Ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralise hybrid mismatch arrangements (Action 2 in the 15-point plan).
The basic idea behind hybrids is to have the same entity or transaction treated differently by different countries to avoid paying tax. By playing off one country’s tax system against another, the company doesn’t pay tax anywhere.
Realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties (Action 6).
“Treaty shopping” is the most common form of treaty abuse. It generally refers to arrangements through which a person who is not a resident of one of the two states that concluded a tax treaty attempts to obtain benefits that the treaty grants to residents of these states. OECD and G20 countries have all agreed to reject treaty-shopping practices.
Assure that transfer pricing outcomes are in line with value creation, notably in the key area of intangibles (Action 8).
Most world trade actually takes place within multinational enterprises, for example, the headquarters in Germany paying a subsidiary in India to carry out research or manufacture components. This payment has to be at arm’s length to ensure that profits (or losses) are allocated among the different parts of the group in a fair and sound manner. Easy in many cases, it may get extremely difficult, and subject to manipulation, when we are talking about intangibles, like famous brands, patents, algorithms or the like. New guidance has been developed to align the transfer pricing rules with such modern businesses.
Improve transparency for tax administrations and increase certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting (Action 13).
Countries have agreed that companies should report on a country-by-country basis certain key information, such as assets, sales and number of employees. This will provide tax administrations with a broad picture of where profits are made and allocated for tax purposes.
Address the challenges of the digital economy (Action 1).
The digital economy can exacerbate BEPS risks due to the importance of intangibles, the mobility of users, network effects and multi-sided business models. It’s hard to say where certain activities or assets “are” for tax (and other) purposes. The ability to centralise infrastructure at a distance from the market and sell into that market from a remote location, generates potential opportunities to achieve BEPS, for example when local activities are fragmented to avoid taxation. One year from now, an agreement will be reached so that this will not be possible anymore.
Facilitate swift implementation of the BEPS actions through a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties (Action 15).
Many domestic and international rules to address double taxation of individuals and companies originated from principles developed by the League of Nations in the 1920s. The OECD Model Tax Convention serves as the basis for the negotiation, application and interpretation of over 3,000 bilateral tax treaties in force around the world. But without a mechanism for swift implementation, changes to model tax conventions will only widen the gap between these models and the content of actual tax treaties.
Counter harmful tax practices (Action 5).
The OECD published a report on Harmful Tax Competition: An Emerging Global Issue in 1998, but 15 years later, concerns about the “race to the bottom” on the mobile tax base are as relevant as ever. To counter harmful tax practices more effectively, this action commits the Forum on Harmful Tax Practices (FHTP) to revamp their work, a priority being to improving transparency, with the obligation to exchange information on rulings related
to preferential regimes.
Extract from blog originally published at www.oecdinsights.org, 29 September 2014.
For full article, see http://oe.cd/Im.
Visit our website at www.oecd.org/tax/beps.htm.
See OECD Policy Briefs on BEPS at www.oecd.org/policy-briefs.
OECD (2013), “Revitalising international taxation. The OECD Action plan on Base Erosion and Profit Shifting: A summary” in OECD Observer No 295, Q2 2013.
© OECD Observer No 300, Q3 2014