The outlook for BEPS in 2015
National tax laws are struggling to keep pace with the rise of the digital economy and the progress of multinational companies. These factors leave gaps that are susceptible to misuse and lead to cases of double non-taxation, which undermine the integrity and fairness of tax systems around the world. The Base Erosion and Profit Shifting (“BEPS”) Project seeks to address this problem through measures that focus on three core principles — coherence, substance and transparency — and will result in fundamental changes in international tax standards.
In previous weeks’ columns, we discussed the recommendations in the seven BEPS action plan reports delivered in September 2014 consisting of: addressing the challenges of the digital economy (Action 1); neutralizing the effects of hybrid mismatch arrangements (Action 2); countering harmful tax practices (Action 5); preventing treaty abuse (Action 6); assuring transfer pricing of intangibles (Action 8); reexamining transfer pricing documentation and a country-by-country reporting template (Action 13); and developing a multilateral instrument to modify bilateral tax treaties (Action 15). The work performed with regard to these action plans is unfinished, with a number of issues being carried over for continued work in 2015. In fact, only two of the reports are final: Action 1 on the digital economy and Action 15 on the development of a multilateral instrument.
By September 2015, it is expected that the work on the remaining action plans will be completed. The 2015 deliverables relate to strengthening controlled foreign corporation (“CFC”) rules (Action 3); limiting base erosion via interest deductions and other financial payments (Action 4); preventing the artificial avoidance of permanent establishment (“PE”) status (Action 7); assuring that transfer pricing outcomes are in line with value creation (Actions 8-10); establishing methodologies to collect and analyze data on BEPS and the actions to address it (Action 11); requiring taxpayers to disclose their aggressive tax planning arrangements (Action 12); and improving dispute resolution mechanisms (Action 14).
These BEPS measures, together with the 2014 deliverables and their follow-up work, will equip countries with the necessary tools to ensure that profits are taxed where the economic activities generating them are performed and where value is created and will simultaneously give businesses greater certainty and predictability in the application of international tax rules.
The BEPS Project has caused ripples of change around the world, with many countries already undertaking unilateral tax reform activities ahead of the final recommendations from the Organization for Economic Cooperation and Development (“OECD”). However, it must be noted that these early and uncoordinated actions, although consistent with the direction of the BEPS Project, threaten the coherence of the overall project, and may create uncertainty for businesses, difficulty in gaining consensus on major issues and inconsistency in the implementation of the proposed measures.
EY’s publication, The Outlook for Global Tax Policy in 2015, provides valuable insights into the overall direction of tax policies around the world for the year ahead, and how quickly this policy mix is changing due to the BEPS initiatives.
As policy makers anticipate further BEPS developments in 2015, the trend towards taxpayer scrutiny and transparency continues to accelerate with automatic, spontaneous and on-request exchange of information, country-by-country reporting, as well as transfer pricing master and local files submissions, which are set to be implemented by 2017. Other BEPS-related issues such as hybrid mismatches, CFC rules, interest deductibility, transfer pricing, and thin capitalization are also attracting growing interest from policy makers. This attention is likely to heighten in 2015 as some of the more complex and controversial elements of the BEPS Project reach fruition.
Addressing BEPS is critical for most economies and must be done in a timely manner. The ultimate goal is to have final reports on all 15 action points (not just recommendations) and implementation guidance by the third quarter of 2015. The real success of the BEPS Project depends heavily on the adoption of a comprehensive, holistic and concrete set of rules that the majority of, if not all, jurisdictions will agree upon and implement, to end double non-taxation and the artificial shifting of profits. But since many of the actions will require changes in national legislation, bilateral treaties, or the creation of a multilateral instrument, we anticipate that it will be challenging to gain international consensus and timely implementation on these measures.
Though ambitious in scope and pressed with tight deadlines, the BEPS initiative is confirmation that tax policies are shifting and will have far-reaching effects in the future. Significant work at the national level will be required to determine whether, when and how to implement the recommendations and changes. Companies and governments alike cannot simply sit back and wait for the final recommendations of the OECD to unfold. It is important now, more than ever, that we keep up to date with tax legislation and the tax policy environment in key jurisdictions, participate in tax policy development efforts, consider collaboration with industry or trade groups, and assess the impact of change on existing business models and tax-planning strategies. The BEPS Project is coming like a tidal wave, slowly but surely building up strength, and our stakeholders need to be ready when it strikes.