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BEPS project

Base erosion and profit shifting (BEPS) action plan is a plan prepared by the Organisation for Economic Co-operation and Development (OECD) in order to reform the international tax system to tackle tax avoidance. The BEPS action plan contains 15 different actions.

 International Tax Law until BEPS

  • The primary goal was to eliminate double taxation.
  • Legal grounds were the treaties for the avoidance of double taxation concluded between separate States (>1.300 treaties). But the goals of the States, the treaties and the national law, differs considerably.
  • Result – numerous possibilities for double non-taxation.
  • Tax revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually (OECD).
  • Multinational companies enjoy ~4-8% lower effective corporate income tax rate compared with the non-multinational companies (OECD).
  • Transfer pricing considered as being at the core of the problem, as it allows to concentrate the profits in countries where no real economic activities are carried out.
  • Economic recession of 2008-2012 brought the BEPS subject to the political agenda – it was decided to prepare the BEPS action plan.

BEPS action plan comprises 15 actions around 3 main pillars – 1) Coherence (to eliminate gaps between the systems of different States), 2) Substance (to bring the taxation back to where the real economic activity and not a mere letter-box), 3) Transparency and Certainty (to ensure the disclosure of information to all the States Tax Authorities, to ensure the more efficient dispute resolution). It also contains two “horizontal” actions, encompassing all the others – the Digital Economy (1) and the Multilateral Instrument (15).

BEPS action plan preparation lasted 2 years, which is very fast given the multitude of participant States – from OECD + developing, all the interested stakeholders were allowed to present their comments and influence.

Action 1 – Addressing the Tax Challenges of the Digital Economy

Goal – to analyze the tax challenges in the digital economy.

Results – NO to a separate tax regime. Address the loopholes by other actions (7 – Permanent establishments, 8-10 – Transfer pricing, also VAT guidelines).

Next steps:

  • Implementation of the related actions
  • Monitoring and report regarding the digital economy on 2020.

Action 2 – Neutralising the Effects of Hybrid Mismatch Arrangements

Goal – create rules (national and treaty rules) to neutralize tax outcomes resulting from the hybrid agreements mismatches

Results:

  • Recommended rules both to the national law and the treaty law.
  • It is aimed not to affect the commercial aspects of the transactions, but to ensure the coherent tax treatment (in all the involved States).
  • It is aimed at preventing the “stateless income”.

Next steps – it is upon the will of the States to implement the recommendations.

Action 3 – Designing Effective Controlled Foreign Company Rules

Goal – create recommendations for more efficient CFC (Controlled Foreign Companies) rules design

Results – CFC rules recommendations in the form of building blocks (definitions of CFC and CFC income, exemptions and threshold requirements, computation and attribution of income, prevention and elimination of double taxation).

Next steps –  it is upon the will of the States to implement the recommendations.

Action 4 – Limiting Base Erosion Involving Interest Deductions and Other Financial Payments

Goal – create recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense.

Results:

  • Recommendation to limit net interest expense deductibility to 10-30% EBITDA
  • Exception – in case the group net interest/EBITDA ratio is higher
  • Important – the interest is measured as “net” – interest revenue minus expense
  • Other – de minimis rule, public benefit funding exception, carry forward/back provisions

Next steps –  further OECD work in 2016, then implementation by the States.

Action 5 – Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance

Goal – to ensure compulsory spontaneous exchange on rulings related to preferential regimes and on requiring substantial activity for any preferential regime.

Results:

  • Exchange of information regarding the future rulings starting from 1 April 2016 and regarding the past rulings – by 31 December 2016.
  • Proportionate approach – the amount of benefiting income depends on the proportion of R&D expenditure incurred by the benefiting taxpayer.

Next steps:

  • States shall review and modify their preferential regimes. In Lithuania, R&D relief might be supplemented, e.g. by interdiction to purchase R&D services from group entities etc.
  • Exchange of information regarding the rulings will be ensured.
  • OECD will continue to monitor this field.

Action 6 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

Goal – setting of a minimum standard against the abuse of treaty provisions (“treaty shopping”).

Results:

  • A clear statement will be included in the tax treaties that the States intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.
  • A specific anti-abuse rule, the limitation-on-benefits (LOB), will be included in the OECD Model Tax Convention. It will limit the availability of treaty benefits to entities that meet certain conditions (legal nature, ownership, activities).
  • A general anti-abuse rule, the principal purposes test (PPT), will be included in the OECD Model Tax Convention. It will deny treaty benefits in case one of the principal purposes of transactions or arrangements is to obtain treaty benefits, unless it is established that granting these benefits would be in accordance with the object and purpose of the provisions of the treaty.

Next steps –  it is upon the will of the States to implement the recommendations in their bilateral treaties, or by signing the multilateral instrument (see Action 15).

Action 7 – Preventing the Artificial Avoidance of Permanent Establishment Status

Goal – to prevent the use of certain common tax avoidance strategies that are currently used to circumvent the existing permanent establishment (PE) definition.

Results –  changes to the definition of the PE in the OECD Model Tax Convention regarding the following:

  • Commissionaire agent
  • Preparatory or auxiliary activities.
  • Splitting-up contracts between related enterprises (e.g. of construction works).

Next steps – it is upon the will of the States to implement the recommendations in their bilateral treaties, or by signing the multilateral instrument (see Action 15).

Actions 8-10 – Aligning Transfer Pricing Outcomes with Value Creation

Goal – to ensure the transfer pricing results alignment with the economic value creation, especially in 3 key areas:

  • Intangibles (Action 8).
  • Allocation of risks and the level of returns for funding (Action 9).
  • Other high-risk areas (Action 10).

Results:

  • New guidance on risk, where the control over risk and the capacity to assume the risk are fundamental.
  • New guidance on intangibles and hard-to-value intangibles.
  • Contracts alone do not attract profits:
  • Legal ownership alone does not ensure the right to high return.
  • Funding alone can justify only risk-free return for “cash box”.
  • Simplification and practical approaches:
  • New guidance on commodities transactions.
  • New guidance on low value adding services and on cost contribution arrangements.

Next steps:

  • Explanatory guidance enters into effect immediately, as far as they are not contrary to local rules (in Lithuania the OECD guidelines are applicable as much as they do not contradict the relatively short local transfer pricing rules).
  • OECD will continue in 2016-2017 regarding the profit split method and financing transactions.

Action 11 – Measuring and Monitoring BEPS

Goal – to measure fiscal and economic impacts of BEPS.

Results – six indicators of BEPS activity identified and measured.

Next steps – further OECD work together with the governments in order to report and analyse more corporate tax statistics.

Action 12 – Mandatory Disclosure Rules

Goal – design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures.

Results – a modular framework that enables countries without mandatory disclosure rules to design a regime that fits their need to obtain early information on potentially aggressive or abusive tax planning schemes and their users. Key design features include the following:

  • Triggers of disclosure, both specific (e.g. losses) and generic (confidentiality requirement or the payment of a premium fee).
  • Impose a disclosure obligation on both the promoter and the taxpayer. Promoter can even be obliged to provide a list of clients.
  • Penalties (including non-monetary) to ensure compliance.

Next steps – it is upon the will of the States to implement the recommendations.

Action 13 – Transfer Pricing Documentation and Country-by-Country Reporting

Goal – design the rules under which the MNEs would provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.

Results – three-tiered standardised approach to transfer pricing documentation has been developed.

  • Master file, containing high-level information regarding the global business operations and transfer pricing policies is to be available to all relevant tax administrations.
  • Local file, containing a detailed transactional transfer pricing documentation, specific to each country, is to be available to the relevant tax administrations.
  • Country-by-Country Report is mandatory for large MNEs and will provide annually and for each tax jurisdiction the revenue, profit, income tax paid and accrued, as well as the number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction.

Next steps:

  • Country-by-Country Reporting requirements applicable starting from 2016, to MNEs with annual consolidated group revenue equal to or exceeding EUR 750 million.
  • States will also have to implement the requirements in their local law.
  • OECD will prepare the necessary XML Schema and a related User Guide to accommodate the electronic exchange of Country-by-Country Reports.

Action 14 – Making Dispute Resolution Mechanisms More Effective

Goal – Improve dispute resolution mechanism

Results – minimum standard for improving the Mutual Agreement Procedure (MAP)

Next steps – States will have to implement the recommendations and allocate necessary resources for improving the MAP.

Action 15 – Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

Goal – explore the feasibility of a multilateral instrument that would have the same effects as a simultaneous renegotiation of thousands of bilateral tax treaties.

Results:

  • Issues and possibilities for the multilateral instrument were analised.
  • The Group to develop a multilateral instrument begun its work in May 2015 with the aim to open the multilateral instrument for signature by 31 December 2016.

Next steps:

  • Further development of the multilateral instrument.
  • Signature of the multilateral instrument will be voluntary.

 

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