On 5 October 2015, the OECD delivered the final package (“Final Package”) of its comprehensive Action Plan on Base Erosion and Profit Shifting ("BEPS"). This marks a culmination of a process that started in September 2013, when the Group of 20 (“G20”) Leaders first endorsed the Action Plan on BEPs.
The Action Plan contains 15 actions setting out the plan by the OECD and G20 countries to harmonise tax rules across jurisdictions in order to reduce BEPS.
This update discusses the key highlights of the Final Package, as well as the possible implications for businesses operating in Singapore.
Action Plan on BEPS Final Package - Key Highlights
With the delivery of the Final Package, several outstanding issues have been addressed by the OECD and G20 countries which should lead to a more consistent implementation of the Action Plan on BEPS. Amongst them, minimum standards have been agreed upon to tackle issues in cases where some tax jurisdictions do not take any action against BEPS, which may cause negative spillover effects on other countries. With the OECD and G20 countries largely committed to consistent implementation in areas such as preventing treaty shopping, country-by-country reporting, fighting harmful tax practices and improving dispute resolution, one expectation of the Action Plan is for a future international tax framework which will adopt minimum standards against BEPS. As the OECD Action Plan enters its implementation phase, the expectation is that the countries outside the OECD and G20 will eventually sign up to these standards, so as to protect their own tax bases, thus leveling the playing field for all.
The key highlights of the Final Package are as follows:
- Model provisions to prevent treaty abuse have been developed, with the intention that countries may use such provisions to advise them on issues in bilateral tax treaties. These provisions require additional technical work, and are expected to be finalised in 2016.
- The Final Package has recommended that country-by-country reporting be used for transfer pricing documentation. The implementation of such reporting is recommended to start from 2016 and apply to multi-national enterprises with an annual consolidated group revenue of EUR 750 million or more.
- A peer review process to address harmful tax practices will be set up. Its main aim is to allow tax authorities to address harmful tax practices arising from mobile financial and service activities in preferential intellectual property regimes.
- A minimum standard has been reached to secure progress on dispute resolution, such as through the mutual agreement procedure ("MAP"). In relation to this, an effective monitoring mechanism will also be established to improve dispute resolutions.
- The Final Package contains a set of agreed guidance to review existing international tax standards on eliminating double taxation with a view of preventing BEPS abuses. In particular, these transfer pricing guidelines will be modernised in relation to intangibles, such as intellectual property.
- Changes to the definition of a permanent establishment have been agreed upon, although the report notes that follow-up work will need to be done to provide additional guidance on profit attribution to permanent establishments.
- Measures will be developed in due course to address the tax challenges of the digital economy.
- An ad hoc group consisting of around 90 countries has been formed to develop a multilateral instrument to implement the treaty-related BEPS measures to facilitate the modification of bilateral tax treaties in a synchronised and efficient manner. This is targeted to be completed by the end of 2016.
Implications for Singapore
These global developments are in line with Singapore’s increased efforts to clamp down on tax avoidance and be in line with global transfer pricing standards.
Singapore’s Ministry of Finance has, in a statement addressing the OECD announcement, expressed Singapore’s support for OECD’s final BEPs recommendations for an international approach to combat tax avoidance. In particular, Singapore supports the BEPS principle that profits should be taxed where substantive economic activities generating the profits are performed and where value is created.
Singapore’s tax treaties already incorporate provisions that guard against treaty abuse and provide for exchange of information upon request, in line with international standards. Singapore also adopts the internationally-agreed arm’s length principle to guide transfer pricing (i.e., the determination of prices for transactions between related parties), and has been scrutinising transfer pricing practices since 2006.
In January 2015, Singapore's tax authority, the Inland Revenue Authority of Singapore ("IRAS") published its updated e-Tax Guide on Transfer Pricing ("Guidelines"). The updated Guidelines set out IRAS’s clarifications on the need for companies to prepare contemporaneous transfer pricing documentation, as well as the documentation requirements, exclusions and materiality thresholds, and various procedures that apply. Please click here for our earlier client update in relation to the updated Guidelines.
With the delivery of the OECD's Final Package on the Action Plan for BEPS, businesses operating in Singapore should therefore expect IRAS to implement most, if not all, of the Action Plan items in due course. For example, Singapore may start to require multi-national enterprises to provide all relevant tax administrations with high-level information regarding their global business operations and transfer pricing policies in a “master file”, together with the detailed transactional transfer pricing documentation to be provided in a “local file” specific to each country, as well as a Country-by-Country report that will provide annually and for each tax jurisdiction in which they do business, the amount of revenue, profit before income tax and income tax paid and accrued. There is currently no such requirement under the present Guidelines.
Singapore businesses should therefore familiarise themselves with the current Guidelines, and take note of the recent developments with the OECD Action Plan on BEPS, in particular the key announcements highlighted in this client update.
With the delivery of the Final Package of the OECD's Action Plan for BEPS, it is anticipated that egregious transfer pricing practices will become increasingly difficult to sustain. Even companies that do not have an intention to abuse the transfer pricing mechanism will be affected, as more and more tax jurisdictions cooperate to tighten any tax discrepancies that may lead to BEPS. As noted, within Singapore, the IRAS already imposes on certain companies the requirement to produce and maintain contemporaneous transfer pricing documentation. Companies should take this obligation seriously, in anticipation that further transfer pricing developments are afoot in the international tax arena which will likely be adopted in Singapore in due course.