With the first seven deliverables of the OECD/G20 BEPS Project now delivered to Finance Ministers of the G20, IFC Review speaks to Pascal Saint Amans about the future of the project.
On 20 September, the first seven deliverables of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project were presented to the Finance Ministers of the G20, who welcomed the significant progress achieved towards the completion of the two-year project.
The BEPS Project is aimed at addressing the gaps and mismatches in the international tax system, which allow the location of profits to be separated from where the economic activity or value creation takes place. Most tax planning strategies which result in BEPS are not illegal, they simply take advantage of rules which were first set down almost 100 years ago.
The BEPS Project is being undertaken by 44 countries, including all OECD and all G20 countries, who participate on an equal footing. Its scope is outlined in the 15-point BEPS Action Plan that was published in July 2013. The 2014 deliverables are the first results of their work, addressing seven of the Actions.
Given the global impact of this work, engagement with developing countries, as well as with other stakeholders such as business, academia and civil society, is extensive. More than 80 developing countries have been consulted through targeted programs as well as regional consultations and five thematic global fora. Numerous public consultation drafts and regular webcasts have drawn more than 3500 pages of comments, and over 12,000 viewers.
IFC: What are the 2014 OECD/G20 Base Erosion and Profit Shifting (BEPS) Project deliverables about?
Pascal Saint-Amans: The 2014 deliverables include measures that will help ensure the coherence of corporate income taxation at an international level, restore the intended effects and benefits of international tax standards, improve transparency, and promote increased certainty and predictability for both multinationals and governments. Specifically, they include three reports: two final reports on the Digital Economy (Action 1) and the Feasibility of a Multilateral Instrument (Action 15); and one interim report on Harmful Tax Practices (Action 5). They also include Draft Rules in four areas:
Hybrid mismatch arrangements (Action 2)
Treaty abuse (Action 6)
Transfer pricing of intangibles (Action 8)
Transfer pricing documentation and a country-by-country reporting template (Action 13)
Each of these Action areas is explained in more detail below.
IFC: How will the 2014 deliverables tackle tax base erosion and profit shifting?
PSA: The first set of measures and reports represent substantial progress towards eliminating double non-taxation due to base eroding and profit shifting tax planning strategies. These measures, combined with the work to be completed in 2015, will give countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, while giving business greater certainty by reducing disputes over the application of international tax rules.
IFC: When do the measures become applicable?
PSA: The measures will apply once they are implemented, either in domestic laws or through modification of the network of bilateral tax treaties. Further guidance and work with respect to implementation has already begun, and will be completed during the course of 2015.
IFC: Why will the measures not be finalised until later?
PSA: Because the BEPS Project is intended to take a comprehensive and holistic approach, the interactions between the 2014 measures and the 2015 ones will need to be considered. For this reason the 2014 measures are agreed but will formally remain in draft form.
Action 1 - Address the tax challenges of the digital economy
IFC: How will this report address tax avoidance by digital companies?
PSA: There is now agreement that, because information and communication technology has spread across the economy, it is not possible to ‘ring fence’ the digital economy for special tax treatment. There is also agreement that while the digital economy does not create unique BEPS issues, some of its features exacerbate existing issues. The report identifies these key features so that the work under the rest of the Action Plan can address them effectively. In the context of VAT, the report concludes that VAT collection in the business-to-consumer context urgently needs to be addressed, and work in this area will be completed by the end of 2015.
Action 2 -Neutralise the effects of hybrid mismatch arrangements
IFC: What are hybrid mismatches?
PSA: Hybrid mismatches are cross-border arrangements that take advantage of differences in the tax treatment of financial instruments, asset transfers and entities to achieve ‘double non-taxation’ or long term deferral outcomes, which may not have been intended by either country. A common example of a hybrid financial instrument would be an instrument that is considered a debt in one country and a share in another so that a payment under the instrument is deductible as interest when it is paid but is treated as a tax-exempt dividend in the country of receipt.
IFC: How do the 2014 rules tackle hybrid mismatches?
PSA: The work sets out general and specific recommendations for domestic hybrid mismatch rules and model treaty provisions. Once translated into domestic law and tax treaties, the recommended rules will neutralise the effect of the hybrid mismatch without disturbing any other tax, commercial or regulatory outcomes. The domestic rules recommended in the report are self-executing and are designed to co-ordinate with the rules in the other jurisdiction. Guidance is now being developed, to explain how the rules should operate in practice.
Action 5 - Counter harmful tax practices more effectively, taking into account transparency and substance
IFC: How is the BEPS Project addressing harmful tax competition?
PSA: The OECD started working on harmful tax competition more than 15 years ago with the report Harmful Tax Competition: An Emerging Global Issue (OECD, 1998). To counter harmful tax practices more effectively, the BEPS Action Plan mandated a revamp of the work on harmful tax practices, with a priority and renewed focus on requiring substantial activity for any preferential regime and on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes.
IFC: How does the OECD’s work affect patent boxes?
PSA: A ‘patent box’ is a preferential tax regime offered by a country to support growth and innovation. Fostering innovation is an important element of growth strategies because intangibles such as patents have become one of the key value drivers of many business models. A preferential regime is useful in supporting growth and innovation in a country if it attracts real activity. It is not so if it merely encourages companies to shift profits from the location in which the value was actually created to another location, where they may be taxed at a lower rate.
A key priority of the BEPS Project has been to focus on whether or not there is substantial activity associated with any preferential regime, so as to ensure that profits are taxed where substantial activities take place. Once consensus is reach on the best approach to evaluate substantial activity, the 15 intellectual property regimes identified in the report will be reviewed.
Action 6 - Prevent treaty abuse
IFC: What is the best way to address treaty shopping?
PSA: Different anti-abuse rules can be used for that purpose and the work puts forward drafts of: (i) a specific anti-abuse rule based on a ‘limitation-on-benefits’ provision, and (ii) a more general anti-abuse rule based on a ‘principal purpose test’. Importantly, all OECD and G20 countries agreed for the first time to establish a minimum standard, based on these anti-abuse rules, to be incorporated in their treaties to address treaty shopping.
Action 8 - Assure that transfer pricing outcomes related to intangibles are in line with value creation
IFC: What issues does the work on Action 8 cover and what is the expected impact?
PSA: The work on the transfer pricing aspects of intangibles has resulted in revisions to the Transfer Pricing Guidelines. These revisions clarify among other things the definition of intangibles, provide guidance on identifying transactions involving intangibles, and provide supplemental guidance for determining arm’s length conditions for transactions involving intangibles. This guidance, In conjunction with further work to be completed in 2015 on transfer pricing (Actions 9 and 10), will ensure that profits associated with the transfer and use of intangibles are allocated in accordance with value creation, and will hinder BEPS structures based on the nominal allocation of intangibles to a low tax environment.
IFC: Does the new guidance address the issues related to corporate synergies and location savings?
PSA: Yes, it does. The guidance provides that the benefits from corporate synergies are to be allocated to the group members that have contributed to these synergetic benefits and makes sure that these benefits cannot be isolated and allocated to an entity in a low tax environment. The guidance on locational advantages requires a determination of whether such benefits exist and if so, leads to an allocation of these advantages in a way that reflects the market circumstances that exist in the specific situation.
Action 13 - Re-examine transfer pricing documentation
IFC: What is country-by-country reporting?
PSA: Country-by-country reporting is a tool intended to allow tax administrations to perform high-level transfer pricing risk assessments, or to evaluate other BEPS-related risks. The country-by-country reporting template will require multinational enterprises (MNEs) to provide annually for each jurisdiction in which they do business, aggregate information relating to the global allocation of the MNE’s income and taxes paid, together with certain indicators of the location of economic activity within the MNE group, as well as information about which entities do business in a particular jurisdiction and the business activities each entity engages in.
IFC: Will country-by-country report information be made public?
PSA: The information must be provided to the relevant governments; to protect the confidentiality of potentially sensitive information, it will not be made publically available. This is consistent with the treatment of most other taxpayer information.
Action 15 - Develop a multilateral instrument
IFC: What is the goal of a multilateral instrument?
PSA: In the context of the BEPS Project, the goal of a multilateral instrument is to expedite and streamline the implementation of the measures developed to address BEPS, in particular by modifying bilateral tax treaties. Developing such a mechanism is necessary not only to tackle BEPS, but also to ensure the sustainability of the consensual framework to eliminate double taxation. This report on Action 15 confirms the feasibility of using a multilateral instrument to amend the more than 3000 bilateral tax treaties currently in force around the world.
IFC: What are the next steps?
PSA: Work on the reports to be delivered in 2015 has already started, and this work will continue at a fast pace. In parallel, work will continue to address remaining technical issues with the measures in the 2014 reports, and to ensure that implementation and practical guidance can be developed with respect to all measures.
In line with the commitment of all OECD members and G20 countries, an overall package taking into account the need for a comprehensive approach to the BEPS Project will be delivered by the end of 2015.
IFC: What are the 2015 deliverables?
PSA: The 2015 deliverables relate to strengthening CFC (Controlled Foreign Corporation) rules (Action 3), limiting base erosion via interest deductions and other financial payments (Action 4), countering harmful tax practices more effectively, taking into account transparency and substance (Action 5), preventing the artificial avoidance of Permanent Establishment status (Action 7), assuring that transfer pricing outcomes are in line with value creation (Actions 8-10), establishing methodologies to collect and analyse data on BEPS and the actions to address it (Action 11), requiring taxpayers to disclose their aggressive tax planning arrangements (Action 12), making dispute resolution mechanisms more effective (Action 14), and developing a multilateral instrument (Action 15). We expect to complete this work by the end of 2015.
Pascal Saint-Amans is the Former Director of the Centre for Tax Policy and Administration at the OECD. Mr. Saint-Amans, a French national, joined the OECD in September 2007 where he played a key role in the advancement of the OECD tax transparency agenda in the context of the G20. Prior to his appointment as Director, he was the Head of the Global Forum on Transparency and Exchange of Information for Tax Purposes since 2009. Mr. Saint-Amans graduated from the National School of Administration (ENA) in 1996, and was an official in the French Ministry for Finance for nearly a decade.