Base Erosion and Profit Shifting is a tax planning strategy employed by many Multinational Entities (MNE’s), which have tried to evade the payment of tax in the jurisdiction in which they operate by shifting their profits to tax havens in which they have incorporated related entities, thus paying lower or no Corporation Tax. This is particularly concerning as most of the developing countries in which the profits are being shifted to rely heavily on Corporation Tax income.
The Organization for Economic Co-operation and Development (OECD) is a centralized group consisting of 34 countries, which has implemented rules and regulations in its attempt to combat this double non-taxation.
What is transfer pricing and how does this relate to BEPS
Transfer pricing is the setting of the price for goods and services sold between related legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price.
Transfer pricing can be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before tax to countries where it does business.
The OECD and G20 have united in order to work together on this tax matter. More than a dozen developing countries have participated directly in the work and more than 80 non-OECD and non-G20 jurisdictions have provided input.
A prudent estimation from a research carried out by the OECD since 2013 shows that BEPS result in an annual loss of $100 – 240 billion.
The 2013 BEPS report made by the OECD and the discussions made thereafter have created speculation as to where the key area to focus is; in other words, which act of business is creating the BEPS and thus where the monitoring and control by the OECD should focus on. The discussions have narrowed down to the key areas which are: control of risks and intangibles, use of hybrids, taxation of digital business, transparency agenda, inter-group financial transactions and anti-avoidance measures.
How will the BEPS measures be implemented
Some of the measures may be immediately applicable such as the revised guidance on transfer pricing. Some measures require changes to bilateral tax treaties, something that can be done via the multilateral instrument under Action 15. Finally, other measures require domestic law implementation.
What is the nature of the BEPS outputs? Are they legally binding?
They are soft law legal instruments. They are not legally binding but there is an expectation that they will be implemented accordingly by countries that are part of the consensus. The past track record in the tax area is rather positive. Minimum standards were agreed in particular to tackle issues in cases where no action by some countries would have created negative spill overs (including adverse impacts of competitiveness) on other countries. Recognizing the need to level the playing field, all OECD and G20 countries have committed to consistent implementation in the areas of preventing treaty shopping, Country-by-Country Reporting, fighting harmful tax practices and improving dispute resolution. In addition, existing standards have been updated and will be implemented, noting however that not all BEPS participants have endorsed the underlying standards on tax treaties or transfer pricing. In other areas, such as recommendations on hybrid mismatch arrangements and best practices on interest deductibility, countries have agreed a general tax policy direction. In these areas, they are expected to converge over time through the implementation of the agreed common approaches, thus enabling further consideration of whether such measures should become minimum standards in the future. Guidance based on best practices will also support countries intending to act in the areas of mandatory disclosure initiatives or CFC legislation.
The final BEPS package gives countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, while at the same time give business greater certainty by reducing disputes over the application of international tax rules, and standardizing compliance requirements.
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