On 5 October 2015 the OECD presented the final package of measures resulting from the action plan on base erosion and profit shifting (BEPS). The package of measures based on the fifteen action points is to be presented to the G20 Finance Ministers on 8 October 2015 and then to the G20 leaders at their summit on 15 and 16 November 2015.
The BEPS measures aim to eliminate double non-taxation, ensure that taxation is better aligned with economic activity and value creation and render ineffective any tax planning structures intended to result in base erosion and profit shifting.
The BEPS action plan has three main constituents, these being to introduce coherence in domestic rules affecting cross-border activities; to strengthen requirements for economic substance to align taxation with the location of economic activity and value creation; and to improve transparency and certainty.
Significant features of the final BEPS package include the introduction of a minimum standard on country by country reporting that will require parent companies of groups to submit data on profits, tax and economic substance in respect of each country within which the group is operating. This will allow tax administrations to access information on the global activities of multinational enterprises.
The package also includes measures to combat treaty shopping. These aim to end the practice of using conduit companies with no economic substance to take advantage of favourable tax treaty provisions. Also the definition of a permanent establishment is to be strengthened to make it more difficult for enterprises to avoid tax in a jurisdiction by claiming that they do not have a permanent establishment and are therefore not liable to tax there.
Another key measure aims to combat harmful tax practices in areas such as intellectual property, where governments are competing to attract companies to their territory by offering favourable taxation for certain types of intellectual property. The BEPS measures will also provide for automatic exchange of tax rulings to ensure greater transparency in respect of the rulings provided to taxpayers.
The BEPS measures in respect of transfer pricing rules aim to align transfer prices with value creation in areas such as intangible assets. The suggested rules include a method of dealing with intangibles that are hard to value at the time of the transaction. Amendments to the OECD transfer pricing guidelines will also be made to strengthen the guidance on cost contribution arrangements. Guidance on transfer pricing is also to be strengthened to make sure that no inappropriate profits arise where an enterprise contractually assumes risks or provides capital. The rules will aim to ensure that returns on risk and capital are aligned with value creation.
Another important part of the BEPS package recommends domestic measures to strengthen rules on controlled foreign corporations; prevent artificial tax advantages from hybrid mismatch arrangements; or using tax rules on interest deductibility to reduce profits in certain jurisdictions.
In addition to the recommended domestic law changes the OECD is working with around 90 countries on a multilateral instrument that will insert changes into current bilateral double tax treaties without the need for extensive bilateral renegotiations. This multilateral instrument is to be finalized in 2016.
