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Base Erosion and Profit Shifting (BEPS)

Introduction

Base erosion and profit shifting (BEPS) project developed by the Organisation for Economic Cooperation and Development (OECD) and sponsored by the G20 that refers to tax planning strategies that exploit gaps, mismatches and loopholes in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid.

Role of OECD

Many BEPS strategies take advantage of the interaction between the tax rules of different countries, which means that unilateral action by individual countries will not fully address the problem. In addition, unilateral and uncoordinated actions by governments responding in isolation could result in double – and possibly multiple – taxation for business. OECD  attempts to address the need to provide an internationally coordinated approach which will facilitate and reinforce domestic actions to protect tax bases and provide comprehensive international solutions to respond to the issue. The BEPS Action Plan provides a consensus-based plan to address these issues and is part of the OECD’s ongoing efforts to ensure that the global tax architecture is equitable and fair.

Developments to date

The OECD published in July 2013 a document identifying the 15 Actions through which the BEPS strategies can be tackled. These 15 Action Plans are focused on :

  1. establishing coherence in international taxation;
  2. aligning taxing rights with substance; and
  3. improving transparency.

The first set of recommendations was published in September 2014 while others will be delivered in October 2015 to the G20 Finance Ministers together with a plan for the follow up work and timetable for implementation.

The complete list of action plans is the following:

2014 Deliverables (Released in September 2014)

  • Action 1: Address the Tax Challenges of the Digital Economy
  • Action 2: Neutralise the Effects of Hybrid Mismatch Arrangements
  • Action 5: Counter Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance
  • Action 6: Prevent Treaty Abuse
  • Action 8: Assure that Transfer Pricing Outcomes are in Line with Value Creation/Intangibles
  • Action 13: Re-examine Transfer Pricing Documentation
  • Action 15: Develop a Multilateral Instrument

2015 Deliverables

  • Action 3: Strengthen CFC Rules
  • Action 4: Limit Base Erosion via Interest Deductions and Other Financial Payments
  • Action 7: Prevent the Artificial Avoidance of PE Status
  • Action 9: Assure that Transfer Pricing Outcomes are in Line with Value Creation/Risks and Capital
  • Action 10: Assure that Transfer Pricing Outcomes are in Line with Value Creation/Other High-Risk Transactions
  • Action 11: Establish Methodologies to Collect and Analyse Data on BEPS and the Actions to Address It
  • Action 12: Require Taxpayers to Disclose their Aggressive Tax Planning Arrangements
  • Action 14: Make Dispute Resolution Mechanisms More Effective

The BEPS recommendations will result in modifications to domestic laws of each country or their bilateral tax treaties. Additionally a multilateral instrument will be developed in order to ensure swift implementation of the tax treaty related BEPS measures in a consistent manner with respect to the tax treaties currently in force.

In essense the aim of the BEPS project is to ensure that profits are taxed where economic activities take place.

Support and Planned next steps

Since its launch by the OECD, the work on BEPS received strong and consistent support by the G20. Furthermore, all G20 countries have participated as equal partners in the development of the work and are pushing all developed and developing countries to participate.

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. For the first time ever in the tax matter non- OECD/G20 countries are involved on an equal footing.

Further information on BEPS project and participating countries can be found at www.OECD.org.

Tax and VAT Committee