarding the design of domestic rules and the development of model treaty provisions that would neutralise the tax effects of hybrid mismatch arrangements. These recommendations are aimed at neutralising multiple deductions for a single expense, deductions without corresponding taxation or the generation of multiple foreign tax credits for one amount of foreign tax paid.
- Treaty anti-abuse rules that will address the issue of treaty shopping, which in effect is when a person who is not a resident of a State attempts to obtain benefits that a tax treaty concluded by that State grants to residents of that State, for example by establishing a company without real substance in that State.
- An amendment to the definition of permanent establishment in the OECD Model Tax Convention.
- A recommendation for an analysis of the tax and public international law issues related to the development of a multilateral instrument to enable interested countries to amend bilateral tax treaties.
- To this end an ad hoc Group was formed to develop a multilateral instrument on tax treaty measures to tackle BEPS. The Group begun its work in May 2015 with the aim to conclude its work and open the multilateral instrument for signature by 31 December 2016.
The introduction of the provisions of the OECD/G20 BEPS Project is an interesting project that will require a collaboration of various jurisdictions. Time will tell whether it will deliver its intended results and what impact it will have on the international tax landscape.