What is the BEPS plan?*

The BEPS plan (acronym for action plan vs. base erosion and profit shifting) is a response by the G-20 to the aggressive tax practices implemented by some multinational taxpayers in recent years. The BEPS plan is coordinated by the Organization for the Economic Co-operation and Development (OECD) and seeks to establish new guidelines on fiscal policy and reforms to the current rules on international tax and transfer pricing, allowing profits to be taxed where the economic activity and value is generated.

The implementation of the BEPS plan has had unprecedented support, with over a hundred countries involved directly in technical committees that have been formed for the implementation of the plan and many others have contributed to the final results through their participation in regional forums. Regional tax authorities such as the African Tax Administration Forum (ATAF), the Exchange and Research Centre for Leaders of Tax Administrations (CREDAF, in French), and the Inter-American Center of Tax Administrations (CIAT, in Spanish) joined international organizations as the International Monetary Fund (IMF), the World Bank and the United Nations (UN) to collaborate in this work. Other interested parties, in particular businesses and civil society, have made great contributions in the form of 12,000 pages of commentaries relating to the 23 drafts for debate published and discussed in 11 public meetings, as well as webcasts held by the OECD that registered over 40,000 visits.

The BEPS plan is currently in an implementation phase. Many of the actions in the BEPS plan, for example actions 8-10 and 13, have had an almost immediate effect, reforming transfer pricing regimes worldwide. Other actions, for example action 1 (Tax Challenges of the Digital Economy) will be reviewed until a final position is reached by the end of 2020. In any case, we face the most significant changes in international taxation in the last hundred years[2].

BEPS Actions

The Action Plan vs Base Erosion and Profit Shifting have 15 actions, which look for substance, coherence and transparency in the taxpayer´s operations. The measures are the following[3]:

 

ACTION 1 Addressing the tax challenges of the digital economy	Action 1 addresses the tax challenges of the digital economy and identifies the main difficulties that the digital economy poses for the application of existing international tax rules. The Report outlines options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation.
ACTION 2 Neutralizing the effects of hybrid mismatch arrangements	Action 2 develops model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effects of hybrid instruments and entities (e.g. double non-taxation, double deduction, long-term deferral).
ACTION 3 Designing effective controlled foreign corporations (CFC) rules	Action 3 sets out recommendations to strengthen the rules for the taxation of controlled foreign corporations (CFC).
ACTION 4 Limiting base erosion involving interest deductions and other financial payments	Action 4 outlines a common approach based on best practices for preventing base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income.
ACTION 5 Countering harmful tax practices more effectively, taking into account transparency and substance	Action 5 revamps the work on harmful tax practices with a focus on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for preferential regimes, such as IP regimes.
ACTION 6 Preventing treaty abuse to avoid double taxation	Action 6 develops model treaty provisions and recommendations regarding the design of domestic rules to prevent treaty abuse.
ACTION 7 Preventing the artificial avoidance of Permanent Establishment (PE) status	Action 7 contains changes to the definition of permanent establishment to prevent its artificial circonvention, e.g. via the use of commissionaire structures and the likes.
ACTIONS 8-10 Aligning transfer pricing outcomes with value creation	Actions 8 – 10 contain transfer pricing guidance to assure that transfer pricing outcomes are in line with value creation in relation to intangibles, including hard-to-value ones, to risks and capital, and to other high-risk transactions.

 

ACTION 11 Establishment of methodologies for the compilation and analysis of data regarding tax evasion and transfer of profits and actions to face it	Action 11 establishes methodologies to collect and analyse data on BEPS and the actions to address it, develops recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluates the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis.
ACCIÓN 12 Establishment of mandatory disclosure of aggressive tax planning	Action 12 contains recommendations regarding the design of mandatory disclosure rules for aggressive tax planning schemes, taking into consideration the administrative costs for tax administrations and business and drawing on experiences of the increasing number of countries that have such rules.
ACTION 13 Transfer pricing documentation and country-by-country report	Action 13 contains revised guidance on transfer pricing documentation, including the template for country-by-country report, to enhance transparency while taking into consideration compliance costs.
ACTION 14 Dispute resolution	Action 14 develops solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, via a minimum standard in this area as well as a number of best practices. It also includes arbitration as an option for willing countries.
ACTION 15 Multilateral Instrument	Action 15 provides an analysis of the legal issues related to the development of a multilateral instrument to enable countries to streamline the implementation of the BEPS treaty measures. On 7 June 2017, over 70 Ministers and other high-level representatives participated in the signing ceremony of the Multilateral Instrument.

 

Aggressive tax practices that seek to offset the BEPS plan

As a reference in relation to the causes that originate the BEPS plan, the OECD pointed out that due to tax avoidance practices and profit shifting, there is a loss of income tax collection of approximately 4% to 10%, in other words, around 100 to 240 billion dollars annually. The losses are caused by various factors including aggressive tax planning schemes by certain multinational groups, lack of regulation at a local level and/or lack of co-ordination with international standards, lack of transparency and co-ordination among tax administrations, the effects of tax competition, and the limited resources available in countries for the application of tax regulations.

Tax avoidance practices are diverse and vary in complexity. “Treaty shopping” schemes are common, where a multinational group can reduce its tax burden by imposing an instrumental company for its tax planning in order to access benefits that it otherwise would not have been able to obtain. The reorganization of value chains, without taking into consideration the actual economic activity of the entities involved (and certainly without considering the functions, risks, and assets actually carried out by the companies) is another typical avoidance scheme. The use of hybrid instruments, where even double non-taxation is achieved in certain financial transactions, has also been a relatively frequent mechanism to erode the taxable base. Simpler schemes involve intercompany transactions that lack economic substance via royalty charges, services, or financial transactions.

Given the magnitude of the changes in the BEPS plan, it is necessary that multinational groups immediately address the actions proposed in order to avoid tax contingency and controversy in the future.

 

* Article drafted for a special edition of the publication IDC in regards to the BEPS plan.

[2]  OCDE (2015), Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project, OCDE.

http://www.oecd.org/ctp/beps-explanatory-statement-2015.pdff

[3] http://www.oecd.org/ctp/beps-actions.htm