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October 29, 2014
Base-Erosion and Profit-Shifting – Organization for Economic Co-operation and Development (OECD) Report
In February, the Organization for Economic Co-operation and Development (OECD) released its long-awaited report on base-erosion and profit-shifting (BEPS). In general terms, the report presents nothing new; substantively, it largely restates previous work such as the Report on Harmful Tax Competition and the Harmful Tax Project. However, it is clear that BEPS has now become a political issue and that there is a momentum behind the OECD’s work on this issue. In this post, we briefly summarize the key findings and recommendations in the BEPS report and explain the next steps it envisages.
Key Findings in the BEPS Report
The report was published against the backdrop of a uproar over a perceived lack of integrity in the international tax system. Overall, however, the report itself is relatively even-handed; it concludes that there is no empirical evidence that proves either the existence of BEPS or how BEPS could be affecting the tax-take of any given country; it recognizes that multinational enterprises (MNE) have a duty to their shareholders to minimize their tax bills; and it admits that the planning strategies being castigated in the press simply involve MNEs legitimately using the current rules made available to them, such as the principle of separate legal personality.
However, the report concludes that the current rules on international tax are outmoded because they have failed to keep pace with the way in which MNEs do business nowadays. In particular, there is a recurrent focus in the report on what have become ‘the usual suspects’ in any discussion about the efficacy of the current principles on international tax; namely, transfers of intellectual property, e-sales/digital business and the tendency towards a ‘debt bias’ in most MNEs’ supply-chain structures in view of the differential treatment typically accorded by most tax systems to debt and equity.
The report also touches on the impact of state-sponsored tax incentives. It notes that these may lead to an MNE having a low effective tax rate in an entirely uncontroversial manner (e.g., where a government policy to encourage investment in a particular sector gives rise to a tax-break), but also flags the potential for distortion in a global economy where sovereign states compete with each other to attract inward investment by offering competitive tax systems.
The report concludes that an action plan should be developed in order to address BEPS and the underlying legal/tax bases that facilitate it. The plan is to be developed over the next few months and will identify the necessary actions, deadlines and methodologies to be adopted in order to combat BEPS. The report indicates that the plan should be agreed at the 2013 OECD Committee on Fiscal Affairs (CFA) meeting in June. It is understood that the BEPS report is also being shared with the G20 meeting and that it will be discussed at the Forum on Tax Administration meeting in May 2013.
The BEPS report identifies an extensive list of international tax principles for overhaul (everything from transfer pricing rules on intangibles to anti-arbitrage rules and enhanced information exchange). It is therefore unrealistic to expect a multilateral consensus to be reached at the international level on a suitable way forward for each of these topics within the next few months. Most likely therefore, the action plan we eventually see will be a further restatement of the conclusions reached in this report together with enhanced political backing in the form of G20 approbation. However, even if the proposed timetable for reform is destined to fail, it seems clear that tackling BEPS has gained sufficient political momentum for real change to occur in due course. MNEs will need to keep fully abreast of developments in this sphere in order to ensure their supply chain structuring is compliant with whatever form the new rules take.