United States: A Call To Rewrite The Fundamentals Of International Taxation: The OECD BEPS Action Plan

The Organization for Economic Co-operation and Development has released its ambitious action plan to address base-erosion and profit-shifting. Whilst the action plan leaves many questions unanswered and may fall at the first hurdle if the assumed political support for change turns out to be lacking, multinationals need to be aware of its content and should be monitoring developments closely 


In February 2013, the Organization for Economic Co-operation and Development (OECD) released its long-awaited report on base-erosion and profit-shifting (BEPS). The topic had become high on the political agenda in the preceding months owing to intense media scrutiny of the current principles of international taxation. Please see our previous coverage on the BEPS Report on the Transfer Pricing 360 blog.

Key Findings in the BEPS Report

The BEPS Report concluded that there was no empirical evidence that proved either the existence of BEPS or how BEPS could be affecting the tax-take of any given country. It also recognized that multinationals have a duty to their shareholders to minimize their tax bills, and it conceded that the planning strategies being castigated in the press simply involved multinationals legitimately using the current rules made available to them, such as the principle of separate legal personality.

The report concluded, however, that the current rules on international tax are outmoded because they have failed to keep pace with the way multinationals now do business. It recommended the development of an action plan to address BEPS and the underlying legal and tax bases that facilitate it. That action plan was released on 19 July 2013.

The Action Plan: Overview

The action plan can be found by following this link. In a preview meeting about its content on 17 July 2013, Pascal Saint-Amans (Director of the OECD's Centre for Tax Policy and Administration) stated that the action plan "represents a unique opportunity that comes along once in a century to rewrite the principles of international taxation" and said the OECD's vision is to facilitate the creation, via the action plan, of a set of principles "that will last for the next 100 years". Viewed against that background, it is clear that the OECD has high hopes for this initiative and the action plan itself certainly does not disappoint in terms of ambition from a content or timing perspective.

The Action Plan: Contents and Proposed Steps

The action plan identifies an extensive list of international tax principles for overhaul, ranging from the transfer pricing policies applicable to intangibles, to the introduction of model "controlled foreign company" codes and changes to the "permanent establishment" definition. It also contains a timetable for the envisaged reform, with proposed deadlines for each action point. Most of these fall within the next 12 to 24 months, with the OECD playing a facilitative role in the process.

Viewed in isolation, the ambitious content of the action plan does not particularly set it apart from similar initiatives that have gone before, including, for example, the OECD's previous work on "Harmful Tax Practices". What does make the action plan arguably unique (and certainly deserving of serious and considered thought) is the apparent political will behind it. For example, the action plan has already received approval in principle from the G20 Finance Ministers, who gave their public approbation in a communiqué dated 20 July 2013. Moreover we understand from comments made by OECD representatives at the 17 July 2013 preview meeting mentioned above that many of the "source" states, including the BRICS (Brazil, Russia, India, China and South Africa), have also adopted the action plan in principle.

This is remarkable given the short passage of time since the BEPS Report was published in February this year. Indeed, at the preview meeting, the OECD commented that it had been "amazed at the speed of progress and the fact that we are reaching international consensus at the political level so quickly". However, in spite of the public enthusing over the action plan, it should be kept in mind that reaching high level political agreement to a plan of action is a far cry from subscribing to, and implementing, the more granular proposals that may be forthcoming in due course.

Moreover, it is well-known that the BRICS countries have generally been outspoken critics of the OECD Model Treaty and its transfer pricing guidelines for many years now; as the action plan itself makes clear that it is "not directly aimed at changing the existing international standards on the allocation of taxing rights on cross-border income", multinationals can therefore expect the BRICS countries to continue pursuing their own respective agendas outside the context of the OECD's BEPS project.


It is tempting to get carried-away by the grand overtones in the action plan. However, the OECD itself has no mandate to change the law, so it has to rely on the take-up from interested sovereign states. And therein lies the fundamental problem for an initiative such as this: it relies on domestic implementation on a country-by-country basis. As there will inevitably be variation in how states adopt the ultimate proposals from the OECD, there will never be a perfectly co-ordinated, supra-national action on BEPS. In practical terms, this means that the process envisioned by the action plan will not be a panacea for all the perceived shortcomings of the current principles of international taxation.

Take for example the United Kingdom's newly-introduced Patent Box, which from one perspective could be interpreted as a base-eroding tactic in favour of the UK Exchequer. The OECD cannot force the United Kingdom to abandon the regime and, given its relatively recent appearance on the statute books, it seems highly unlikely that the United Kingdom would voluntarily remove the regime. In addition, it simply cannot have been enacted without due thought or consideration having already been given to the public and prominent work of the OECD in the BEPS space.

This basic example shows that in real terms, perfect alignment on international issues of such complexity and importance is simply unfeasible. There can never be a truly global solution; principles are easier to agree in broad terms at an international policy level than they are to implement on the ground.

But this is simply a function of the existence of national sovereignty in tax policy. There is only so far that states can go in order to fetter their neighbors' abilities to utilise tax policy-making as a generator of inward economic investment (and this is particularly true in the context of states pursuing a policy of capital import neutrality). Notwithstanding the impossibility of achieving a perfect international consensus, the action plan raises points that multinational enterprises operating in a global environment cannot afford to ignore.

The Action Plan: Deliverables

The action plan is arranged around four core areas, namely: (i) transfer pricing (actions 8, 9, 10 and 13); (ii) treaty matters (actions 6, 7, 14 and 15); (iii) backstop matters (actions 1 to 4 and action 5 in the context of requiring substantial activity for any preferential regime); and (iv) information exchange and documentation (action 5 in the context of disclosing rulings on preferential regimes and actions 11 and 12). Each action has its own deadline and proposed next steps. There is also a general theme running through the action plan of the alignment of economic activity and the right to tax.

Particular areas on which the action plan has stated deliverables of interest include the following:

  • Changes to the transfer pricing rules to clarify their application in the context of: (i) "global value chains" with particular emphasis on the use of profit splits (two-sided methodologies versus the normal one-sided methodology of transaction net margin method or others); (ii) base erosion payments, including management fees and head office expenses; (iii) "hard-to-value" intangibles (which may perhaps include items such as so-called "super royalties"); (iv) risk-taker arrangements; and (v) clarifying "the circumstances in which transactions can be recharacterized". In our view, the confirmation that "moving to a system of formulary apportionment of profits is not a viable way forward" is welcome, although we note with some unease the reference on page 20 of the action plan to the possible exploration of "special measures, either within or beyond the arm's length principle". See actions 8, 9 and 10. These are all areas in which tax authorities around the world are already focused, producing a continuous stream of controversies to be resolved.  
  • Exploring the development of a multilateral instrument so that states wishing to participate can amend their existing double taxation treaties. The action plan is relatively thin on the detail of what such an instrument would contain, but does expressly mention "anti-treaty abuse" provisions. See action 15. 
  • Establishing a taskforce to identify the main difficulties posed by the taxation of the digital economy and to report back with a proposed "holistic approach" for applying the international tax rules to this particular business sector. See action 1. Interestingly, the action plan also proposes that indirect taxes such as VAT should be included in this exercise. We find this surprising, as there is ostensibly less of an issue around the collection of VAT than the perceived issues relating to direct taxation. Moreover, there is arguably less that can be done with an indirect tax such as VAT beyond moving between the origin and the destination principle; and in any event, the reverse charge facility has already been explored. It will be interesting to watch developments in the OECD's thinking in the VAT space in particular.  
  • Developing proposals for a limited and confidential form of country-by-country reporting, whereby multinationals would report which jurisdictions they operate in (and the amount of tax they pay in each jurisdiction) on a confidential basis to their domestic tax authorities. Such data would be used to additionally monitor the effectiveness of the action plan. See action 11.
  • Designing mandatory disclosure regimes requiring taxpayers to disclose to their domestic tax authorities the details of any aggressive tax planning arrangements in which they participate. See action 12.
  • Developing changes to the definition of a "permanent establishment" in order to "prevent the artificial avoidance of PE status in relation to BEPS, including through the use of Commissionaire arrangements" (commonly used in civil law jurisdictions to prevent the creation of a "permanent establishment" and akin to an agent with an undisclosed principal from a common law perspective). See action 7.
  • Revamping the OECD's previous work on "Harmful Tax Practices", which will include proposals on compulsory spontaneous exchange of information concerning rulings on preferential regimes, and on requiring substantial activity for preferential regimes. See action 5.
  • Developing model treaty provisions and recommendations to "neutralize" the effects of hybrid instruments and hybrid vehicles in intended cross-border tax arbitrage. This may include commonly-utilised hybrid instruments such as PECs and CPECs. See action 2.
  • Supporting the OECD's long-running intangibles project so as to deliver a "broad and clearly delineated definition of intangibles". See action 8.
  • An improvement to existing Mutual Agreement Procedures – possibly by the introduction of mandatory arbitration rights – in an effort to enhance taxpayer protection and guard against the possibility that a state delivering on the action plan inadvertently visits double taxation upon a given taxpayer. See action 14.

An additional issue that will need to be considered in-depth as the process evolves is the transition from the status quo in the case of specific action by one or more countries. The action plan seems to be trying to discourage this (calling in several places for concerted and coordinated action), but the possibility that some states will wish to move faster and more comprehensively than others is almost inevitable.


As noted above, the ultimate value of the action plan will be determined by its implementation. Given that the current opportunities for international tax planning and BEPS are simply a consequence of the rules on international tax enacted by states (rather than anything multinationals have created of their own accord), it is possible that little may come of the action plan if those states ultimately feel more inclined to guard their national interests when the cards are on the table.

That being said, it seems possible that tackling BEPS has gained sufficient political momentum for some form of change to occur in due course. Certainly one would think it achievable in the automatic information exchange space and in the context of an amended permanent establishment concept that seeks to align taxing rights more closely with economic activity.

Next Steps for Multinationals

If there is enough political will to push-through even some of the changes envisaged by the action plan, then in view of the proposed timeframe multinationals need to proactively engage with the principles and policies underlying the action plan's stated aims. All multinationals should be keeping fully abreast of developments in this sphere and should be actively considering the potential implications of the action plan on their global value supply chains, particularly their global effective tax rate.

In practice, our experience is that modelling effective tax rate strategies is relatively straightforward in the scheme of things: it is a process that is regularly undertaken in the process of evaluating and resolving transfer pricing disputes, either administratively, in Competent Authority, Advance Pricing Agreement, or litigation contexts. However, legacy structures may need to be revisited, especially where anticipated tax benefits are accruing annually and existing planning falls within the scope of a deliverable under the action plan, and new approaches may also need to be developed.

We are entering an exciting and challenging time for multinationals. The OECD has made it very clear that it wants to drive a fundamental re-write of the principles of international taxation that were laid down almost a century ago. The challenge for multinationals will be to ensure that their existing structures evolve in parallel and are fit for purpose for the next century. The challenge for each of the sovereign states involved will be putting the stated principles into practice in a way that balances tax revenue and political considerations with each country's presumed desire to remain competitive as both a source country and a residence country with respect to multinational direct investment.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.