BASE erosion and profit shifting (BEPS) pertains to tax-planning strategies that exploit gaps and mismatches in tax rules in different jurisdictions to make profits artificially “disappear” for tax purposes or to move profits to locations where there is little or no real activity, as well as where the taxes are low, resulting in little or no overall corporate tax being paid. BEPS is a form of “tax avoidance”, in which multinational enterprises (MNEs) take advantage of gaps between different domestic tax systems in order to achieve double nontaxation, or an income not being taxed anywhere.
The Organization for Economic Cooperation and Development (OECD) said that, through BEPS, enterprises that operate cross-border may acquire a competitive advantage over those that operate domestically. It may also lead to the inefficient allocation of resources by distorting investment decisions toward activities that have lower pretax rates of return, but higher after-tax returns. Finally, it is an issue of fairness: when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.
The OECD does not see BEPS as a problem created by one or more specific companies. Apart from some cases of egregious abuses, the issue lies with the domestic tax rules themselves. Business cannot be faulted for using the rules that governments have put in place. It is, therefore, the governments’ responsibility to revise or introduce new rules.
Thus, in 2013, OECD and the Group of 20 (G-20) countries, working together on an equal footing to address BEPS, adopted a 15-point Action Plan, namely:
- Action 1: Address the tax
challenges of the digital economy;
- Action 2: Neutralize the effects of hybrid mismatch arrangements;
- Action 3: Strengthen controlled foreign corporation rules;
- Action 4: Limit base erosion via interest deductions and other financial payments;
- Action 5: Counter harmful tax practices more effectively, taking transparency and substance into account;
- Action 6: Prevent treaty abuse;
- Action 7: Prevent the artificial avoidance of PE status;
- Action 8: Transfer-pricing issues in the key area of intangibles;
- Action 9: Assure that transfer-pricing outcomes are in line with value creation/risks and capital;
- Action 10: Assure that these same outcomes are in line with value creation/other high-risk transactions;
- Action 11: Establish methodologies to collect and analyze data on BEPS and the actions to address it;
- Action 12: Require taxpayers to disclose their aggressive tax-planning arrangements;
- Action 13: Transfer-pricing documentation and a template for country-by-country reporting;
- Action 14: Make dispute-resolution mechanisms more
- Action 15: Feasibility of developing a multilateral instrument.
On September 16 OECD issued its first set of BEPS deliverables. The 2014 BEPS deliverables consist of two final reports (Actions 1 and 15); one interim report (Action 5); and four reports containing draft recommendations (Actions 2, 6, 8 and 13), which are agreed upon and will be finalized with further work on implementation and interaction with the 2015 deliverables.
Of these deliverables, it is the report on Action 13, or the “transfer-pricing documentation and a template for country-by-country reporting,” that caused the biggest uproar among practitioners. The guidance on transfer-pricing documentation requires MNEs to maintain a
“master file” through the country-by-country reporting, which gives tax administrations high-level global information regarding their global business operations and transfer-pricing policies, and that more transactional transfer-pricing documentation be provided in a “local file” in each country.
The country-by-country report requires MNEs to report annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNEs to report their total employment, capital, retained earnings and tangible assets in each jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities that each entity engages in. Companies have the impression that country-by-country reporting appears to provide greater information that may impel fiscal authorities and other organization to pursue some “fishing trips/expedition”.
Once finalized, BEPS can be implemented through bilateral tax treaties or in a multilateral agreement. Some may find its way as an amendment to domestic laws.
Although the Philippines is not a member of the G-20/OECD, there is the likelihood that the BEPS measures may be adopted here. Recent manifestations of the country’s compliance with OECD rules are becoming clear. Recently, the country became the 68th signatory to the OECD Convention on Mutual Administrative Assistance in Tax Matters. Likewise, the Bureau of Internal Revenue adopted the OECD’s transfer-pricing guidelines.
So, is BEPS something to be afraid of?
The author is a senior tax specialist of Du-Baladad and Associates Law Offices, a member-firm of the World Tax Services Alliance.
The article is for general information only, and is neither intended nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should, therefore, be supported by a professional study or advice. For comments or questions about the article, e-mail the author at firstname.lastname@example.org or call 403-2001, local 380.