BEPS – Base Erosion and Profit Shifting

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 BEPS143 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?

  • Joined the BEPS Inclusive Framework – committed to development and implementation of global standards in line with the BEPS Action Plans
  • Accepted and invitation from the OECD to join the ad hoc group on the multilateral instrument
  • Committed to signing the BEPS Multilateral Instrument (June 2017)
  • Signed up to the Multilateral Competent Authority Agreement on Country by Country Reporting as well as broadly adopting the CbCR implementation package
  • Put in place CbCR implementing regulations

What do financial institutions need to do?

Very few financial institutions will have taken much action under BEPS yet, however the following may apply:

  • CbCR – may apply if the Guernsey company is parent company or substitute parent company (particularly if the parent is not in a participating jurisdiction) for a large group (group revenue over EUR 750 million)
  • Transfer pricing will have to change depending on where the point of value creation is, at  this stage this should be awareness work
  • Ensure senior management remain briefed on implementation of BEPS initiatives
  • Be aware of where structures they manage or administer may be used for BEPS

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.