Base Erosion and Profit Shifting: G-20/OECD Project Update

The OECD presented the latest developments in the OECD/G20 project to combat BEPS by multinational enterprises during a recent G-20 Finance Ministers meeting in Istanbul, Turkey during February, 2015.

OECD and G-20 countries agreed three to key elements that will enable implementation of the BEPS Project:

“These are important steps forward, which demonstrate that progress is being made toward a fairer international tax system,” OECD Secretary-General Angel Gurría said. “These decisions signal the unwavering commitment of the international community to put an end to base erosion and profit shifting, in line with the ambitious timeline endorsed by G-20 leaders.”

The G-20/OECD BEPS Action Plan sets out 15 key elements of international tax rules to be addressed by year-end 2015. The project aims to help governments protect their tax bases and offer increased certainty and predictability to taxpayers, while guarding against new domestic rules that result in double taxation, unwarranted compliance burdens or restrictions to legitimate cross-border activity. The OECD presented seven of the 15 elements of the Action Plan to the G-20 Leaders Summit in Brisbane, Australia in November 2014, and is scheduled to present the remaining elements by the next Leaders’ Summit in Antalya, Turkey in November 2015.

The implementation of the BEPS Action Plan will require modifications to the existing network of more than 3,000 bilateral tax treaties worldwide. The planned multilateral instrument will offer countries a single tool for updating their networks of tax treaties in a rapid and consistent manner. The agreed mandate authorizes the formation of an ad-hoc negotiating group, open to participation from all states. The group will be hosted by the OECD and will hold its first meeting by July 2015, with an aim to conclude drafting the multilateral instrument by 31 December 2016.

Another key objective of the BEPS project is to increase transparency through improved transfer pricing documentation standards – including through the use of a country-by-country reporting template that requires multinationals to provide tax administrations with information on revenues, profits, taxes accrued and paid, along with some activity indicators. The new guidance presented to the G-20 requires country-by-country reporting by multinationals with a turnover above EUR 750 (US$840) million in their countries of residence starting in 2016. Tax administrations will begin exchanging the first country-by-country reports in 2017. Countries have emphasized the need to protect tax information confidentiality.

The guidance confirms that the primary method for sharing such reports between tax administrations is through automatic exchange of information, pursuant to government-to-government mechanisms such as bilateral tax treaties, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, or Tax Information Exchange Agreements (TIEAs). In certain exceptional cases, secondary methods, including local filing, can be used.

Determining which intellectual property regimes (patent boxes) and other preferential regimes can be considered harmful tax practices is another key objective of the BEPS Project. In Brisbane, G-20 Leaders endorsed a solution proposed by Germany and the UK on how to assess whether there is substantial activity in an intellectual property regime. The proposal – based around a “nexus approach,” which allows a taxpayer to receive benefits on Intellectual Property income in line with the expenditures linked to generating the income – has since been endorsed by all OECD and G-20 countries. Transitional provisions for existing regimes, including a limit on accepting new entrants after June 2016, have been agreed upon and work on implementation of the provisions is ongoing.

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