On 16 September 2014 the Organisation for Economic Co-operation and Development (OECD) published its first set of reports and recommendations on the BEPS project. Seven of the 15 areas of the BEPS action plan are covered, addressing:
- the digital economy
- hybrid mismatches
- treaty abuse
- transfer pricing documentation and country-by-country reporting
- transfer pricing and intangibles
- harmful tax practices
- a possible multilateral instrument to implement BEPS
It is beyond the scope of this update to give more than a taste of the recommendations contained in this lengthy, and impressive body of work. A number of highlights are, however, worthy of mention.
To combat so-called “hybrid mismatches” (which exploit cross-border differences in the tax treatment of entities or instruments), the overall aim of the BEPS recommendations is to ensure that amounts treated as deductible in one (payer) jurisdiction do not escape taxation in another (payee) jurisdiction. The recommendations also look at situations that give rise to duplicate deductions, resulting from the use of “hybrid” entities (treated as tax transparent in one jurisdiction, but opaque in another).
On preventing tax treaty abuse, the OECD remains of the view that including within treaties both a “limitation of benefits” (LoB) article, and a general anti-abuse article, would be an appropriate means of combatting perceived treaty abuse. This approach would see both an objective, and a subjective, measure added to the OECD’s model treaty to counter perceived treaty shopping. The concept of an LoB article will be well known to those familiar with US tax treaties. However, the report now concludes that a minimum level of protection is recommended in all cases, with inclusion of the anti-abuse article as the starting point.
As far as “harmful” tax practices are concerned, the OECD’s ambition is to reduce the role of tax treatment in determining the location of financial and service activities. The key question, in determining whether a state operates a potentially “harmful” tax practice, is whether the state offers a low (or no) effective tax rate for income from geographically-mobile activities. Only if the regime shifts activity, or proves to be the primary motivation for location, will it be actually harmful. Key to this will be deciding whether “substantial activity” is required in the jurisdiction, in order to benefit from the favourable tax regime. This is an ongoing piece of work, with the OECD first looking at existing intellectual property regimes, including the UK’s “patent box”.
Although the OECD appears to be on course to meet its target of finalising its full set of reports and deliverables by the end of 2015, the process of reaching global consensus on these issues is clearly going to be difficult and delicate. That said, it is equally clear that there are going to be significant changes to the international tax landscape for multinationals in the coming years.
To view the first BEPS reports, click here.