Understanding the Post-BEPS World

Understanding the Post-BEPS World

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Base Erosion and Profit Shifting (“BEPS”) is an OECD/G20 initiative to close the gaps in international tax rules that allow multinational companies to legally yet artificially reduce the tax base in a specific country (Base Erosion) and/or shift profits to low or no-tax jurisdictions (Profit Shifting). The 15 Actions developed by the BEPS initiative include changes to model treaties and transfer pricing guidelines, as well as recommendations for improvements to and changes in domestic legislation to help circumvent tax avoidance.

WHY this Matters to You

While not illegal, tax avoidance planning allows multinational companies to take advantage of current tax rules which are largely grounded in “bricks and mortar” types of businesses, while today’s global environment relies more on creating value through intellectual property and the digital economy. Because of mis-matches in local tax rules and treaties, the use of aggressive tax avoidance planning can distort competition, allowing an advantage to global business who utilize BEPS opportunities. Additionally, the deployment of such strategies can lead to the inefficient use of resources by distorting investment decisions toward activities which result in a lower pre-tax rate of return but a higher after-tax rate of return. Finally, many OECD member-states believe that without restructuring of world-wide taxation being brought about by BEPS, the world-wide system of voluntary compliance will be undermined.

BEPS Core Principles

The 15 Action Items within the OECD BEPS initiative focus on three core principles: Coherence, Substance and Transparency.

  • Coherence: Domestic tax systems are coherent – tax deductible payments by one person results in income inclusions by the recipient. Action Items 2 -5 address international coherence in corporate income taxation to complement the standards that prevent double taxation with a new set of standards designed to avoid double non-taxation.
  • Substance: Action Items 6 – 10 focus on aligning “tax rights” with substance. Current rules work well in many cases, but must be modified to prevent instances of BEPS. The involvement of third countries in the bilateral framework established by treaty partners puts a strain on the existing rules, in particular when done via shell companies that have little or no economic substance: e.g. office space, tangible assets and employees. In the area of transfer pricing, rather than replacing the current system, The OECD BEPS initiative aims to fix the flaws, in particular with respect to returns related to over-capitalization, risk and intangible assets.
  • Transparency: Because preventing BEPS requires greater transparency at many levels, Action Items 11 – 15 call for: improved data collection and analysis regarding the impact of BEPS; taxpayers’ disclosure about their tax planning strategies; and less burdensome and more targeted transfer pricing documentation. These Action Items together require “Country-by-Country” (CbC) reporting, which has raised scrutiny over the information to be disclosed as well as safe-guarding of such information. Only in July, 2016, did the IRS issue final regulations regarding CbC Reporting, which will be required of all companies with world-wide revenue in excess of €750 million (approximately $850 million).

Who Does this Impact?

While the €750 million threshold has been set for the reporting on years beginning after December 31, 2015, that threshold is expected to be reduced in the future. Additionally, other aspects of BEPS which are implemented will affect all businesses operating on a global basis.

When Should You Take Action?

Now! The OECD Actions were finalized in 2015 and most member nations have implemented CbC reporting effective for the current year. The Actions have formulated a plan whereby bi-lateral treaties can be updated for the BEPS changes in a simplified manner, rather than requiring the re-negotiation of treaties on an individual (treaty-by-treaty/country-by-country) basis.

Next Steps

All businesses operating on a global basis should review their international activities and structure to ensure that their operations are in-line with forthcoming BEPS requirements. Reach out to a member of Withum’s International Team at [email protected] to review your strategy and compliance needs in this new “Post-BEPS” tax world.

Kimberlee Phelan CPA, MBA, Partner Practice Leader, International Services Group 609.520.1188 kphelan@withum.com Kimberlee S. Phelan, CPA, MBA, Partner
International Tax Services Practice Leader
(609) 520 1188
[email protected]

Brian Lovett LinkedIn

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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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