Update on OECD BEPS tax plans
On 16 September the OECD released its first recommendations for a coordinated international approach to combat tax avoidance by multinational enterprises, under the OECD/G20 BEPS project. The project is designed to create a single set of international tax rules to end the erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax. The recommendations constitute the building blocks for an internationally-agreed and coordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment.
The announcement comes just 14 months since the 19 July 2013 release by the OECD of the "action plan" for multilateral cooperation to the G20 finance ministers at their meeting in Moscow. This had launched a global collaborative effort to modernize the international tax system. Since then OECD working groups have been drafting plans, the first of which were released at the most recent OECD meeting. The remarkably swift action and very high level of consensus among G20 and OECD countries has been made possible by growing calls all over the world to close loopholes that large multinational corporations operating in multiple jurisdictions have used for years to minimize their taxes.
The OECD action plan describes 15 proposed actions, identifies expected outputs and establishes the anticipated timeframe for each output. The first part of the action plan is aimed at addressing the challenges of the digital economy, where much online commercial activity is currently not taxed because of legal ways that companies are structured across multiple jurisdictions and revenue and income accounted for in the most advantageous tax centres. Action two is aimed at neutralising the effect of hybrid corporate structures to prevent the exemption of payments that are deductible in other countries and deny deductions that are not taxable or have been deductible in other countries. Action three is aimed at enhancing controlled foreign operating company (CFC) rules. Action four is aimed at limiting base erosion via interest deductions and other financial payments. Action five is aimed at countering harmful tax practices more effectively, taking into account transparency and substance while action six is aimed at preventing treaty abuse. Action eight deals with transfer pricing, especially related to intangibles. For example, it will provide a broad and clear definition of intangibles and aim to ensure profits associated with intangibles are allocated in accordance with value creation. Actions nine and 13 deal with transfer pricing (TP) to counter the inappropriate transfer of risks or allocation of excessive capital among group companies.
Three reports were released at the 16 September meeting: two finalized reports on the Digital Economy (Action one) and the Feasibility of a Multilateral Instrument (Action 15). In addition an interim report on Harmful Tax Competition (Action five) was also released. Four others are still in draft form so that outstanding technical issues and the potential impact of the 2015 deliverables can be incorporated before finalizing: Actions two, six, eight and 13. Besides finalizing the drafts, there are still a number of other issues still to be worked out, such as how to safeguard confidentiality.
The changes will have the most impact on so-called tax havens or countries that have attracted business primarily on the grounds of being low tax jurisdictions.
While the OECD, as an association of nation states, is not empowered to make regulations, all parties to the BEPS are expected to change their regulations according to the recommendations. The EU, for example, is especially supportive of the project. Recommendations from the OECD, once adopted, will find their way into EU legislation. EU Directives will be updated with adopted OECD recommendations and tax treaties between EU member states will include adopted OECD recommendations. The EU has already started taking action. For example, on 8 July this year, the European Commission announced that the Economic and Financial Affairs Council formally adopted an amendment to the EU Parent-Subsidiary Directive that will prevent the double non-taxation of dividends distributed within corporate groups derived from hybrid loan arrangements.
In a post BEPS world, it will no longer be possible, for example, to set up paper companies or similar structures in tax friendly jurisdictions, hold token board meetings there or similar actions to give the appearance of operating there. Post BEPS, companies will have to demonstrate that they actually do business there.
It is inevitable that more taxes will be collected and all companies will be affected by the changes, especially those that have set up paper companies or instruments specifically to reduce taxes. Companies would do well, therefore to prepare well in advance to ensure compliance. Companies operating in multiple jurisdictions should also make sure that their understanding and reporting of their accounting practices are consistent with how they are understood by their colleagues in other jurisdictions, especially their headquarters.
Taiwanese authorities have been following the OECD developments closely. The Ministry of Finance has officially initiated a "BEPS Action Plan Project", consisting of personnel from the Taxation Administration, Department of International Fiscal Affairs and each national taxation bureau. Task forces have been set up in various agencies to study the 15 action plans to determine if regulatory changes will be required. It is not yet clear exactly how Taiwanese tax authorities will respond but they are expected to adopt most of the OECD recommendations, although it is possible there may be exceptions if actions are deemed to be not in Taiwan's interest.