BEPS – Base Erosion and Profit Shifting

What is BEPS (Base Erosion and Profit Shifting)?

BEPS is a tax avoidance strategy used by multinational companies, wherein profits are shifted from jurisdictions that have high taxes (such as the United States and many Western European countries) to jurisdictions that have low (or no) taxes (so-called “tax havens”). BEPS can be achieved through the use of “transfer mispricing” (contracting between subsidiaries in different jurisdictions at prices that are not arm’s length).

 

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?

 

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.