UK: Base Erosion And Profit Shifting (BEPS)

Last Updated: 20 March 2013
Article by Deloitte LLP

Most Read Contributor in UK, August 2017

The measure

The Chancellor today confirmed the Government's support for the work of the OECD on addressing the issue of base erosion and profit shifting by multinational companies.

The OECD recognises that the interaction between domestic tax laws in different countries and the international tax system that has developed over the last 85 years may not have kept pace with globalisation and modern-day centralised business models, or the use of the internet for business. The issues that arise cannot be dealt with effectively by individual governments acting alone, but require international coordination and consensus.

The OECD issued its initial report on Addressing Base Erosion and Profit Shifting in February 2013, in time for the G20 meeting in Moscow. The report concludes that further work is needed. In particular, the OECD identifies six key pressure areas:

  • Hybrid instruments and entities that create mismatches in tax treatment between different jurisdictions;
  • Transfer pricing, in particular in relation to risks and intangibles, and transactions that are rarely seen between third parties;
  • The allocation of taxing rights between countries, in particular in relation to digital goods and services;
  • The tax treatment of intra-group financing, including debt and captive insurance;
  • The effectiveness of anti-avoidance rules such as GAARs, CFC legislation, and anti-treaty abuse rules; and
  • Harmful preferential low-tax regimes.  

The OECD will consider each of these areas, and at the same time review and appraise fundamental tenets of the existing system for international taxation, such as the balance between tax at source (eg withholding taxes, permanent establishments) and tax on the basis of residence. The initial report recognises that changes will need to be implemented, and that challenges (such as the existence of more than 3,000 bilateral double tax treaties) will need to be overcome via 'innovative solutions'.

The OECD's work has the unanimous support of the OECD's 34 member states, and the backing of the G20. In addition, countries with observer status at the OECD, including importantly China and India, have also expressed their support for the project. Three working groups have been set up to work on distinct areas of the project:

  • Transfer pricing, which will be chaired by the UK;
  • Base erosion, which will be chaired by Germany; and
  • Allocation of taxing rights, which will be chaired jointly by the US and France.

Who will be affected?

All companies operating cross-border may be affected, and in particular those with internet businesses.

When?

The next step is for the OECD to consider a detailed action plan in June 2013, including specific measures, the means to implement those measures quickly, and a timetable. The plan is for changes to be finalised within two years.

Our view

The global recession means that all governments are increasingly keen to ensure that tax revenues from multinationals are recognised in their respective countries. International coordination is key to ensuring that changes to the taxation of cross-border activities do not lead to double taxation. The alternative, with countries introducing unilateral measures, will lead to even more uncertainty for business.

The challenge for the government and the OECD is to find a balance between updating the international tax system to prevent issues of double non-taxation and ensuring that it remains fit for purpose for internet and globalised businesses on the one hand, whilst maintaining a business-friendly environment that attracts investment and allows the creation of employment and economic growth on the other.

The timetable is aggressive - and there will no doubt be pressure to achieve quick wins. History has shown that it takes time for the OECD to achieve consensus on points of detail, despite their reciprocity, as countries consider the effect on their individual economies.

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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