On 5 October 2015, multinational enterprises (“MNEs”) received final recommendations from the OECD’s base erosion and profit shifting (“BEPS”) project. This week, the G20 Finance Ministers are likely to agree on these OECD recommended changes to the international tax rules and to implementation plans. A number of non-G20 countries have also been involved in work on the Action Plan and contributed to the proposals.
The OECD’s BEPS Action Plan categorised its various areas of focus into three themes: (i) addressing substance, (ii) coherence of the international tax system and (iii) transparency. Substance actions seek to align taxing rights with the relevant value-adding activity. Coherence actions aim to remove gaps and ‘black holes’. Transparency actions look to provide significant additional disclosure. In addition to the various actions grouped under these three themes, the BEPS Action Plan also seeks to address digital business, improve dispute resolution and create a multilateral instrument for rapid updating of bilateral tax treaties. Finalised proposals on all of these areas are now included in the package of measures just released by the OECD.
We see three fundamental ways in which this OECD BEPS work will have a practical impact. First, and most obvious, there will be the direct application of the BEPS package itself, whether in the shape of changes to tax treaties (through amendment of the OECD Model Tax treaty and/or the multilateral instrument) and the Transfer Pricing Guidelines or through changes to domestic legislation as a result of individual recommendations of the BEPS action points. Second, there will be the change the OECD does not want to see, namely unilateral actions by states. Countries adopting such alternative unilateral measures will typically be doing so because they disagree with the direction the BEPS package is taking or think the recommendations don’t go far enough. Third, and in our view perhaps the most important direct impact of BEPS, is its behavioural impact – specifically in emboldening the behaviour of tax administrations the world over. This is likely to lead to tougher and more protracted anti-avoidance challenges, higher thresholds for rulings, etc.
The policy formulation stage of the BEPS Action Plan will conclude at the end of this year, although it has been agreed that certain follow-on actions will take place during 2016 and beyond. The major focus of 2016, however, will shift to the implementation and monitoring of the package.
More information regarding the BEPS Action Plan can be found here.