13
OECD Recommendations on BEPS Lexis ® PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS) action plan Lexis ® PSL TAX

OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

  • Upload
    others

  • View
    19

  • Download
    0

Embed Size (px)

Citation preview

Page 1: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

OECD Recommendations on BEPSLexis®PSL Tax Analysis

Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS) action plan

Lexis®PSL TAX

Page 2: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Contents

1 Introduction

1 Overview Pascal Saint-Amans, OECD Centre for Tax Policy and Administration

2 The digital economy Francesco Guelfi and Giuseppe Franch, Allen & Overy

3 Hybrid mismatch arrangements Barbara Angus, EY

4 Countering harmful tax practices Francesco Guelfi and Giuseppe Franch, Allen & Overy

6 Tax treaty abuse Godfried Kinnegim, Allen & Overy

7 Intangibles Paul Flignor, DLA Piper LLC

8 Country-by-country reporting Richard Murphy, Tax Research UK

9 Feasibility of developing a multilateral instrument Dr Asmus Mihm, Allen & Overy

Please click on a title below to view to the content

Page 3: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 1

IntroductionOn 16 September 2014, the Organisation for Economic Co-operation and Development (OECD) issued its first recommendations and reports addressing seven of the 15 key elements of its co-ordinated Action Plan on Base Erosion and Profit Shifting (BEPS), originally published in July 2013. This first group of measures is subject to change once the next set, the 2015 deliverables, is agreed.

The first recommendations focus on:

• hybrid mismatches (Action 2)

• treaty shopping and other forms of treaty abuse (Action 6)

• transfer pricing rules for intangibles (Action 8), and

• the introduction of country-by-country reporting for multinational enterprises (Action 13)

Reports have also been issued to cover progress on:

• the challenges of the digital economy (Action 1)

• countering harmful tax practices (involving intellectual property and tax rulings) (Action 5), and

• the feasibility of implementing BEPS measures through a multilateral instrument (Action 15)

Following the publication of these recommendation and reports, forming part of what is perhaps the most important and fundamental evolution of tax law in a generation, the Lexis®PSL Tax News Analysis team obtained independent, expert, opinion and reaction on each of the seven 2014 deliverables and the OECD/G20 BEPS Project in general. In addition, Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, kindly agreed to provide an overview of the current status of the Project and of what is coming next in 2015. This document collates the eight pieces of comment to provide a unique glimpse of the near-future of international taxation.

The following commentary items originally appeared in LexisPSL Tax, which you can find information on at the end of this document.

Interviews conducted by Anne Bruce. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Keep up to date with the latest Corporate Tax news from our LexisPSL Tax team @LexisUK_Tax. You can also get the broader legal and tax news @LexisUK_News.

OverviewPascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, gives an overview of the OECD/G20 BEPS Project.

How does this fit into the broader BEPS strategy?The 2014 deliverables are the first seven outputs of the OECD/G20 BEPS Project, drawn from the 15-point Action Plan published in July 2013.The remaining deliverables are scheduled to be published in September and December 2015.

Given the need for comprehensive and coherent solutions across the anti-BEPS measures, the 2014 measures, while agreed, are not yet formally finalised as they may be impacted by some of the decisions taken with respect to the 2015 deliverables with which they interact. However, the 2014 deliverables already reflect a consensus on a number of solutions to put an end to BEPS.

What aspects have changed since plans initially put forward?The 2014 deliverables are in line with the original BEPS Action Plan. Notwithstanding the ambitious nature of the project, the 44 OECD members and BEPS associates have reached agreement on the first stage of this challenging work, through a consensus approach.

Page 4: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 2

Has the OECD included any surprises?The BEPS Project is about developing measures that will ensure that the international tax system adequately addresses double non-taxation as well as preventing double-taxation, taking into account modern business practices and the global economy of the 21st century. For many, the real surprise is that there is agreement by all countries involved, something which many observers predicted would not happen. Those who have followed our webcasts, the release of discussion drafts and the public consultation process, will have been able to chart the evolution of this work, and understand the considerations which have fed into the 2014 deliverables. In that regard, there are no surprises.

What’s next?The 2014 deliverables look at seven of the 15 areas outlined in the BEPS Action Plan, and thus are a mid-way point in the two-year BEPS Project. There is still a significant amount of work to be done, both to develop the 2015 deliverables and to integrate them with the work undertaken so far. In addition, with more than 80 developing countries already engaged in the first year of the BEPS Project, the next phase will see a more structured dialogue with developing countries put in place to ensure that they are appropriately supported in addressing the priority BEPS issues which they have identified. Looking further ahead, efforts to ensure a coherent approach to implementation to the BEPS measures will be important, in order to maintain the consistent approach on which OECD and G20 members have agreed.

See also, the Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project (OECD 2014) which provides an overview of the seven BEPS reports delivered on 16 September 2014

The digital economyFrancesco Guelfi, partner, and Giuseppe Franch, senior associate at Allen & Overy in Milan, look at the OECD’s recommendations to address the tax challenges posed by the digital economy.

What are the origins of this particular Deliverable?The OECD notes that the digital economy is exacerbating the risk of BEPS. In a context where tax rules have been created having in mind the ‘traditional economy’, the features of the digital economy can allow for tax planning that raises the prospect of BEPS. For instance, advances in technology have increased the ability to minimise taxation in a country that receives goods or services while avoiding being deemed a taxable presence. Another example is intangibles, which have growing importance and are very mobile, which may give leeway for aggressive planning. It is also of note that the digital economy has developed a number of new business models that are increasingly permeating the economy in general.

How does it fit into the broader BEPS strategy?Recent high-level tax investigations on multinationals show that the digital economy often allows aggressive tax planning, which ultimately enables taxpayers to divert profits to low-tax jurisdictions. In a nutshell, many of the key features of the digital economy—eg the mobility of intangibles, users and business functions—generate BEPS concerns in respect of both direct and indirect taxes. Therefore, addressing the impact of digital economy on BEPS practices is crucial to tackle BEPS effectively.

Have any aspects of this deliverable changed since it was initially put forward?This deliverable has allowed a wider and more comprehensive picture of the tax challenges of the digital economy to be drawn. An important outcome is the realisation that digital economy does not only represent a sector per se (eg e-commerce) but permeates the economy in general more and more. As a consequence, notably observed during the presentation of the deliverables, it is not possible to deal with tax issues by ring-fencing the digital economy from the rest of the economy.

Has the OECD included any surprises?Obtaining consensus on tackling certain issues, namely on potential options to address the tax challenges, represents a positive result, and one which was far from certain to be achieved last year. Obviously, concrete measures are now to be developed to fit the recommendations—it is likely that discussions in this regard will be lengthy.

Page 5: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 3

From a technical perspective, it is interesting that, apart from the establishment of a new basis for taxation centred on the concept of significant digital presence, the OECD is tackling the issue, among others ways, by proposing amendment to the exceptions to the general definition of permanent establishment under article 5(4) of the OECD Model Tax Convention. Accordingly, where activities were previously viewed as preparatory or auxiliary in nature, they may in fact actually be regarded as core activities with recourse to the new business models, thus resulting in the recognition of a permanent establishment.

How might this deliverable play out in practice?The report on BEPS Action 1, ‘Addressing the Tax Challenges of the Digital Economy’ represents a turnaround as regards facing the tax challenges of the digital economy. Fine-tuning on the options provided in the deliverable is necessary. It will then be the responsibility of national governments to implement any new provisions into domestic law.

In practice, the business models of e-commerce will be significantly affected and relevant figures in financial models might need to be reviewed. In this respect, where the business organisation was tax driven, multinationals might consider re-allocating certain functions and risks.

With regard to other businesses—such as search-engines, data collecting, apps—further developments are still expected, namely in respect of the options to address relevant tax challenges, which are illustrated in the report.

What’s next?Specific issues that relate to the digital economy will be dealt with by certain actions—those to tackle the artificial avoidance of profit erosion, transfer pricing and controlled foreign company rules are already in the pipeline. During this period, potential further options to address tax challenges are to be refined by the taskforce on digital economy—eg in relation to creating a profit erosion based on a significant digital presence, creating a nexus for a digital tax presence with recourse to a collection of data and introducing withholding tax on digital transactions. Aspects of VAT, and namely VAT collection in business-to-consumer transactions under certain circumstances, is another a topic to be dealt with by December 2015

Hybrid mismatch arrangementsBarbara Angus, EY’s leader of strategic international tax policy services, looks at the OECD’s position on hybrid mismatch arrangements.

What are the origins of this particular deliverable?The OECD’s focus on hybrids dates back to before the BEPS project. The OECD conducted an exercise involving the identification by interested member countries of examples of uses of hybrid mismatch arrangements and the assessment of the effectiveness of the countries’ response strategies. This work led to the OECD’s 2012 report ‘Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues’ (LNB News 05/03/2012 58). The draft recommendations included in the September 2014 Report on BEPS Action 2 reflect concepts discussed in that earlier report—including the basic ‘linking rule’ approach under which one country’s tax treatment of an arrangement is linked to the tax treatment provided in the other country.

How does it fit into the broader BEPS strategy?Action 2 on hybrid mismatch arrangements is one of four Actions that the OECD describes as aimed at ‘establishing international coherence of corporate income taxation’. The OECD’s focus is on perceived ‘gaps’ in how domestic tax laws Interact in their application to cross-border activity. The other three Actions in this focus area are:

• Action 3 on controlled foreign company rules

• Action 4 on limitations on interest deductibility, and

• Action 5 on harmful tax practices

Page 6: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 4

Have any aspects of this deliverable changed since it was initially put forward?The report released on Action 2 and hybrid mismatch arrangements reflects important refinements from the original discussion draft. The use of the ‘bottom up’ approach, that focuses on related party and structured transactions, and the modest liberalisation of the threshold for related party status both address matters on which the OECD received extensive (and consistent) comments from the business community. Moreover, there are several key areas where the OECD has indicated that more work is needed so further changes will likely be made in 2015.

How might this deliverable play out in practice?The OECD’s commitment to continue to work to address key issues affecting the financial services industry is a welcome development. More work is needed to ensure that the proposed rules do not interfere with the ability of financial institutions to meet their regulatory capital requirements. Similarly, rules are needed to ensure that repo and stock lending transactions in the ordinary course of business are not disrupted.

The proposed construct for the treatment of various types of hybrid arrangements reflected in the report remains extraordinarily complex. Moreover, these proposed rules would have to be meshed with each country’s existing tax rules and would require extensive coordination between or among countries. In addition, there will be interactions between the recommendations in this area and the work on other Actions—particularly Action 4 on deductibility of interest, which need to be taken into account.

Has the OECD included any surprises?The OECD had a robust consultation process with respect to the work on Action 2, seeking and receiving extensive input from business and other stakeholders. While the report is complex and there is much detail to consider and digest, the OECD was quite transparent about the direction of their thinking as the work in this area proceeded. Therefore, the changes from the discussion draft that are reflected in the report are not major surprises.

What’s next?As with most things, the devil is in the details—and here there will be many details, both big and small, that will need to be fleshed out in order to move the recommendations forward. The OECD has indicated an intention to develop more detailed guidance on implementation of the proposed approach. It is critically important that the business community continue to engage with policymakers in the OECD and countries as that work is undertaken.

Countering harmful tax practicesFrancesco Guelfi, partner, and Giuseppe Franch, senior associate at Allen & Overy in Milan, look at the OECD’s position on countering harmful tax practices.

What are the origins of this particular deliverable?This deliverable is an interim report on action 5 of the OECD BEPS Action Plan. The OECD’s work on harmful tax practices goes back to 1998, when the OECD published the report ‘Harmful Tax Competition: An Emerging Global Issue’. After more than 15 years, and a number of progress reports on this topic, the OECD, through the Forum on Harmful Tax Practices (FHTP) is seeking to revitalise the work by focusing on substantial activity for any preferential tax regime (namely, those relating to intangibles) and on improving transparency. The development of a strategy to expand participation to non-OECD members is also on the agenda.

How does it fit into the broader BEPS strategy?This deliverable deals with tax practices that traditionally represent a way to achieve profit-shifting from high-tax to low-tax countries. The preferential tax regimes relating to intangibles, in particular, came to be a central theme in recent tax investigations into multinationals which found themselves under the glare of the media spotlight. Further, the review and update of such preferential tax regimes, and the potential extension to non-OECD members (for example, to the BRIC economies), is paramount considering the globalisation and mobility of the activities involved. The renewed focus of this topic is therefore crucial in order to tackle BEPS effectively.

Page 7: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 5

Have any aspects of this deliverable changed since it was initially put forward?An important outcome of this deliverable is an appreciation of the importance of intellectual property (IP) as an intensive industry for growth and employment, and that countries are free to provide incentives for research and development (R&D)—provided they are granted according to the principles agreed by the FHTP.

Notably, R&D activities seem to be central in the so-called ‘nexus approach’ developed by the FHTP to check the substantial activity requirements in the context of intangibles. In brief, this approach would allow a regime to provide benefits to the extent that the tax payer has incurred R&D activities in relation to that IP. In other words, according to this approach, expenditures borne by taxpayer to develop the IP would act as a proxy for substantial activities, and would affect the portion of income raised from that IP that can benefit from the preferential regime.

Has the OECD included any surprises?Turning to the possible approach for checking the substantial requirements—it is of note that the FHTP did not focus further on the so-called transfer pricing approach, as many countries raised a number of concerns in this respect.

The transfer pricing approach would allow a regime to provide benefits to the amount of profit that is determined by looking at, among others things, the jurisdiction in which the taxpayer has located important functions—provided the taxpayer is the legal owner and user of the assets which give rise to the tax benefit and bears the relevant economic risks.

If this preliminary conclusion is confirmed in the final outcome of the FHTP’s work, multinationals might be required to factor into their business models an alignment of substance and economic activity with taxability of profits (in accordance with the proposals set out in this deliverable), which until now has been mainly a matter of transfer pricing.

How might this deliverable play out in practice?This document is still a work in progress and many aspects—including, in particular, an agreement in relation to the criteria to ascertain what constitutes ‘substantial activity’—are still to be finalised. Depending on these conclusions, however, multinationals may be required to reshape their businesses. Where the analysis of preferential regimes has been concluded, the outcome has led to clarity for businesses—for example, in relation to the Luxembourg regime concerning the ‘private asset management company’ and the ‘investment company in risk capital’ which have been qualified as ‘not harmful’ by the FHTP. The interest of business will now be focused on the outcome of the review of other existing intangible regimes, which include the UK Patent Box and Luxembourg IP regimes.

What’s next?The next steps are for the FHTP to finalise an agreement on an approach to substantial activity for IP regimes and to reach an agreement on how to apply these criteria to other, non IP, regimes.

With regard to transparency, the FHTP will continue to work on the application of the framework for compulsory spontaneous exchange on rulings to members’ preferential regimes, with a view to starting the exchange of information and reporting on this in 2015.

Finally, the development of a strategy to engage non-OECD members is expected in September 2015, while the possible revision or amendment of the existing criteria applied to preferential regimes is expected in December 2015.

Page 8: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 6

Tax treaty abuseGodfried Kinnegim, partner at Allen & Overy LLP, Amsterdam, looks at the OECD’s position on tax treaty abuse.

What are the origins of this particular deliverable?According to the OECD, tax treaty abuse, and specifically treaty shopping, is one of the most important tools used in tax planning resulting in BEPS. In that context, in its report on action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), the OECD has focused on three main areas to combat tax treaty abuse:

• development of model tax treaty provisions and domestic rules

• clarification that tax treaties should not cater for double non-taxation, and

• the provision of guidance on when and when not to enter into a tax treaty with a particular jurisdiction

How does it fit into the broader BEPS strategy?The BEPS strategy is, broadly, that profits should be taxed where real economic activities are carried out and value is actually added. It is evident that preventing tax treaty abuse fits this strategy like a glove. Tax treaty abuse may be considered present, for example, if cash flows are routed via a jurisdiction only because of its tax treaty network and thus without any other sound business reason. In such cases, no real economic activities takes place in the jurisdiction and no value is added there.

Have any aspects of this deliverable changed since it was initially put forward?No material aspects of the deliverable have changed since 2013. The OECD has, however, concluded that the adaptation of current tax treaties to cater for specific anti-abuse provisions (such as a general or specific limitation on benefits (LOB) provision) will require domestic legislative process and bilateral tax treaty negotiations. As such, the necessary amendments may not be implemented very soon. In addition, the OECD have further concluded that more work will be needed in respect of this particular deliverable—in particular, on specific LOB wording and on anti-abuse provisions regarding collective investment vehicles and other funds.

Has the OECD included any surprises?The OECD is not a legislative body and the BEPS reports make that evident. They only contain recommendations. The recommendations from the OECD on this deliverable are quite stringent, yet still only provide guidance without any obligations. In addition to a statement in the preamble of the tax treaty, indicating the spirit of the treaty and the LOB-provisions, a principal purpose test (PPT) has been proposed as part of the ‘three-pronged’ approach to countering tax treaty shopping. The recommendation of the OECD is that all jurisdictions will at least include the preamble and either the LOB-provisions or the PPT-provisions. Implementing all three would, in the OECD’s view, be best practice.

How might this deliverable play out in practice?Where LOB-provisions are linked to objective criteria—for example, origins of the shareholders’ base—the PPT-provisions are meant to catch those structures which may technically meet the LOB-test but should still be considered as abusive. Experience has taught us that LOB-provisions, if drafted properly, can work without distorting sound business structures. PTT-provisions are a source of uncertainty due to their softer nature. Adopting the PPT provisions will, most likely, result in more frequent consultation of local tax authorities in order to obtain clearance in advance for the tax position (if that is possible in the particular jurisdiction). In our view, more jurisdictions should start to cater for a preliminary consultation process if PPT-provisions are to be included in tax treaties and, indeed, on implementing enhanced bilateral dispute resolution provision. In the absence of such measures, tax litigation is likely to rise. Our expectation is that the anti-abuse provisions will mainly impact conduit arrangements.

What’s next?We can expect further tailoring of the suggested model tax treaty provisions (and the corresponding commentary) during 2015. In addition, on specific items, the OECD will provide more guidance—for example, on collective investment vehicles and other types of funds. An important question is whether the suggested LOB-provisions, which are quite similar to those applied by the US, and may be considered as US-driven, will survive a wider OECD-debate in their current stringent form. Finally, the anti-abuse provisions are typically ones which could be included in the proposed multilateral instrument (action 15) instead of in bilateral tax treaties or in domestic legislation.

Page 9: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 7

IntangiblesPaul Flignor of DLA Piper LLC (US) in Chicago looks at the OECD’s position on transfer pricing and intangibles.

What are the origins of this particular deliverable?The larger BEPS project is a series of 15 coordinated initiatives aimed at reducing perceived taxpayer ‘double non-taxation’, or the presence of corporate income that is untaxed by any country, that has led to political outcry in Europe, the US and emerging markets. The OECD BEPS project is a complicated and comprehensive initiative requiring input and agreement from 20 major global economies; a monumental effort. Two of the papers relate to transfer pricing:

• Action 8—Guidance on Transfer Pricing Aspects of Intangibles (the Intangibles Paper), and

• Action 13—Guidance on Transfer Pricing Documentation and Country-by-Country Reporting (CBCR)

This discussion will focus on the Intangibles Paper.

How does it fit into the broader BEPS strategy?Management, ownership, transfer and valuation of intangible assets are a critical component of many companies’ financial and tax policies. Tax authorities have raised concerns that companies are shifting ownership of intangible assets to low tax jurisdictions for less than arm’s length compensation. Intangible assets, by their nature, can be transferred and exploited seamlessly, and have high potential value, which can have a significant impact on the realization of taxable income among jurisdictions within a multinational enterprise. Many of the more high profile political actions against companies in the recent past, including Amazon and Starbucks in the UK and Apple and Caterpillar in the US, have at their core issues involving the transfer and valuation of intangible assets.

Have any aspects of this deliverable changed since it was initially put forward?This is the third OECD draft on this topic. The first draft was issued in September 2012 before the inauguration of the BEPS initiative and the second draft was issued in July 2013. The first draft established some strict positions on the key issues of:

• the definition of an intangible asset

• the determination of who owns a given intangible, and

• how to attribute returns and value to intangible assets—at times at odds with positions taken in other sections of the OECD Transfer Pricing Guidelines, especially Chapter IX on business restructurings

The succeeding two drafts have softened some of these positions, but a key point remains—if a legal entity is merely the legal title holder to an intangible asset and performs no functions to create or exploit the intangible asset directly, it will not earn an intangible return.

Has the OECD included any surprises?The OECD did a good job of setting expectations on the content of the final Intangibles Paper. The OECD:

• retained a loose definition of an intangible, including goodwill and going concern value

• upheld the arm’s length standard and the role of functions, assets and risks in determining the ownership and pricing of intangibles, and

• generally asserted positions more consistent with Chapter IX than those outlined in the first draft

The Intangibles Paper also endorsed the use of valuation methods, in particular the income method, to price unique intangibles for which there are no comparable transactions. The Intangibles Paper also endorsed the use of a modified ‘commensurate with income’ standard to enable use of actual income to test the validity of the ex-ante forecast of income. Lastly, the Intangibles Paper supported the use of contingency arrangements for valuing intangibles with a high degree of uncertain expected income. These last two positions are similar to the US transfer pricing regulations.

How might this deliverable play out in practice?The intangibles ideas are already currently playing out with many of the propositions in the Intangibles Paper being currently adopted in audit examinations.

The key implementation issues going forward are how, and how quickly, governments will adopt the principles in the Intangibles Paper into local law. The OECD guidelines are not binding on any member country and local laws will, of course, take precedence. Therefore, the timing and implementation of these principles by the OECD member countries and the

Page 10: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 8

broader G20 is critical. Historically, adoption by local countries has been slow, but the urgency behind the BEPS initiative may hasten legislative action to implement some or all of these principles.

What’s next?The CBCR, the Intangibles Paper and the other five ‘position’ papers are part one of the 15-part BEPS Action Plan. The remaining eight actions are scheduled to be delivered in September 2015. Given the interrelationships between these 15 actions, the OECD has decided to leave several large and critical sections of the Intangibles Paper in an interim draft form (helpfully shaded in the report document). These sections include the controversial ‘B’ section on ownership and pricing of intangible assets, treatment of risk, re-characterisation of transactions and hard to value intangibles. The draft nature of these sections reflects the necessary coordination of the transfer pricing aspect of BEPS with the remaining eight, open, actions.

Country-by-country reportingRichard Murphy, director of Tax Research UK, provides his response to, and opinion on, the recommendations on country-by-country reporting (CBCR).

What are the origins of this particular deliverable?CBCR has its origins in a proposal I wrote in January 2003. The intention of that proposal was to produce accounting data that could be used as a risk assessment tool to identify transfer-pricing risk in multinational corporations. It was adopted by the then new Tax Justice Network as a main campaign ask and has been taken up as a demand of tax justice campaigners in NGOs around the world since then. This may, fairly, be seen as the first ever technical tax tool to have originated in civil society.

How does it fit into the broader BEPS strategy?CBCR fits firmly into the BEPS agenda. In fact, without CBCR it is very hard to see how the outcomes of BEPS could be measured. The whole purpose of CBCR is to provide a mechanism to appraise whether and where base erosion and profit shifting might be taking place. It does that by looking at whether profit is recorded in the places where the likely drivers of profit—third party sales, employees, and assets—are located. In a couple of hours a tax authority will now be able to decide that a multinational group is trying to achieve that goal, or not. That also puts it at the heart of the BEPS cost and efficiency agenda.

Have any aspects of this deliverable changed since it was initially put forward?The deliverable that we have got here is remarkably like the one that I expected from the BEPS process although I would have ideally liked ‘sales by destination’ and ‘labour cost’ to be included as well. These fell by the wayside during development. So too did some OECD suggestions on naming key managers, their locations and lines of responsibility. I was always slightly surprised these were ever included in the process. Overall the outcome has a pleasingly predictable shape that means it may achieve what is expected of it.

Has the OECD included any surprises?There are some surprises in the OECD package. No compromise has been offered on the demand for materiality that most business representatives put forward in debate in Paris. There is good reason for that—it would, of course, have left out reporting of activities in many tax havens when these are precisely the focus of much of the concern for many tax authorities. In addition, two measures of capital—‘retained earnings plus equity’ and ‘tangible assets excluding cash’—survived into the final draft. I was surprised and pleased by that.

How might this deliverable play out in practice?Reports suggest that many tax authorities—including HMRC—are already jumping the gun on this issue and are asking for CBCR data in transfer pricing investigations. I am not surprised. I suspect that in due course many companies will want to offer up fully worked through CBCR data based on the principles of unitary tax apportionment (weighting the tax base to

Page 11: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 9

location based on a ratio of one third third-party sales, one third staff and one third tangible assets and comparing this with reported profits in accounts) because there will be no better way of revealing the low risk status they want to obtain from tax authorities on transfer pricing issues. This could deliver a big win for all sides on this issue.

What’s next?There are four obvious ways forward. One is that unitary taxation creeps up the OECD agenda. I think that is likely.

Second, I think that groups who can demonstrate low risk using CBCR data may get transfer-pricing documentation concessions.

Third, I think many tax authorities will find reduced base erosion and profit shifting as they use this tool. The fact is that when something is measured and disclosed behaviour always changes. That’s the key behavioural object of this tool.

Finally, the demand for this data to be published on public record will become relentless. The objection that it would be too costly to produce has been shattered for good by this OECD demand and when that happens there will be massive follow on wins for civil society, corporate governance and accountability.

This has been a good day’s work by the OECD.

Richard Murphy was a founder of the Tax Justice Network and is often credited as being the creator of CBCR. Mr Murphy’s blog can be read here.

Feasibility of developing a multilateral instrumentDr Asmus Mihm, partner at Allen & Overy in Frankfurt, Germany looks at the recommendations on the feasibility of developing a multilateral instrument on BEPS.

What are the origins of this particular deliverable?Several of the substantive actions of the BEPS project are likely to require the amendment of bilateral double taxation treaties. In total, there are more than 3,000 bilateral tax treaties that would need to be amended in order to give effect to the treaty relevant measures of the BEPS project. Based on past experience it would take decades to amend such a number of tax treaties and hence the implementation of the substantive actions of the BEPS project on a comprehensive basis would be significantly delayed. In order to address this problem the OECD/G20 call for the development of a multilateral instrument that allows a more expedient implementation of the treaty relevant actions coming out of the BEPS project.

How does it fit into the broader BEPS strategy?Obviously it is key that the tax law and treaty changes agreed within the scope of the BEPS project are implemented quickly in order to respond to the undesired effects of the current tax systems. The proposed multilateral instrument will hence be the common carrier for the entire BEPS project. The multilateral instrument is designed as a multipartite agreement that will not technically amend the bilateral treaties but modify them—ie the multilateral instrument will supersede relevant clauses of bilateral tax treaties. To address the particular tax situation of each participating country it is proposed for the multilateral instrument to contain certain opt-ins, opt-outs and alternative provisions.

Have any aspects of this deliverable changed since it was initially put forward?The task of Action 15, as defined in the original OECD Action Plan of 2013, was to determine the feasibility of a multilateral instrument for an expedient implementation of the other BEPS actions. The OECD report, Developing a Multilateral Instrument to Modify Bilateral Tax Treaties now confirms the feasibility of such an instrument and shows the way to its introduction also offering views on the best technical manner and the required room for deviations to allow ensure broadest participation.

Page 12: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 10

Has the OECD included any surprises?It is not quite unexpected that the OECD finds it feasible to implement the substantive BEPS actions relevant to tax treaties by way of a multilateral instrument given that this form of agreement has already been used in other areas of international public law. The annex to the OECD report includes various examples in this respect. So no real surprises.

How might this deliverable play out in practice?The more challenging part will be the phrasing of the concrete provisions of the multilateral instrument while ensuring broad participation and coverage of all treaty-relevant BEPS actions. In particular, if there were too many options or alternatives in the multilateral instrument to allow many countries to participate the common implementation of the BEPS actions may become difficult. Hence, the more difficult part—ie negotiating of and agreeing on the multilateral instrument—still lies ahead.

What’s next?The OECD report on Action 15 recommends the convening of an international conference for the development of the multilateral instrument in early 2015. The substantive provisions of the multilateral instrument can only be agreed once the substantive BEPS Actions 1 to 14 have been agreed and the other reports have been finalised. The reports for certain of the substantive actions that likely require the amendment of tax treaties (eg definition of permanent establishment, transfer pricing and dispute resolution) are only due in September 2015. Against this time frame it seems ambitious that the international conference should finalise a broad and effective multilateral instrument within two years—ie by early 2017.

Page 13: OECD Recommendations on BEPS LexisPSL Tax …...OECD Recommendations on BEPS Lexis ®PSL Tax Analysis Commentary on the OECD recommendations on Base Erosion and Profit Sharing (BEPS)

Back to top

OECD Recommendations on BEPS | LexisPSL Tax Analysis Get a free trial of LexisPSL Tax at lexisnexis.co.uk/beps/trial 11

LexisPSL Tax

The best answer, every timeClear, no-nonsence practice notes take you through what you need to know - with direct links straight to the right part of the trusted tax bibles: Tolley’s Yellow and Orange Tax Handbooks, Simon’s Tax Cases and HMRC’s Manuals.

And when you need to delve deeper, direct links to trusted authority, including Simon’s Taxes, Sergeant and Sims on Stamp Taxes, De Voil Indirect Taxes, Tolley’s Tax Annuals, plus articles from Tax Journal and Taxation, in Lexis®Library.

Benefits• Stay on top of the latest developments and find the

answers you need fast.

• Our succinct practice notes and layered approach give you more control over accessing the level of information you need.

• LexisPSL Tax contains a range of precedents with detailed drafting notes, and direct links through to cases, legislation and relevant commentary.

• Receive legal and market news in your inbox, with ‘so what’ analysis.

• Our Lexis®Smart Forms are available in PDF format, allowing them to be easily edited electronically, saved, printed and emailed.

• Access time saving tools such as checklists and flow charts and trackers: a series of regularly updated tracking tools to provide you with the latest developments.

• With direct links to LexisLibrary, you can access the UK’s most authoritative and comprehensive collection of consolidated legislation, cases, forms, precedents and commentary.

For a free trial of LexisPSL Tax, visit lexisnexis.co.uk/beps/trial.