U.K., U.S. Differ on Approaches to Implement BEPS

The U.K. and the U.S. governments will adopt different approaches to implementing the OECD’s final package of measures to tackle base erosion and profit shifting, panelists at a London forum said.

The U.K. government considers an inclusive, multilateral instrument to upgrade bilateral tax treatments as the “best way” for countries to adopt the BEPS measures, Fergus Harradence, deputy director of corporate tax at HM Treasury, said Oct. 8 at a branch meeting of the International Fiscal Association in London to discuss BEPS and U.K. policy.

Action 15 of the Organization of Economic Cooperation and Developments’ final BEPS report, released Oct. 5 , is a “mandate for the development of a multilateral instrument on tax treaty measures to tackle BEPS” (193 TMIN, 10/6/15).

The U.K. is chairing the group that will be responsible for drafting the instrument, Harradence said.

Work on developing such a multilateral agreement to expedite the lengthy process of amending bilateral tax treaties began at the end of May, but Harradence said that given it will involve “quite a lot of drafting,” the process is “likely to continue until the end of 2016.”

U.S. View

Panelist Paul Oosterhuis, a partner at Washington-based law firm Skadden, Arps, Slate, Meagher & Flom LLP, said the U.S. government has no plans to implement BEPS measures through a multilateral treaty. In the run-up to the release of the OECD’s final BEPS package, “the U.S. agreed to participate in multilateral instrument discussions in order to be part of the discussion on mandatory binding arbitration,” he said.

Robert Stack, the Treasury Department’s deputy assistant secretary for international tax affairs, told Bloomberg BNA Oct. 2 that the U.S. viewed mandatory binding arbitration “as the optimal method for resolving disputes and improving tax administration” (192 TMIN, 10/5/15).

Stack was careful to point out that the decision to participate in the multilateral discussions was to advance U.S. interests over mandatory binding arbitration and “by no means foreshadows any decision about whether to eventually join in signing” a multilateral BEPS treaty.

Action 14 of the BEPS package is geared at making dispute resolution mechanisms in the context of cross-border tax treatment more effective. The U.S. is one of 20 countries that are committed to providing mandatory binding arbitration in their bilateral tax treaties under Action 14.

“The U.S. is very interested in the efforts to monitor harmful tax practices and practices related to dispute resolution,” Oosterhuis said.

Regarding Action 14, Harradence said that “we have found that not all countries are as willing to make use of” mandatory binding arbitration, but added there is potential to build on that, most likely using a “multi-track approach.”

Next Steps for U.K

Referring more widely to the overall BEPS package, Harradence said that the U.K Treasury has “not taken any final decisions” on what actions will be implemented next as that would depend on “developments on the multilateral instrument,” as well as “on OECD timings.”

Nick Houghton, HM Revenue & Customs’ deputy director for Business International, also a panelist at the meeting, said the U.K. tax authority had launched a technical consultation on Oct. 5 calling for public comment on the U.K.’s implementation of country-by country reporting.

The U.K. government introduced legislation in Section 122 of the Finance Act 2015 to enable the making of regulations to adopt country-by-country reporting, which forms part of BEPS Action 13, to revise the standards for transfer pricing documentation.

The U.K. plans to introduce country-by-country reporting for accounting periods on or after January 2016, according to the technical consultation document.

In relation to other aspects of the BEPS measures, Houghton said that while various commentators have observed some of the differences between participating members, this “missed the point of common interest” in areas that include hybrid mismatch arrangements (Action 2) and the recommendations on effective controlled foreign company rules (Action 3).

Despite the “different approaches,” he said there “are clear incentives” for the “ball to keep rolling” on the implementation of BEPS.

Next Steps for U.S

For its part, the U.S. is likely to look at introducing a form of diverted profits tax in 2017 or 2018, Oosterhuis said.

“It’s not that it’s on the lips of the Treasury Department in the next round of international tax reforms, but it will start to surface, mainly because of the need for revenue but also the need for balance,” he said.

“There is a real concern especially about Republicans, that even if we reform CFC” rules, domestic companies could be at a disadvantage against foreign multinationals based in the U.S., Oosterhuis said. The U.K. adopted the diverted profits tax—a 25 percent tax on multinational companies’ profits that are artificially diverted from the country—as part of its Finance Act 2015.