What is BEPS?
Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually. Working together within OECD/G20 Inclusive Framework on BEPS, 143 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
The term is also used for a project headed by the Organisation for Economic Co-operation and Development (OECD) which produced a set of deliverables (“Actions”) designed to combat BEPS. The BEPS Actions cover various aspects of international taxation.
What are covered by the BEPS Actions?
The BEPS package provides 15 Actions that equip governments with the domestic and international instruments needed to tackle tax avoidance. Countries now have the tools to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. These tools also give businesses greater certainty by reducing disputes over the application of international tax rules and standardising compliance requirements.
Action 1: Digital Economy – no direct taxation changes recommended, but proposed that indirect taxes be collected in the jurisdiction of consumption (but this is not a standard)
Action 2: Hybrid mismatch arrangements – introduction of domestic hybrid mismatch rules recommended along with other domestic provisions; changes to the OECD model tax treaty proposed to ensure hybrid entities are not used to unduly obtain treaty benefits
Action 3: CFC (controlled foreign company) Rules – recommendations form six “building blocks” considered necessary for the design of CFC rules; designed to ensure that countries choosing to adopt them will have rules that effective prevent income shifting
Action 4: Interest deductions – determination of what is “abusive”; recommendation of fixed ratio rule (FRR) and group ratio rule (GRR); proposals will impact intra-group financing arrangements
Action 5: Harmful tax practices – Introduction of the Nexus principles to link benefits under IP (intellectual property) “box” regimes to proportionate contribution to R&D activities underpinning the income; grandfathering until June 2021; compulsory spontaneous exchange of information on certain rulings from April 2016
Action 6: Treaty abuse – standards to counter “treaty shopping”; suggested specific anti-abuse rules
Action 7: Definition of PE (permanent establishment) – significant extension to the definition of PE; widened circumstances for creation of a “dependent agent” PE; list of expected activities; new anti-fragmentation rule
Actions 8 to 10: Transfer Pricing (TP) – separation of legal ownership of an intangible from the right to the return generated; guidelines regarding accurate delineation of a transaction; return for risk allocation
Action 11: BEPS data – data to be collected and analysed, presentation of data in a consistent format; improved data and analysis tools
Action 12: Mandatory disclosure rules – adoption by a country is voluntary; modular approach recommended; implementation to be balanced with country-specific needs and existing compliance/disclosure initiatives; information on how mandatory disclosure contributes to enhanced tax transparency
Action 13: TP documentation and CbCR (Country-by-country reporting) – all three elements being implemented in many jurisdictions (including Guernsey) following signing of the Multilateral Competent Authority Agreement on Country by Country Reporting; CbCR reporting is now due to commence
Action 14: Dispute resolution – commitment to a minimum standard of treaty dispute resolution; rapid expansion of binding mandatory arbitration
Action 15: Multilateral instrument – the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS is now negotiated and open for signing
What has Guernsey done?
What do financial institutions need to do?
Very few financial institutions will have taken much action under BEPS yet, however the following may apply:
Need advice?
Midshore are able to help provide advice, project management, or procedures for your organisation to successfully implement necessary policies and practices to ensure your compliance with both the BEPS actions and local CbCR reporting requirements. We can also provide BEPS Awareness training for your staff.
Please contact us to discuss your needs.
