OECD BEPS guidance includes anti-treaty shopping rules, country-by-country reporting requirements

OECD and G20 country tax officials have agreed that minimum standards should be added to tax treaties to prevent treaty shopping; have decided on the content required for transfer pricing documentation, including country-by-country reporting; and have narrowed the scope of hybrid mismatch proposals, OECD officials said during a Sept 16 OECD webinar introducing the first seven OECD base erosion profit shifting (BEPS) deliverables.

The OECD guidance, released as part of the implementation of its BEPS Action Plan, includes final reports on the tax challenges of the digital economy (Action 1) and the feasibility of a multilateral instrument (Action 15);  an interim report on harmful tax practices (Action 5); and draft reports on hybrid mismatch arrangements (Action 2), tax treaty abuse (Action 6), transfer pricing aspects of intangibles (Action 8), and transfer pricing and country by country reporting (Action 13).

Pascal Saint-Amans, OECD Director at the Center for Tax Policy and Administration emphasized that despite the characterization of some of the BEPS documents as drafts, the content of all seven deliverables has been agreed to by OECD and G-20 country officials. The recommendations were released in draft form, Saint-Amans said, because the guidance may need to be later modified to coordinate with eight other action plan items scheduled to be released in 2015.

Marlies de Ruiter, OECD Head of Tax Treaty, Transfer Pricing, and Financial Transactions, said a key outcome of the OECD’s BEPS work on tax treaty abuse is a new agreement among OECD and G-20 countries to require minimum standards in tax treaties. Countries have agreed that, at a minimum, treaties should include either a general antiabuse rule or a limitation on benefit rule plus conduit financing rules, she said.

De Ruiter said that country officials also agreed that language should be inserted into the preamble of tax treaties to clarify that treaties should not be used for tax avoidance or treaty shopping; the language is intended to provide a guide for interpretation by judges and others. De Ruiter said that she believed that the changes would stop companies that interpose letterbox companies in countries from inappropriately receiving treaty benefits.

Turning to work on Action 13 on transfer pricing documentation and country-by-country reporting, de Ruiter said that countries have reached a firm agreement on a three-tiered approach to reporting, consisting of a master file, local file, and country-by-country report, and have also agreed on the content of each of the filings. Business should be happy with the limited reporting requirements in the country-by-country template, de Ruiter said.  She also noted that unlike the prior draft, there is no longer a requirement that statutory accounting be the sole source of data.

De Ruiter said that agreement still needs to be reached on whether the master file and country-by-country report will be disseminated through treaty mechanisms, local filing, or through some other means. Officials are considering whether to require reporting only for large companies, and need to formulate phase-in rules, she said.

Saint-Amans added that the country-by-country data will only be provided to tax administrations, and only through a secure mechanism. Multinationals have vigorously opposed public dissemination of country-by-country reports, while NGOs have argued in favor of public disclosure.

Achim Pross, OECD Head of the International Cooperation and Tax Administration Division, said that countries have a reached a consensus on the use and the detailed application of linking rules to address hybrid mismatches. He noted that a 25 percent ownership threshold now applies to determine if parties to a hybrid instrument are related, wheres the draft rules contained a 10 percent threshold. Tax neutral entities such as REITS have been excluded from the rules, he said.

Pross said that there is still work to be done on substantive issues concerning intragroup hybrid regulatory capital; on-market stock lending and repo transactions; application of the imported mismatch rule; and on whether controlled foreign corporation (CFC) inclusion should be treated as an inclusion at the shareholder or entity level.  Transition rules must also be addressed, he said.

Pross said the interim report on harmful tax practices addresses application of substantial activities to regimes that provide a preferential tax treatment to income arising from intellectual property. The report’s primarily focus is on a nexus approach, which had the greatest support among interested countries. The report also includes a framework for exchanging information on taxpayer specific rulings related to preferential regimes, Pross said.

Raffaele Russo, OECD Head of BEPS Project, said a key conclusion of the final Action 1 report on the tax challenges of the digital economy is that it is not possible to “ring fence” the digital economy for tax purposes. Rather, other BEPS action items will deal with special problems posed by the digital economy. Russo said that officials must decide if best practices would require digital income to be included in CFC rules, noting that such rules are designed to cover mobile income. He also said that Action 7 on artificial avoidance of permanent establishment and Actions 8-10 on transfer pricing could be used to address digital economy tax challenges.

Russo further said that officials have agreed that mechanisms to collect VAT in business-to-consumer transactions involving the digital economy are sometimes lacking. He said that a subsidiary body of the OECD Committee on Fiscal affairs will address this issue before the end of 2015.

The BEPS action plan items will be presented to the G20 finance ministers at their Sept. 20-21 meeting in Cairns, Australia. If approved, they will then be presented to leaders of the G20 at the Brisbane summit in November.

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