The OECD released its Action Plan on Base Erosion and Profit Shifting (BEPS) on Friday. The BEPS initiative was launched earlier this year at the request of the G20 to counter alleged abuses by multinational corporations to artificially reduce income tax. The Action Plan is aimed to counter perceived weaknesses in international taxation that allow corporations to exploit mismatches in domestic tax regimes, take advantage of deficiencies in tax treaties, especially in the digital economy, and pursue aggressive transfer pricing.
The BEPS Action Plan is an ambitious plan with 15 actions that can be grouped into five main areas, intended to be addressed over a two-year timeframe:
- Address tax challenges of the digital economy: The Action Plan calls for the establishment of a dedicated task force on the digital economy to analyze business models and value generators in this sector. It will cover direct and indirect taxation (income tax and sales/value-added tax).
Establish coherent rules for corporate income taxation: The Action Plan asserts that globalization coupled with uncoordinated domestic tax regimes create increasing opportunities for double non-taxation through artificial means. Key practices targeted in this workstream are:
- Hybrid mismatches in entity or instrument classification, e.g., entity treated as a corporation in one jurisdiction is treated as a flow-through in another or debt/equity mismatches;
- Controlled foreign company rules for offshore subsidiaries/affiliates in multinational groups;
- Excessive interest deductions – so called “base erosion” rules to limit the use of related party and, in some regimes, third-party debt to achieve allegedly excessive interest deductions – and other abusive financial payments; and
- “Harmful” tax competition, especially from preferential tax regimes.
Restore full effects and benefits of international standards: The key aims of this leg of the Action Plan are to:
- Prevent treaty abuse, notably treaty shopping, e.g., taking advantage of a tax treaty by interposing an intermediary holding company in the desired treaty jurisdiction to reduce withholding taxes or access capital gains exemptions not permitted to the “home country” entity;
- Update “permanent establishment” (PE) definition to counter artificial avoidance of PE status that reduces source country taxation of local activities of foreign enterprise; and
- Reinforce transfer pricing rules especially around intangibles, risks and capital and other high-risk transactions.
- Ensure transparency: This leg of the Action Plan is aimed at increasing disclosure by taxpayers and greater information sharing among governments.
- Amend Tax Treaties: The final action in the Action Plan is to develop a multilateral instrument that would form the basis of treaty amendments. This is perhaps the vaguest action item and not surprisingly has the longest timeline.
Implementation of the Action Plan is to be achieved through a dedicated project in which OECD member and non-member governments alike will be able to participate. Non-governmental organizations, including the business community, will be consulted and a “high-level policy dialogue” has been promised on an annual basis.
There has been much enthusiasm in many government quarters for the BEPS initiative as governments struggle with fiscal pressures and seek to increase tax revenues. Interestingly, however, as I noted in my February 21 blog post, the OECD’s own data show only a slight decrease in corporate tax as a percentage of the total tax take in OECD countries from 1965 to 2010 and a net increase in the overall tax burden (measured by the corporate tax to GDP ratio) over that period. BEPS is highly politicized and the development of tax policy, which is inherently complex, in such an environment and in a short timeframe, carries many risks of ineffective regulation and unintended consequences. Despite the vociferous criticism by some politicians of corporate tax planning, it remains to be seen whether individual governments are prepared to make changes in their own tax regimes, which often include tax incentives to businesses to locate or expand in their jurisdiction, in order to achieve the OECD’s desired co-ordination and integration of international corporate taxation.