BEPS Actions 8-10 Most Important For Latin American, Caribbean States
The Inter-American Center of Tax Administration (CIAT) has released a new statement summarizing the feedback from Latin American and Caribbean countries from ongoing discussions on countering base erosion and profit shifting.
CIAT said it and a number of regional and international organizations have brought together policymakers from countries in the region to discuss BEPS on seven occasions since 2014, specifically to discuss policy responses to the OECD’s base erosion and profit shifting Action Plan.
The BEPS Action Plan covers 15 areas of international tax law that have been identified as enabling multinational tax avoidance. The organizations found that the countries attached much the same level of importance to all areas of the OECD’s BEPS work but said they had anticipated that its recommendations in the area of transfer pricing, under Actions 8 through 10, would be the most important. They considered the following areas as being less important: Action 2, on neutralizing hybrid mismatches, Action 3, on improving controlled foreign corporation (CFC) rules, and Action 14, on making dispute resolution mechanisms more effective.
CIAT said this “is to be expected, as the region has been deploying efforts in the area of transfer pricing and thus, capitalized more knowledge. In cases where there is a lower level of priority, the reasons can be multiple. For example, lack of experience in the area, not understanding the risk, or as a result of the country’s specific economic context.”
Since 2014, when the territories’ opinions on BEPS policy priorities were gauged, the countries have been focusing in particular on introducing the three-tiered regime for transfer pricing documentation set out in Action 13 and making changes to their transfer pricing regimes based on the recommendations of the OECD in Actions 8 through 10 and subsequently updates to its transfer pricing guidelines. The OECD’s recommendations on preventing the avoidance of permanent establishment status is also seen as a high priority, CIAT said.
On transfer pricing, countries are focusing their resources on closing BEPS risks with respect to low value-added services, reclassification of operations, reporting of cost and expense distribution agreements, advance pricing agreements, treatment of intangibles, use of the profit split method, and the taxation of multinational groups engaged in the extractive sector.
Territories are also said to be keen to make enhancements to their regimes to tackle the tax challenges of the digital economy, covered by Action 1, and to tackle harmful tax practices (Action 5), with efforts focused on taxing economic activities based on substance, and preventing tax treaty shopping (dealt with under Actions 6 and 15).
Only the tax authorities of more advanced nations are interested in Action 2 policy changes to tackle hybrid mismatch outcomes. Such mismatches can result in either double deductions for the same expense, or deductions for an expense without the corresponding receipt being fully taxed. Hybrid mismatch outcomes can arise from hybrid financial instruments (both equity and debt) and hybrid entities, and from arrangements involving permanent establishments. They can also arise from hybrid transfers and dual resident companies. More advanced territories are likewise more concerned with measures to limit base erosion involving interest deductions (Action 4).
Looking ahead, the countries have reportedly expressed the need for guidelines that better cater to the specific needs of the region, particularly with more in-depth guidance on the use of the so-called “sixth method” for assessing international transactions involving commodities and the prevalent use by multinationals of derivative financial instruments.
They have also emphasized the need to analyze how multinationals typically structure their affairs tax efficiently in different economic sectors – particularly in the mining and natural resources, agriculture, financial services, and commodities sectors.
Finally they emphasized the need for an improved framework for the exchange of information and expertise, specifically to facilitate the exchange of best practices, documents, and to achieve consensus on policy approaches and consider regional responses to BEPS matters in global talks.