OECD officials highlight key decisions in final BEPS reports

by Julie Martin

Senior OECD officials provided an overview the 13 final reports issued under the OECD/G20 base erosion and profit shifting plan (BEPS) during two webcasts that aired October 5, just after the reports were released. Discussion covered all 15 action items, including the final reports on the taxation of the digital economy, permanent establishments, and transfer pricing.

The final report under action 11 concludes that because of BEPS, large multinationals have an effective tax rate that is 4–8 1/2 percent lower than their domestic firm competitors, noted David Bradbury, who heads tax policy and statistics at the OECD.

Between USD 100–240 billion in corporate income tax is lost annually from BEPS, which translates to a loss of 4–10 percent of countries’ corporate tax revenue, Bradbury said.

Bradbury said that countries have agreed that further study of BEPS is needed. He added that the data in country-by-country tax reports provided to tax authorities will be an important future source of information for statistical analysis of BEPS.

Digital economy update

While the OECD completed a tremendous amount work since the BEPS plan was announced in 2013, including a final report under action 1, the work to combat BEPS in the digital economy is by no means finished.

“There is no general trust that things are solved,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, during a discussion of the taxation of the digital economy. “We are just at the beginning of a lengthy, difficult, but very interesting process,” but the good news is that tax administrations are cooperating, Saint-Amans said.

Raffaele Russo, OECD Head of BEPS Project, said that the final BEPS report under action 1 provides that countries have the option to adopt domestic tax rules to address the tax challenges associated with the digital economy as long as the rules are consistent with treaty obligations or the measure is agreed to bilaterally with other affected countries.

Russo said that countries expect that most BEPS challenges posed by the digital economy will be addressed in the other BEPS reports, especially through the new permanent establishment definitions and transfer pricing rules. However, there remains some uncertainty regarding how to address a digital business’ ability to operate in a country without being physically present and the treatment of data collection in a country that is monetized.

The final report under action 1 offers a number potential solutions to these issues, Russo said. Included is a significant economic presence test, which has a threshold for taxation of nonresidents based on factors that demonstrate a constant interaction with a country’s economy; special rules for withholding tax on digital transactions; and an equalization levy “that would probably solve the issues related to attributing profits to such a significant economic presence,” Russo said.

Russo said that the action 1 report concludes that these three options should not be international standards; however, the OECD will continue to monitor new developments and will study data made available from country-by-country reporting, monitoring under action 11, and VAT declarations. The OECD may later determine that further action should be taken multilaterally in these areas, he said.

Transfer pricing, PEs

Saint-Amans said the OECD will know that BEPS plan work is a success if tax planning returns to being a “support function in companies instead of a profit center.” Another sign of success would be if countries begin to lower their tax rates because BEPS measures have broadened the countries’ tax bases, he said.

Asked why the OECD settled on a EUR 750 million threshold for country-by-country reporting to tax authorities, and why there is no provision for the reports to be made public, Saint-Amans responded that the threshold was arbitrary, and that it may be lowered during the planned 2020 review of the implementation of the country-by-country reporting rules.

He said the country-by-country reports were not make public because tax administrators were more focused on getting the information for themselves for risk assessment. He said there was some worry that countries would agree only to more limited company disclosures if the information was made public.

He also said that unitary apportionment was not adopted in the BEPS plan because no country asked for it. The cost to transition to a new transfer pricing system would be high, and there is an urgency to collect the tax now, he said. Moreover, the EU has been working on the common consolidated corporate tax base for 20 years without making much progress, he noted.

Marlies de Ruiter, OECD Head of Tax Treaty, Transfer Pricing, and Financial Transactions, described the final reports dealing with transfer pricing, including a new approach to analyzing risk in the transfer pricing guidance. She noted that there has been significant change to OECD work on cost contribution arrangements to coordinate that work with the new work on risk and intangibles.

De Ruiter said that the OECD still needs to prepare transfer pricing guidance on profit splits and financial transactions, and work must be done to consolidate the changes made into the transfer pricing guidelines.

She also said that the OECD plans more guidance on the implementation of hard-to-value intangibles and low-valuing-adding services, as well as very important work mandated by the G20 to create transfer pricing tools for low-income countries. The next step for country-by-country reporting is to prepare an XML Schema and a related user guide, she said.

De Ruiter pointed out that changes were made in the final BEPS report on permanent establishments “at the very last stages” of the project. She said the OECD wants “to make sure the commentary is as good as possible, so there may also be refinements in the commentary that we will prepare in 2016 that will be included.”

She also reiterated that the OECD intends to prepare guidance on the attribution of profits to permanent establishments, to be finalized by the end of 2016. The intention is for the work to be included with the work on the multilateral instrument.

Further, de Ruiter said that follow-up work is still needed on action 6 concerning combating treaty abuse. She said that final decisions on the limitation on benefits standard had to be delayed pending the finalization of the new US model tax treaty, and that work on treaty issues associated with non-CIVs is incomplete.

Interest deductions, harmful tax practices

The final report on interest deduction limits under action 4 of the BEPS plan recommends that countries adopt a fixed ratio rule based on a benchmark net interest/EBITDA ratio between 10 and 30 percent Achim Pross, OECD Head of International Cooperation and Tax Administration said. At their option, countries can supplement the fixed ratio rule with a group ratio test, which would allow some entities to deduct greater interest expense based on the situation of its worldwide group.

The report further recommends a number of targeted rules, including rules on funding tax exempt income, Pross noted.

Pross said the OECD intends to prepare more detailed guidance on the design of the group ratio, as well as specific work for the banking and insurance sectors. This will be complete by the end of 2016, he said.

Pross noted that the final report under action 5, dealing with harmful tax practices, adopts a new definition of qualifying IP assets, which includes a broad definition of patents, copyrighted software, and similar IP assets that meet specific conditions.

He said the final report provides for compulsory exchange of tax rulings only for specific categories of rulings, namely, unilateral advance pricing agreements, permanent establishment rulings, related party conduit rulings, rulings related to preferential regimes, and rulings giving a unilateral downward adjustment.

Implementation

Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration said that in addition to providing more technical work, the OECD must now begin focusing on the effective implementation of the BEPS output. 

She said the OECD is planning to monitor all aspects of the project to make certain that the work is effective.

The intention is to develop an inclusive process, bringing in all interested parties to examine implementation and monitoring. “We can’t just put out these complex rules and leave countries on their own,” she said.

Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.

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