The Organization for Economic Cooperation and Development (“OECD”) recently held its annual tax conference in Washington, DC focusing on the progress of implementation of its Action Plan on Base Erosion and Profit Shifting (the “BEPS Action Plan”).
Overview of the BEPS Action Plan
The OECD published the BEPS Action Plan in July 2013 to bring about discussion of and to correct perceived problems with base erosion and profit shifting (“BEPS”), tax planning strategies of multinational entities and other international taxpayers that exploit gaps in domestic tax law systems and that shift profits to low tax rate jurisdictions where relatively little economic activity is actually taking place. The Action Plan called for member nations to, among other things, shore up their domestic tax rules where interaction between domestic tax systems has unintentionally led to gaps in corporate taxation (double non-taxation or less than single taxation). The Action Plan (i) identifies 15 actions needed to address BEPS, (ii) sets a timeline of deadlines to implement the actions and (iii) identifies the resources needed, the methodology, and certain output deliverables required to implement the actions. The Action Plan can be viewed on the OECD website.
The 15 action items to be addressed identified by the BEPS Action Plan are as follows:
(1) address the tax challenges of the digital economy, (2) neutralize the effects of hybrid mismatch arrangements, (3) strengthen CFC rules, (4) limit base erosion via interest deductions and other financial payments, (5) counter harmful tax practices more effectively, taking into account transparency and substance, (6) prevent treaty abuse, (7) prevent the artificial avoidance of Permanent Establishment status,(8) assure that transfer pricing outcomes regarding intangibles are in line with value creation, (9) assure that transfer pricing outcomes regarding risks and capital are in line with value creation, (10) assure that transfer pricing outcomes regarding high-risk transactions are in line with value creation, (11) establish methodologies to collect and analyze data on base erosion and profit shifting and the actions to address it, (12) require taxpayers to disclose their aggressive tax planning arrangements,(13) re-examine transfer pricing documentation and country by country reporting, (14) make dispute resolution mechanisms more effective, and (15) develop a multilateral instrument to enable jurisdictions to implement these actions items.
Key Upcoming Dates and US Comments
Action items (1), (2), (5), (6), (8), (13) and (15) currently have a September 2014 target delivery date. The OECD expects to present final output reports reflecting fulsome recommendations for additional work to be done regarding these 7 action items at its G20 Finance Ministers Meeting in September 2014. Draft reports for many of these action items were released in February and March, and related comments have been collected. The OECD has admitted that it is working at a frantic pace to deliver the final reports by September and to pre-empt the development of unilateral BEPS legislation and regulation in OECD and G20 member nations.
lIn light of the quickly approaching target delivery dates, US lawmakers and regulators have publicly expressed doubt about the progress and effectiveness of the project. A joint statement was released by Senate Finance Committee Ranking Minority Member Orrin Hatch and House of Representatives Ways and Means Committee Chairman Dave Camp in late June 2014 regarding the time frame and progress of the implementation of the BEPS Action Plan as well as concerns that the plan is being used by other member nations to increase taxation on American taxpayers. According to Hatch and Camp, the September 2014 deadline for implementation of the 7 early action items (as well as the timeframe for the remaining action items) is “extremely ambitious,” and it limits the ability to review, analyze and comment on the rules being proposed. Accordingly, Hatch and Camp believe the process “raises serious questions about the ability of the United States to fully participate in the negotiations.” Camp and Hatch nevertheless suggest comprehensive US federal income tax reform by lowering the corporate income tax rate to a level which is internationally competitive and modernizing the US international tax system.14
Robert Stack, US Treasury Deputy Assistant Secretary for International Tax Affairs for the Office of Tax Policy, similarly expressed concerns regarding the implementation of the BEPS Action Plan in the United States, recently. Specifically, Stack criticized the BEPS Action item (15) call for the development of a multilateral instrument as an idea that is “not well-defined” in terms of its process and substance. He doubts whether such a document is even “doable.”15