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BEPS: Implementing the OECD’s recommendations

ON MONDAY the OECD published their much anticipated ‘final’ reports on BEPS. Since the publication of the Action Plan back in 2013, there has been much speculation as to whether its ambitious timelines and objectives would be met. BEPS carries the challenge of significantly updating the landscape of international tax on a scale not seen before.

The public, the media and politicians have been demanding change for some time. Multinationals were generally perceived as being engaged in aggressive tax planning. Billions of revenues were being earned, yet a ‘fair share’ of tax was not churning in the governments’ till.

Business models have developed to meet the demands of the digital age and globalisation is increasingly the new norm. International tax rules, as they were, quite simply could not keep up with the pace of change of the commercial world.
So, where have we got to? Let’s take a step back two years and remind ourselves of the objectives of BEPS. A 15 point Action Plan was developed by the OECD categorised into three pillars as follows:

• Coherence in domestic rules which impact cross border activity;
• Focusing on substance requirements ; and
• Improving transparency and certainty.

Most would agree that these pillars are appropriately solid and just what the international world of tax has been crying out for. Success of implementation and the view that a significant compliance and resource burden will be placed on multinational enterprises (MNEs) has, however, been a major concern of the taxpayer.

What have we learnt from the final reports?

The OECD recognises implementation is the key to moving BEPS forward. Throughout the consultation period, the complexities and challenges of implementation became clear. We have seen 30 unilateral measures implemented by 19 countries, perhaps reflecting the level of sophistication of certain tax regimes and willingness to support some of the BEPS initiatives. However, this also highlights the potential for countries to pick and choose which recommendations they will adopt, thereby creating uncertainty for MNEs.

This uncertainty goes against one of the very pillars on which BEPS is built: improving transparency and certainty.

As indicated above, the OECD is not hiding behind implementation concerns. The OECD has indicated that shortly after the delivery of the BEPS measures to the G20 Leaders in Antalya in mid-November, “the focus will shift to designing and putting in place an inclusive framework for monitoring BEPS and supporting implementation of the measures, with all interested countries and jurisdictions invited to participate on an equal footing.”

So what do the recommendations tell us?

1. There will be renewed emphasis on the position that profits of an MNE follow where the activities associated with the MNE are carried out and where value is created. The impact of this is that it is likely that MNEs will bear a greater tax burden.

2. Intangibles remain a key focus; moving away from the idea that legal ownership in itself attracts profits is a notion of the past. To attract the profits associated with the relevant intangibles, consideration must be given to where the intangible is developed, enhanced, maintained, protected and exploited.

3. Risk is a main focus, specifically in relation to contractual risk. The taxpayer must be able to demonstrate that they exert control over managing risk, and importantly, have the financial capacity to meet the risk in order to be entitled to the return associated with a transaction.

4. ‘Capital-rich’ entities with little or no economic activities are not entitled to excess profits.

5. Recommended changes to the long standing definition of a Permanent Establishment have been put forward.

6. Action Four, with respect to interest deduction, could potentially impact effective tax rates (this will, of course, vary by jurisdiction and by industry). Work is ongoing with this action and should be completed in 2017.

7. Almost 90 countries are collaborating to develop a multilateral instrument to help fast track the incorporation of measures into existing bilateral treaties. This instrument will be available for signature in 2016.

Where do we go from here?

The OECD has estimated “conservatively” that there is $100bn to $240bn (£65.4bn to £157bn) of lost revenue from BEPS – or between 4% to 10% of global income tax revenues). A few outstanding matters that need to be addressed remain in some of the reports.

The OECD has undertaken a commendable project and rightly acknowledges that more work is necessary to achieve the objectives of the three pillars. It is now time for businesses, and indeed individual tax authorities, to take a deep breath and consider the reports’ implications. It is only then we will see how united we are in achieving an international tax system for the modern world.

Tom McFarlane is a managing director at Alvarez & Marsal Taxand

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