A combination of increased media attention on tax avoidance and the need to shore up Governmental tax receipts in difficult economic conditions has led to the tax arrangements of multi-nationals being put in the spotlight. Newspaper articles, such as the Guardian’s “Tax Gap” series and the activities of NGOs and charities have, in particular, raised the issue of tax avoidance in the public consciousness and the political arena. This has in turn led to a popular perception that “something must be done” about tax avoidance, culminating in the UK in the very public and aggressive “dressing down” of officials, advisers and business leader by the Public Accounts Committee and much criticism of large multinational companies, including Amazon and Starbucks.
Much of the debate, often addressing very complex issues has been conducted in an unfortunately simplistic manner, eliding the difference between avoidance and evasion and painting legitimate, long-standing arrangements as aggressive avoidance, for example. However, in the furore over tax avoidance, one area in relation to which all could find common ground was the need to modernise some of the international tax rules.
Many of the rules which determine the tax treatment of cross-border situations pre-date the current digital economy. For example, it is now possible for businesses to sell goods and services into economies with no physical presence in a way that could not be conceived when the rules dealing with permanent establishments were first formulated. As a result, it can be difficult to apply these rules to the modern business context. There was general agreement, therefore, that the international tax rules needed to be overhauled in some areas and that it was far better that this overhaul should be carried out on a multi-national basis, as opposed to individual states taking individual action.
OECD Action Plan
As a result of the growing pressure in the tax avoidance debate and at the request of the Governments of the G20, the OECD produced a report into base erosion and profit shifting (BEPS) in February 2013. The report analysed the issues which give rise to BEPS and identified six key areas that needed to be addressed.
The OECD February 2013 report received strong support from the G20 leaders and accordingly was followed in July 2013 by the OECD Action Plan, which set out 15 specific actions to be taken forward by the OECD.
The action points cover a wide-range of international tax issues, including: taxation of the digital economy; use of hybrid instruments and entities; modernising transfer pricing rules, especially with regard to intangibles; double tax treaty abuse and double non-taxation; permanent establishment rules; CFC rules; base erosion via interest deduction; and country-by-country reporting.
Following the publication of interim reports in September 2014, the OECD published its final reports on all 15 action points, ahead of its own deadline, in October. The final reports were as follows:
Action 1: Addressing the Tax Challenges of the Digital Economy
Action 2: Neutralising 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
Look out for…
Following the release of the final reports, the OECD and G20 countries have continued to work on a number of areas requiring further development. These include finalising transfer pricing guidelines, discussing rules for the attribution of profits to PEs and finalising the model provisions and detailed Commentary on the proposed limitation-on-benefits rule for treaties. Rules on group carve-outs for interest deductions and special rules for the insurance and banking sector have also seen further work.
More generally, in many ways the delivery of the reports by the OECD is the start of the difficult task of implementing the reports’ recommendations. The focus has since shifted to putting in place the agreed measures and monitoring BEPS compliance. Some of the provisions, for example those involving changes to the transfer pricing guidelines and OECD Model Treaty or purely domestic rules, may be easier to implement than others. In relation to the tax treaty related aspects of the BEPS project, over 100 jurisdictions have concluded negotiations on a Multilateral Convention that is intended to enable implementation without the need for renegotiation of large numbers of bilateral treaties.
Within the EU, the EU Council has adopted an Anti-Tax Avoidance package, which is aimed at implementing the BEPS measures in a consistent manner within the EU.
The OECD’s BEPS materials can be found on its BEPS homepage. This includes the OECD’s overview and explanatory statement for its final reports on the 15 Action Points.
For more information on the EU Anti Tax Avoidance Directive, see Draft Anti Tax Avoidance Directive approved.
For more details on the multilateral instrument to implement changes to bilateral tax treaties, see The Multilateral Convention to implement BEPS Tax Treaty Measures.
All our materials on the OECD BEPS project are readily accessible on our BEPS microsite on elexica. These include further details of the project and the individual action points, including details of implementation in jurisdictions, together with links to various resources.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.