The Organization for Cooperation and Economic Development presented on Monday a final set of measures that seek to reform international tax rules to close gaps and inconsistencies that allow corporate profits to “disappear” or to be artificially shifted to jurisdictions with low or no taxation.
The OECD estimates in its Base Erosion and Profit Shifting (BEPS) project that current gaps in international tax rules cause revenue losses of US$100 billion to US$240 billion annually, or the equivalent of 4 percent to 10 percent of global corporate income tax revenues.
The BEPS project was instituted by the OECD at the request of the G20 leaders and based on the 2013 G20/OECD BEPS Action Plan, which identified 15 actions necessary to tackle international tax avoidance.
The plan was based on the assumption that tax rules have not developed in line with changes in global business and the tax practices of some multinational companies.
Weaknesses in international regime
As a result, the existing international regime has shown weaknesses, particularly in instances where the interaction of tax rules from different countries means that income from cross-border activities is not taxed anywhere.
Tax issues also relate to arrangements that result in no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place.
The expansion of the digital economy in particular poses challenges for international taxation that BEPS aims to address. In recent years companies like Google, Amazon or Apple were singled out for criticism of their very low effective corporate tax rates in hearings in the U.K. and the U.S.
The digitalization of business models raises questions as to how these enterprises add value and make their profits, and where they generate their income for tax purposes, the OECD said.
Impact of base erosion
Given developing countries’ greater reliance on corporate income tax revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant, the organization noted.
“Base erosion and profit shifting affects all countries, not only economically, but also as a matter of trust,” said OECD Secretary-General Angel Gurría. “BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide.
“The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective,” Mr. Gurría said.
The BEPS Action Plan was structured around three fundamental pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency, as well as certainty for businesses and governments.
The final set of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the tackling of double non-taxation does not result in double taxation.
Transfer pricing rules
The BEPS package also revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called “cash box” entities to shelter profits in low or no-tax jurisdictions, and redefines the key concept of permanent establishment, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition, the OECD said.
The BEPS package provides governments with a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.
Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.
The BEPS measures were agreed after a two-year consultation process between OECD, G20 and developing countries and stakeholders from business, labor, academia and civil society organizations.
“Everyone has a stake in reversing base erosion and profit shifting,” Mr. Gurria said. “The BEPS Project has shown that all stakeholders can come together to bring about change. Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.”
The reform package will be discussed by the G20 Finance Ministers at their meeting on Thursday in Lima, Peru and delivered to G20 Leaders at their annual summit on Nov. 15-16 in Antalya, Turkey. The focus will then shift to designing and putting in place a framework for monitoring and supporting implementation of the measures.