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 


Background

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.

Challenges

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.

Conclusion

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
McDermott Will & Emery
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
McDermott Will & Emery
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions