2015-Issue 36—At the recent meeting of the G20 nations’ finance ministers and central bank governors, the ministers announced their support for the remaining base erosion and profit-shifting (BEPS) initiatives published on October 5 by the Organization for Economic Cooperation and Development (OECD). The 15 action items (published in 13 reports and nearly 2,000 pages) are the largest revision to international taxation practices since the original framework was established in the 1920s.
The OECD BEPS Initiative
In view of ongoing economic globalization and the resulting challenges faced by tax administrators to keep pace, the OECD spearheaded an ambitious effort starting in 2013 to tackle what was viewed by many tax authorities as rampant tax avoidance. While much focus had historically been placed on the elimination of double taxation, tax authorities and tax policy-makers now had a growing concern about double non-taxation.
The framework for the BEPS initiative was to develop a consensus approach for administering international tax policy in the 21st century, centered on a broad selection of economic drivers for the modern world, such as the digital economy, the development and exploitation of intangibles, hybrid financing arrangements and transfer pricing. Although led and coordinated by the OECD and its 34 member countries, the BEPS initiative also had active participation from the full group of G20 nations as well as developing countries that enjoy membership in neither of the aforementioned groups.
Numerous territories (particularly developed European nations) have been “early adopters” of some of these BEPS initiatives, proposing and introducing legislation in multiple areas of focus. While reducing what territories label as tax avoidance and evasion has been a stated aim, BEPS has also become a tool for tax authorities to gain local popularity, particularly in emerging markets. Referencing the BEPS initiative has become an easy excuse to reform taxation in line with national interests.
The stated intention of the final BEPS reports is indeed to represent the consensus recommendations of this diverse body of nations. Whether the objectives will be achieved remains to be seen, but it is clear that a new dawn in global taxation has arrived.
The Action Reports
The plan — developed and released over the course of the past two years — contains guidelines for updates to several areas of international tax law, including treaty benefits, interest deductions, controlled foreign company rules, and transfer pricing — with the stated aim to prevent such practices as treaty shopping and various means of effecting double non-taxation.
The Full List of Action Items:
- Action 1: Addressing the Tax Challenges of the Digital Economy
- Action 2: Neutralizing the Effects of Hybrid Mismatch Arrangements
- Action 3: Designing Effective Controlled Foreign Company Rules
- Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
- Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
- Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
- Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
- Actions 8-10: Guidance on Transfer Pricing Aspects of Intangibles
- Action 11: Measuring and Monitoring BEPS
- Action 12: Mandatory Disclosure Rules
- Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
- Action 14: Making Dispute Resolution Mechanisms More Effective
- Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties
For a quicker overview read, download the executive summary report here.
Alvarez & Marsal Taxand Says:
After several years of work on this global initiative and speculation as to its final recommendations, the BEPS guidance is indeed real and must be squarely faced. Although member countries are expected to fully endorse the recommendations at the G20 Leaders Summit in mid-November, the devil is in the details for any individual country. For real impact to occur, the recommendations would have to be consistently implemented. This notion was echoed by Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, stating “the challenge is consistent implementation.” Without such consistent implementation across regions, taxing authorities can expect only partial success in addressing gaps and inconsistencies in current policy.
To this end, several countries have already taken initial steps to implement various aspects of the guidance, notably country-by-country reporting, which is largely set to commence for fiscal years beginning on or after January 1, 2016. There are sure to be technical issues arising from the BEPS reports for nearly every multinational enterprise to consider and to develop a coordinated, global action plan.
In coming weeks, Alvarez & Marsal Taxand will publish commentary on some of the targeted key impacts of BEPS for our clients; however, in the meantime do not hesitate to reach out to your local A&M tax advisor for further details and the latest BEPS considerations.
The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the US., and serves the U.K. from its base in London.Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.