Canada: BEPS: A Spent Force Or Radical Change?

On October 5, the OECD presented its final package of measures attacking base erosion and profit shifting.1 Undertaken at the request of the G-20 leaders, the efforts to address BEPS are based on the G-20 and OECD's BEPS action plan from July 2013, which identified 15 actions to end what is perceived by the OECD as unacceptable international tax planning.

On four prior occasions since the advent of the BEPS project in February 2013, we have offered both a general and a Canadian perspective on various aspects of this unprecedented attack on international tax management (including strategic planning and structuring) by multinational enterprises.2 The release of the final reports gives occasion to revisit our prior views and offer new commentary on the BEPS initiative.


Simply put, the BEPS project aims to provide governments with tools to increase income taxation of multinationals, despite the OECD's view that corporate taxation is the most harmful form of taxation for economic growth.3

The BEPS project is unique in that it reflects a massive, concerted effort by G-20 and OECD nations against cross-border corporate tax planning; it has arisen out of the confluence of several factors:

  • decreasing tax receipts of G-20 and OECD state treasuries, driven by economic stagnation after the 2008 global economic crisis;
  • rising costs of the welfare state in many developed nations, driven by aging populations putting pressure on healthcare systems and state-sponsored defined benefit pension systems;
  • a citizenry exposed to more (though not necessarily better) information from the media and public interest groups on the taxation and finances of multinationals; and
  • politicians searching for new, expedient sources of government funding without causing a backlash at the polls.4

These elements appear to have led governments and the citizenry of G-20 and OECD countries to conclude that multinationals are both the source of and the solution to their financial woes; hence, the BEPS project.

What is not unique about the BEPS project, however, is the substance of its proposals, which have been criticized as being based on the ''same old paradigm.''5 It was not without reason that we titled our first commentary on this subject ''BEPS: The OECD Discovers America,''6 demonstrating our view that there are few anti-international tax planning rules and principles that had not already been implemented by countries involved in the BEPS project. This view was based on our review of the action plan in light of historical elements, most notably:

  • the formation of transfer pricing principles in the 1920s and 1930s7 and their crystallization in the 1960s and 1970s;8
  • the 1962 adoption of controlled foreign corporation rules in the U.S. and their adoption in Canada in 1972 (effective 1976);
  • the 1972 adoption of mechanical debt-to-equity thin capitalization rules in Canada9 and the 1986 adoption of an anti-earnings-stripping rule (based on a percentage of earnings before interest, tax, depreciation, and amortization) in the U.S.;10
  • the 1997 enactment in the U.S. of the world's first anti-hybrid rule;11
  • the 1990 adoption of mandatory transfer pricing contemporaneous documentation and penalty rules in the U.S.; and
  • successful anti-treaty-shopping attacks based on beneficial ownership, as seen in the U.S. decision in Aiken Industries v. Commissioner12 from 1971 and the Canadian decision in McMillan Bloedel Ltd. v. MNR,13 as well as the U.S. policy of incorporating elaborate limitation on benefits provisions in its treaties since 1993.

Aside from the relative novelty of action 15 (proposing a multilateral instrument with the promise of quick and broad-based implementation of agreed tax treaty changes), we doubted that the project could offer any anti-BEPS solutions that countries could not have already adopted on the basis of preexisting principles and rules.

Notwithstanding this, the BEPS initiative is unique in its context involving a G-20 mandate to the OECD to develop the action plan, and in the OECD's highly charged accompanying rhetoric that countries are under a moral and political obligation to implement the BEPS project outcomes. The OECD's rhetoric raised the prospect of a tsunami of harmonized tax reform across the globe that would effectively end international tax planning.


What has transpired or will transpire as a result of the final BEPS package? The answer to this question fundamentally depends on the level of support that G-20 and OECD nations give to the individual measures in the final package. Paragraph 11 of the explanatory statement accompanying the final package is most revealing:

A comprehensive package of measures has been agreed upon. Countries are committed to this comprehensive package and to its consistent implementation. These measures range from new minimum standards to revision of existing standards, common approaches which will facilitate the convergence of national practices and guidance drawing on best practices. Minimum standards were agreed in particular to tackle issues in cases where no action by some countries would have created negative spill overs (including adverse impacts of competitiveness) on other countries. Recognising the need to level the playing field, all OECD and G-20 countries commit to consistent implementation in the areas of preventing treaty shopping, Country-by-Country Reporting, fighting harmful tax practices and improving dispute resolution. Existing standards have been updated and will be implemented, noting however that not all BEPS participants have endorsed the underlying standards on tax treaties or transfer pricing. In other areas, such as recommendations on hybrid mismatch arrangements and best practices on interest deductibility, countries have agreed a general tax policy direction. In these areas, they are expected to converge over time through the implementation of the agreed common approaches, thus enabling further consideration of whether such measures should become minimum standards in the future. Guidance based on best practices will also support countries intending to act in the areas of mandatory disclosure initiatives or controlled foreign company legislation. There is agreement for countries to be subject to targeted monitoring, in particular for the implementation of the minimum standards. Moreover, it is expected that countries beyond the OECD and G-20 will join them to protect their own tax bases and level the playing field.14

The above statement distinguishes between:

  • new minimum standards;
  • revised existing standards;
  • common approaches that will facilitate the convergence of national practices; and
  • guidance drawing on best practices.

Importantly, only ''new minimum standards'' are backed by a commitment of all OECD and G-20 countries to consistent implementation. We next examine the action items that fall under each of the above four categories.

To read this Report in full, please click here.


1 See OECD and G-20, ''BEPS 2015 Final Reports,'' available at The final package contains a report for each of the 15 action items, together with Executive Summaries, available at; Explanatory Statement, available at; and various other incidental documents.

2 See Nathan Boidman and Michael Kandev, ''BEPS: The OECD Discovers America?'' Tax Notes Int'l, Dec. 16, 2013, p. 1017; Boidman and Kandev, ''BEPS Action Plan on Hybrid Mismatches: A Canadian Perspective,'' Tax Notes Int'l, June 30, 2014, p. 1233; Boidman and Kandev, ''The BEPS Deliverables: A Macro Critique,'' Tax Notes Int'l, Nov. 17, 2014, p. 611; and Boidman and Kandev, ''BEPS and Acquisitions of Canadian Targets,'' Tax Notes Int'l, Aug. 3, 2015, p. 431.

3 See OECD, ''Tax Policy Reform and Economic Growth,'' 2010, at 3.

4 Politically speaking, foreign multinationals are likely the weakest constituency. But they can certainly vote with their feet, so to speak.

5 See ''Corporate Taxation: New Rules, Same Old Paradigm,'' The Economist, Oct. 10, 2015.

6 For a recent similar sentiment, see David Ernick, ''OECD BEPS Project: Nothing New Under the Sun?'' Tax Notes Int'l, Aug. 10, 2015, p. 511.

7 In Canada, for example, these principles date back to 1939: Canada's transfer pricing rule was originally introduced by S.C. 1939, c. 46, section 13 as section 23B of the Income War Tax Act of 1939.

8 See Hofert v. MNR, 62 DTC 50 (TAB), Canada's first transfer pricing case from 1962, which applied the rule, supra note 7. See also IRC section 482 regulations from 1968 and the first OECD transfer pricing guidelines from 1979 (basically modeled on the U.S. regulations).

9 Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), section 18(4).

10 Internal Revenue Code, 26 U.S.C. (1986), section 163(j).

11 IRC section 894(c).

12 56 T.C. 925 (1971).

13 79 D.T.C. 297 (TAB).

14 See Explanatory Statement, supra note 1 at para. 11.

Originally published in Tax Notes International, December 7, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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