The BEPS plan was launched during the 2008 financial catastrophe. The notion behind this launch was threefold (i) Firstly, to revise the international tax structure; (ii) Secondly, to align the framework with the enlargements of the global economy; and (iii) Lastly, for ensuring that profits are taxed at the place of the economic activities.
The BEPS essentially stands for ‘Base Erosion and Profit Shifting’. This expression is commonly used along with the tax evading strategies in which the taxpayers shift their profit from a high tax paying jurisdiction to a truncated tax paying jurisdiction. OECD once pointed out that unilateral measures by countries “could lead to global tax chaos marked by the massive re-emergence of double taxation.” The world, therefore, recognised that some of the policies, especially relating to the taxation of e-commerce transactions, are inconsistent with general approaches and may be far beyond what the OECD has proposed. In the face of hostile international tax avoidance schemes, it can be said that BEPS is an attempt stemming from countries’ efforts to protect their legitimate tax base.
The framework abuses the gaps and disparities in the tax rules, which results in shifting of tax. To this end, the framework seeks to eradicate double non-taxation, end treaty abuse, etc. This requires countries to implement comprehensive changes to the existing tax treat network. The BEPS edge mirrors the budding commercial, economical and vibrant changing aspects between advanced and developing markets, and hints a major move in the worldwide tax and regulatory environment.
The BEPS Action Plan (“B Action Plan”) has identified 15 action items as carrying out changes to every treaty may have led to inconsistencies and would also have been time-consuming. To allow for a more coordinated approach and to avoid the time-consuming process, Action 15 of the BEPS Action Plan recognised Multilateral Instrument (“MLI”).
- An overview of the B Action Plan
- Digital economy and tax challenges
- To widen the scope of permanent establishment. This can be done by restraining exemption for preparatory/auxiliary activities;
- If proximity is critical to the business model including a domestic warehouse for delivery of goods sold online to customers, and domestic entities principally involved in closing contracts which the foreign company habitually consents without alteration; and
- The imposition of taxes on the country where the customer is located.
- Hybrid mismatch arrangements and their effects
- Strategies for countering multiple deductions or double-taxation by using specific hybrid instruments and hybrid entities; and
- Speaking on issues about dual resident entities.
- Controlled Foreign Company (“CFC”) Rules
Limiting opportunities for tax rearrangement through blocker entities in low tax countries.
- Interest deductions
- Proposes specific fixed ratio rules based on net interest/EBITDA to limit an entity’s deductions for interest pay-outs.
- The OECD believed that due to excessive interest costs countries are losing out on tax receipts, which could have been used by multinational groups to reduce taxable profits in companies in high tax jurisdictions. For example, in comparison with some other countries, the UK has historically had a generous regime for providing tax deductions for interest expenses. The UK changed its favourable rules on the deductibility of interest payments to give effect to the OECD recommendations with effect from April 2017. If the fixed ratio rule results in an interest deduction restriction, this is intended to help groups with high external gearing for legitimate commercial purposes.
- Interest relief restrictions are likely to have a particular effect on businesses in the infrastructure, energy and real estate sectors, where there are often high levels of debt funding for all countries. The B Action Plan mainly affects transfer pricing documentation and country-by-country reporting, permanent establishment status and hybrid instruments. For the business environment in Latvia, the B Action Plan is going to improve tax administration for multinational enterprises, reduce the distortion of competition, but it is not clear how it will be implemented globally.
- Provision for addressing special tax regimes
Perceiving favoured tax regimes and preserving a framework of transparency including sharing of tax rulings, advance pricing agreements and providing substantial activities in a country to avail preferential tax regimes.
- Avoiding treaty abuse
Countering treaty shopping through the following:
- Clear statements in treaties that the treaty does not seek to provide opportunities for tax evasion or avoidance;
- Including principal purposes test that denies treaty relief if one of the primary purposes of the transaction and arrangement is to obtain relief not consistent with the treaty’s objectives;
- Avoiding the artificial avoidance of permanent establishments Status
Contesting treaty provisions through statements and directions in treaties that the treaty does not seek to provide opportunities for tax evasion;
- Bring into line transfer pricing outcomes with value creation
- More direction on the ascription of profits to a permanent establishment for addressing the division of activities to avoid permanent establishment status.
- Data gathering
Instigating better data collection and sharing tools for monitoring the scale of BEPS and determining counter-measures.
- Disclosure rules
References for the compulsory discovery of specific ‘reportable schemes’ for countries to be able to recognise possibly hostile and unmannered tax planning measures, along with enhanced information sharing between countries.
- Transfer pricing certification and country-by-country reporting
- Widening transfer pricing documentation and reporting obligations to include a master file providing an outline of the groups global trade and global transfer pricing rule and a local file containing more detailed information relating to intercompany transactions; and Country-by-country report (where annual consolidated group revenue equal to or exceeding EUR 750 million) with details of distribution, taxes paid and activities in each jurisdiction.
- The transfer pricing regime ensures that transactions made between connected parties are taxed on an arms lengths basis and in the same way that they would have been taxed had the connection not existed. BEPS project, therefore, majorly focuses on transfer pricing. The transfer pricing rules authorise adjustment of the amount of income earned for tax purposes or expense incurred on transactions between companies. However, where it appears that the deal did not take place at ‘arm’s length’, the same terms would apply if the transaction involved an unrelated company. The mainstream proposals merely specify a 'general strategy direction' that countries could hypothetically choose whether, how and when to the device. The BEPS Project therefore acclaimed minimum principles in three zones which are required to be effected as and when required.
- Building an effective dispute resolution mechanisms
Developing minimum standards and best practices for resolution of disputes through in a timely (within an average timeframe of 24 months) and transparent manner.
- Developing a multilateral instrument
Developing a multilateral instrument for amendment of all bilateral tax treaties between signatories for expediting implementation of BEPS action points.
- Impact and Changes in the international tax system
The global tax system has changed rapidly as a result of synchronized actions by directions and independent measures designed by individual countries. These measures are intended to tackle concerns over the BEPS and supposed international tax avoidance techniques of high-profile corporations. The sanctions of the BEPS Project led by the OECD are at the root of much of the harmonized activity, although the timing and methods of portrayal differ.
International businesses are a significant part of BEPS and are represented in several ways in the B Action Plans. When the BEPS package was finally accepted, it served as a stepping-stone for modern international tax limits, which is based on the base principle that multinational corporation income has to be taxed there, where they are collected, or business activities carried on.
The B Action Plan aims to resolve irregularities by fetching tax from a place closer to where it was created. The assessment will be demonstrated within the country, which has human resource and infrastructure.
As regard permanent establishments, it is said that global market places may be compressed if immunities are reduced. In some cases, countries have argued that even a website or intangible property could itself create a permanent establishment, the OECD does not endorse such a broad concept of nexus based on significant economic presence.
The ultimate value of the B Action Plan will be determined by its implementation. About implementation, many parts of the package were already being introduced by member jurisdictions and the imminent agreement within the European Union of compulsory information sharing regarding tax rulings. Other measures will require domestic law changes. Although some actions do not require a lot of attention from businesses, some actions cause the most concern for accountants and experts, for example, country-by-country reporting of business activities. As mentioned above, many of the BEPS reports recommends changes to international tax rules vis-à-vis domestic rules. For valuation purposes, companies apply tax rules to allocate values within the entities and assets. Therefore, there may be a possibility that companies may not have the necessary expertise to deal with the situation.
There are also concerns about security transmission, storage, handling, while it is too early to analyse the impact, it can be said that for advanced and developing countries revenue losses from profit shifting remain.
With the membership of 82 countries and jurisdictions in 2016, the general framework has expanded, and has brought together 116 countries and prerogatives, and includes numerous universal and regional parties. It is planned to be implemented by 2020. From a commercial point of view, this will lead to specific minutest criteria to be applied for achieving the desired results. However, the most pressing challenge is how to bridge the divide among the various points of view so that coherence of the international tax system is maintained. Importantly, businesses based on the manner of subjective application will gain the most. Developing countries, to protect its tax bases, have much to gain from the implementation of the BEPS measures. Sequences of new data gathering processes and analytical tools have been established and are now being put in place, including data in respect of Country-by-Country reports, to address this issue. However, a major challenge of assessing the scale and impact of BEPS is the limitation of existing data sources.
Most entities face the issue of high cost, ambiguity and complexity, which could hamper the growth of business on an international platform. Some of the B Action Plan may hold up investment within which may make it harder for the businesses to expand. Further, many ‘brick and mortar’ companies may expect minor changes.
It is believed that the BEPS Project is the most aspiring bilateral global tax policy initiative ever undertaken. Nonetheless, the impact will be significant, and the framework will irretrievably change how businesses are taxed. The effort to device BEPS is indeed laudable, but there is also an equally compelling need to focus on providing certainty. However, with its implementation, world-wide companies, funds and international stakeholders will have to revisit prevailing structures for securing treaty relief and most notably additional tax acquaintance that may arise on account of permanent establishments and intra-group transfer pricing.
Further, it is also believed that the developments taken together will show great progress. However, the implementation of the BEPS measures is still at an early stage, and more tangible results are yet to come.
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