The Organisation for Economic Co-operation and Development (OECD) issued an “Action Plan” to tackle “Base Erosion and Profit Shifting” (“BEPS”) on 19 July 2013. The concept of BEPS covers a range of international tax principles that are currently perceived to be operating in an unfair manner or that are being abused by sophisticated tax planners. The OECD consider that the Action Plan (which is due to be implemented mainly within a one to two year time horizon) will better align rights to taxation with underlying economic activity.
The Action Plan envisages fundamental changes to international and domestic tax rules of the OECD nations and also other interested non-G20 nations (and possibly other interested invited nations). In broad terms, these changes are designed to restore the coherence of international corporate income taxation by realigning taxation with relevant substance (recognizing changing business models and technological developments) and improving information transparency for participating governments as well as providing increased certainty for businesses.
Among the specific actions envisaged within a 12 to 18 month timeline are actions to:
- Neutralise the effect of hybrid mismatch arrangements (e.g. arrangements which achieve unintended double non-taxation or long term tax deferral by, for instance, creating two tax deductions for one borrowing or generating deductions without corresponding income inclusions).
- Tackle double taxation treaty abuse.
- Revise transfer pricing rules applicable to intangibles.
- Revise transfer pricing documentation requirements to enhance transparency for tax authorities.
- Issue a report identifying key tax issues raised by the digital economy (e.g. as to how value from digital products and services should be attributed).
Other actions envisaged by the Action Plan within a two year timeline relate to:
- Implementation of improved, efficient controlled foreign company rules.
- Limiting interest deductibility particularly in related-party transactions (e.g. where a deduction is achieved but the corresponding receipt is not taxable).
- Preventing the artificial avoidance of permanent establishment status (e.g. increasing use of Swiss principal/limited risk distributor arrangements).
- Data collection, mandatory disclosure of aggressive tax planning arrangements and making dispute resolution mechanisms more effective.
Finally, other actions envisaged under the Action Plan that may require more than a two year timeline will include:
- Revising transfer pricing aspects of financial transactions.
- Work in relation to the abolition of harmful tax practices.
- The development of a multilateral instrument to implement changes swiftly to bilateral treaties.
A link to the OECD paper is contained here.
The Action Plan is extremely ambitious in both the topics it attempts to address and the timeline it has set out to achieve change. If even a small part of what the Action Plan sets out to do is actually achieved it could have widespread implications for existing international structures as well as future international tax planning.