Can the body of international tax rules, which have developed in such an unruly and illogical fashion since the early 20th century, really be transformed into a coherent whole within the space of a few years? The Organisation of Economic Development and Cooperation (“OECD”) seems to think so. Recent developments however, suggest that the OECD may have bitten off more than it can chew with its BEPS project.
What Is BEPS?
BEPS, or base erosion and profit shifting, refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits from high-tax countries to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.
The Birth Of The BEPS Project
BEPS should by now be an all-too-familiar acronym to those who follow international tax developments. But in fact it has a relatively short history; its origins can be traced back to the G20 Summit in Mexico in November 2012 when the British and German Governments issued a joint statement calling for "concerted international cooperation to strengthen international standards for corporate tax regimes."
In response, the OECD published its report, Addressing Base Erosion and Profit Shifting, in February 2013. The report notes that in an increasingly interconnected world, national tax laws have not always kept pace with global corporations, fluid movement of capital and the rise of the digital economy, leaving gaps that can be exploited to generate double non-taxation. This, the report said, undermines the fairness and integrity of tax systems.
The BEPS Action Plan & The First Deliverables
In July 2013, the much anticipated BEPS Action Plan was published by the OECD. This lists 15 specific actions designed to give governments the domestic and international mechanisms to prevent corporations from paying little or no taxes.
By September 2014, seven "deliverables", or recommendations, were released, out of a total of 15 that will be finalised by December 2015.
The Dangers Of Unilateralism
The OECD Secretary-General, Ángel Gurría, said that the recommendations constitute the building blocks for an internationally coordinated response to corporate tax planning strategies. However, there is evidence that countries are already acting on their own initiative to address BEPS, undermining the project's central tenet: multilateralism.
A notable example was the announcement by the UK Government in December 2014 of the proposed "diverted profit tax," designed to deter companies from "artificially" diverting profits from the UK.
In other examples, Ireland is changing corporate residency rules in response to criticism about so-called "double Irish" tax planning arrangements, while France has issued guidance on new interest deduction rules. Action has also been approved at EU level to tackle the use of hybrid loan arrangements by corporate groups.
Transfer pricing is another area where individual countries seem to be taking matters into their own hands. A 2014 survey by EY of 400 senior tax executives across 29 countries found that the vast majority of companies headquartered in the US expected increased scrutiny of their transfer pricing practices in the short-term as a result of the BEPS plan.
The results of a separate BEPS survey, published by EY in February 2015, reveal national policy shifts on BEPS matters, with 40% of respondents to a new survey noting "significant" tax reform activity from governments.
A major factor that could mitigate against the creation of a level playing field in international corporate taxation is the lack of administrative capacity in developing countries to introduce the wide-ranging changes expected to be recommended by the OECD. It is a potential shortcoming that the OECD is acutely aware of, but it remains to be seen whether the technical assistance packages have the desired effect.
The United States
Another concern is the attitude of the United States to the BEPS project. While the Obama administration supports the BEPS work in principle, Republicans, which control Congress, are hostile to new tax measures which could raise the tax burden and impinge on US tax sovereignty. As senior Senate Republican Orrin Hatch observed recently, BEPS "is now being used as a way for other countries to simply increase taxes on American taxpayers."
Overall, multinational businesses have welcomed efforts to bring greater certainty and clarity to the international tax system. However, some are growing concerned about how the project is shaping up. The International Chamber of Commerce (“ICC”) for instance has affirmed its "active engagement" in the BEPS project. However, the ICC warned that it will be "crucial" for both OECD member states and non-members to reach agreement on the BEPS project's outcomes to avoid inconsistencies and conflicts between the national tax regimes and to reduce double taxation.
Whether or not the BEPS project succeeds in substantially reducing opportunities for base erosion and profit shifting in the international tax system remains to be seen. However, it is clear that unprecedented change is going to take place to the international tax landscape in the months and years ahead, and that multinational businesses will need to be alert to these developments.