Diversity & Inclusion
Following on its February 2013 report on Addressing Base Erosion and Profit Shifting (BEPS), the Organisation for Economic Co-operation and Development (OECD) has now released an ambitious action plan (Action Plan) that aims within the next 24 months to fundamentally overhaul the taxation of multinational enterprises. The Action Plan, which the OECD states has broad political support, seeks to introduce dramatically increased transparency and information sharing between multinational entities and taxing authorities. It also could ultimately affect many multinational tax and business structures, including those not viewed as involving aggressive or abusive planning.
At its heart, the Action Plan seeks to eliminate double non-taxation of corporate income and curtail tax minimization strategies that involve the segregation of taxable income from the business activities that generate that income. These issues regarding the taxation of multinational enterprises in the global economy have risen to the top of the political agenda and have become the focus of leading multilateral organizations, including the G20 and the OECD. The Action Plan claims strong political backing among OECD member countries as well as the G20 countries (including the eight G20 countries that are not OECD members), and the OECD expects public endorsement of the Action Plan from all the G20 countries, all of which have been invited to join the BEPS project on an equal footing to carry out the Action Plan.
The Action Plan is as far-reaching in its scope as it is ambitious in its timeframe. It aims to address nearly all of the issues identified in the report by either September 2014 or September 2015. Certain of the Action Plan’s items are likely to be more easily implemented, in particular those focused on procedural enhancements regarding tax transparency and disclosure, as well as modifications to model treaties. Others, which implicate more complicated tax policy issues and require broader domestic law changes, are likely to require more time to achieve consensus and action. Given the Action Plan’s ambitious timeframe and its apparently strong political backing, multinational enterprises that will be affected by the BEPS project will need to engage expeditiously with policymakers to provide input regarding the business community’s views on the issues addressed by the Action Plan.
Broadly, the Action Plan covers three main areas:
The specific topics identified in the plan as action items, and the proposed next steps for addressing these topics, include:
The BEPS Action Plan is an ambitious undertaking that would require fundamental changes to the current system of international taxation. If ultimately adopted by member countries, measures arising from the Action Plan are likely to significantly impact many, if not most, international business structures, including those that do not involve aggressive or abusive tax planning. While the OECD does not have legislative authority, there is substantial political will behind the BEPS project and wide support from the G20 countries. It is noteworthy that all of the G20 countries, including those which are not OECD members, are expected to both support and, on an equal footing, join the program set forth in the Action Plan. This indicates a unified commitment to tackle BEPS, which suggests that many of the measures developed in light of the Action Plan will be seriously considered at the national level. In particular, the concern in the U.S. is the possibility that advocates of legislation developed under the Action Plan can argue that adopting the provisions will not adversely affect the competitiveness of U.S. multinationals because if the U.S. enacts them other countries will do so as well.
Certain of the topics addressed in the Action Plan are likely to proceed on an accelerated basis. New procedural rules regarding enhanced tax transparency and disclosure may well advance rapidly. For example, the Action Plan proposes mandatory reporting by businesses of certain tax information, including the use of “aggressive tax planning strategies” and country-by-country transfer pricing data. The OECD is also proposing a framework for the automatic exchange of information between countries, such that each taxing body will be more aware of the operations of companies within its jurisdictions, together with how those companies fit into the value chain. In addition, countries that offer favorable taxing regimes, often involving the ability to obtain a tax ruling, are likely to face increasing pressure to alter their rules regarding tax rulings, including in ways that could significantly impact their tax revenues.
The enhanced transparency proposed in the Action Plan could well be implemented relatively quickly and would likely prompt increased governmental and broader public scrutiny of corporate tax practices. Indeed, the Action Plan’s transparency agenda dovetails with recent announcements in both the U.S. and the U.K. In the U.S., the Obama Administration has signaled an interest in at least some kind of business tax transparency. In the U.K., the government has taken a much more detailed approach already, and has recently announced an initiative to radically expand corporate transparency and boost public trust in business. The U.K. proposals in this area include proposals for a central public registry of beneficial owners who hold more than 25 percent of the shares or voting rights in a U.K. company, abolition of bearer shares, disclosure of nominee director status and abolition of corporate directors. The U.K.’s proposals are just one example of how governments are responding to public and media demand for complete transparency and openness in the business environment. It will be critical to monitor the uptake of the broadly phrased OECD proposals in both the U.S. and the U.K.
The OECD may also be able to proceed quickly with revising model treaties to address hybrid entity and hybrid instrument mismatches, enhance MAP provisions to improve dispute resolution, and tighten treaty anti-abuse and limitation on benefits rules. And though not likely to be addressed through treaties, model legislation regarding thin capitalization rules could be released relatively quickly, with the potential for swift and broad-based implementation through domestic legislative change.
Other issues addressed in the report — those implicating more complex technical and policy issues and requiring greater domestic law changes — will likely take longer to implement. Addressing issues surrounding the taxation of the digital economy and revisions to the PE rules to address newer, technology-driven business models; developing model CFC legislation; and altering transfer pricing rules may well take a longer time both to reach international consensus and to achieve implementation.
The proposed changes to transfer pricing arrangements are particularly wide-ranging, and will likely require considerable changes to the detailed local transfer pricing rules that have been adopted to date by supporting countries. The ability to disregard related-party contractual and risk-shifting arrangements and allocate income in accordance with value creation may be a difficult concept to legislate appropriately. But perhaps even more challenging will be achieving international consensus and drafting rules to address the proper allocation of income between source or market countries on the one hand and developer countries on the other.
The Action Plan also includes a proposal for the development of a multilateral treaty that can allow signatories to swiftly adopt some of the measures outlined in the Action Plan is a novel approach to international taxation that can potentially accelerate the implementation of a number of measures. Of note, the OECD views the multilateral treaty as a platform to address other international tax issues, and not just BEPS. If the OECD is successful in tackling BEPS, the multilateral treaty platform could well be expanded to other areas of international taxation.
Given the Action Plan’s broad reach and its aggressive timeframe, businesses that are likely to be affected by the Action Plan should consider engaging proactively and promptly with policymakers at the domestic and international levels to raise concerns and provide input regarding the BEPS project. Given the Action Plan’s aim to address nearly all the above-described issues raised within the next 24 months, ordinary channels of engagement may not be sufficient to allow the business community to provide timely input regarding these tax issues that are of critical import to the multinational business community.
With the Action Plan that it has released, the OECD has set forth an ambitious agenda for tackling in a short time frame the problems of corporate tax base erosion and profit shifting. The Action Plan is comprehensive in its scope — seeking to address virtually the entire range of international tax issues facing, and opportunities available to, multinational enterprises. Multinational companies will have to carefully monitor and quickly respond to developments in the BEPS project, many of which could impose significant tax and non-tax costs on businesses and meaningfully impact the way multinational enterprises conduct their global operations.
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