Global Tax Alert | 29 May 2014

OECD hosts third webcast update on BEPS project

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Executive summary

On 26 May 2014, the Organisation for Economic Cooperation and Development (OECD) hosted a webcast on its ongoing project to address base erosion and profit shifting (BEPS). A replay and the slides for the webcast can be found on the OECD website []. The webcast provided an overview of the OECD’s recent activity with respect to its July 2013 Action Plan on Base Erosion and Profit Shifting. The discussion focused in particular on those Actions for which public consultations have recently been held and for which the relevant OECD working parties are in the final stages of drafting the output to be delivered in September. The webcast also briefly touched on the Actions related to harmful tax practices and the multilateral instrument, where the OECD similarly intends to deliver output in September and has been working without public consultation.

Detailed discussion

As in the previous webcasts, this webcast featured Pascal Saint-Amans, who leads the OECD’s tax work. The other members of the OECD Secretariat participating in the webcast were Raffaele Russo, who is leading the BEPS project overall, and Marlies de Ruiter, who has responsibility for the OECD’s work on tax treaties and transfer pricing. The webcast focused in particular on the Actions on the digital economy, hybrid mismatch arrangements, treaty abuse, transfer pricing for intangibles, and country-by-country reporting, with brief comments on the Actions on harmful tax practices and the multilateral instrument.

Saint-Amans opened the webcast giving a general overview of the BEPS project and the work done to date, noting the extensive input received by the OECD from a diverse group of stakeholders including non-OECD member countries, academia and the business community in general. He emphasized the OECD’s intention is to create consensus which is important for effective implementation. In this respect, he stressed the importance of considering the views of developing countries, which he said have expressed particular interest in the Actions on interest deductibility, transfer pricing and treaty abuse and also have other priorities that are more relevant to them than to more developed countries such as addressing “wasteful tax incentives,” techniques that shift the taxation of capital gains and difficulties in accessing information.

Tax challenges of the digital economy

Russo gave a brief update on the work on Action 1 on the digital economy. He summarized the input from the public consultation as showing general agreement as to the key features and business models of the digital economy and as to the inability to ring fence the digital economy. Russo also noted a general consensus that it is crucial to address value-added tax (VAT) issues because VAT is key to establishing a level playing field. He acknowledged the business community’s concern regarding digital nexus and the possible taxation options that had been suggested to the OECD task force and were described in the discussion draft on the digital economy. He also stated that addressing BEPS activity associated with the digital economy should be a particular consideration in the work on other Actions such as treaty abuse, permanent establishment and transfer pricing. He concluded by noting that the task force is meeting this week to finalize the report on the digital economy.

Hybrid mismatch arrangements

Russo next presented a brief update regarding the work on Action 2 on hybrid mismatch arrangements. He noted that a longer comment period had been provided for the discussion drafts on hybrid mismatch arrangements because of the very technical nature of the subject. He indicated that the working group is well underway in their work on recommendations for changes to domestic laws that would minimize the tax consequences of hybrid arrangements, indicating that there are still technical issues to be addressed. Russo stated that the working group will consider the experience some of the countries have had already in addressing the effects of hybrids. He further noted that the primary and secondary rules are needed to ensure that the model addresses hybrids effectively even if one of the countries does not adopt the anti-hybrid rules.

Treaty abuse

De Ruiter provided an update on the work on Action 6 on addressing treaty abuse. She stated that it is agreed that a limitation on benefits (LOB) provision alone will not be sufficient to address all treaty abuse situations. She further expressed the view that there must be flexibility for countries to incorporate other rules, such as the main purpose test, to supplement a LOB provision. However, she acknowledged the concern that having both LOB and a main purpose test could detract from the particular advantages of each because, for example, the benefit of the objectivity of the LOB test would be lost. De Ruiter also noted that there was concern about how the LOB test would apply to collective investment vehicles, pension plans and dual listed companies, indicating that the intention was not to be more disadvantageous than the approach discussed in the OECD’s 2010 report on collective investment vehicles. She also noted that the working group is continuing to look at a derivative benefits test in light of the examples the business community put forth regarding situations where treaty benefits would be inappropriately denied without such provision. In addition, de Ruiter stressed the need for a stronger discretionary relief provision that would appropriately provide benefits where a business structure otherwise fails to qualify the mechanical rules.

De Ruiter emphasized the need to effectively manage the relationship between domestic and treaty based anti-abuse rules. She underscored the need for flexibility, noting that there is no “one size fits all” solution. She also noted the need to consider the work under the other Actions that is relevant to treaty abuse concerns, such as the work on hybrid mismatch arrangements and harmful tax practices. In this regard, she indicated that there will be interaction with the Actions scheduled for 2015 delivery as well. Finally, de Ruiter indicated that there is a draft for consideration and approval by Working Party 1 and the Committee on Fiscal Affairs (CFA).

Transfer pricing

With respect to Action 8 on transfer pricing for intangibles, de Ruiter indicated that Working Party 6 had reached an agreement on revised text of Chapters I, II and VI of the OECD transfer pricing guidelines. She noted that Chapter VI will contain an up-to-date approach on identifying types of intangibles and how the arm’s length valuation should be determined. She indicated that there is a strong interaction between Section B and the work on the Actions related to risk, capital and the associated special measures. Hence, the current work will not be the final deliverable with respect to transfer pricing for intangibles.

De Ruiter stated that with respect to the current work on intangibles there will be one more round of consideration and approval by Working Party 6 and then the CFA. She further noted that another discussion draft is expected to be released in December 2014 on risk, capital and hard-to-value intangibles

Country-by-country reporting and transfer pricing documentation

With respect to country-by-country (CbC) reporting and transfer pricing documentation, de Ruiter underscored the complex nature of the project which involves both tax and accounting matters and practical implementation issues. She stated that the OECD received a vast amount of comments, including input from developing countries during the Global Forum on Transfer Pricing meeting held in March 2014. De Ruiter reported consensus in Working Party 6 that the three-tier approach of CbC reporting template, master file and local file would significantly improve governments’ access to information relevant to transfer pricing. She reiterated that CbC reporting is intended as a high-level risk assessment tool. As it is a new tool, de Ruiter indicated that an efficient monitoring system will need to be implemented to assess its effectiveness and, if necessary, make changes in the future to ensure that it will remain a useful tool. She also acknowledged the need for implementation that ensures consistency in the approaches by governments, timeliness in the provision of information to governments, safeguards protecting the confidentiality of commercially sensitive information, and a balancing of costs and burden. For these reasons, Working Party 6 will do further work on the implementation process and will submit a report regarding implementation to the CFA for approval in January 2015.

Multilateral Instrument

Saint-Amans discussed the current work on a multilateral Instrument, which involves preparation of a report on its political and technical feasibility. Saint-Amans referred to the multilateral instrument as an efficient way to implement the treaty-related recommendations in the BEPS project. He stated that such instrument would be compatible with each jurisdiction’s law and would not violate sovereignty. He further indicated that the multilateral instrument not only would update existing bilateral income tax treaties to include changes resulting from the BEPS project, but also would streamline the implementation of those changes going forward. The instrument is envisioned to co-exist with bilateral treaties as a targeted tool that would be negotiated with all countries on an equal footing. The instrument would then be ratified under the national law of each country.

Closing remarks

Saint-Amans stated that the next steps are for the CFA to finalize the reports and recommendations with respect to the Actions with September 2014 target dates and then for the OECD to present them during the two upcoming G20 meetings: the Finance Ministers’ meeting scheduled for September 2014, and the G20 leaders’ meeting scheduled for November 2014.

Q&A session

As in previous webcasts, the last part of this webcast was dedicated to questions and answers. The first question related to the potential for achieving consensus among participating countries. Saint-Amans responded by stating consensus is precisely what would ensure a successful implementation of the BEPS recommendations, as the goal of the project is to develop measures that all countries would feel comfortable adopting.

The speakers were also asked to comment on recent views expressed by US officials on the effect of the BEPS project on the US tax base. In response, Saint-Amans suggested that the BEPS project is consistent with US tax reform proposals for both inbound and outbound investment.

Another question related to why the proposed CbC reporting template does not include intangible assets. De Ruiter responded by stating that the CbC template is a high level risk assessment tool. As quantitative information regarding intangible assets often is not readily available in financial records, requiring such information in the CbC template would be inefficient as it would require extensive valuation work for the taxpayer. De Ruiter emphasized that detailed information regarding intangible assets would be required in the master/local files so governments would have access to such information without its inclusion in the template.

In response to a question regarding the issue of virtual permanent establishment and related profit attribution, Russo noted that the virtual permanent establishment option was included in the digital economy discussion draft along with other measures related to nexus that had been presented to the task force and that all options will need to be carefully considered.

Responding to a question about the concern that some countries lack familiarity with LOB which could raise potential implementation issues, de Ruiter reiterated the need for a flexible rule to ensure that treaty abuse is addressed effectively.

Finally, Saint-Amans responded to a question on coordination with the European Union on BEPS. He pointed out that the European Commission participates in OECD meetings and that the OECD works closely with the European Union. Saint-Amans noted that the European Union would likely issue its own report on the digital economy that would include input from the OECD project. Another example cited by Saint-Amans is the work on hybrid mismatch arrangements where he described coordination with the European Union as critically important because EU directives, such as the Parent-Subsidiary Directive, may affect the implementation of the forced inclusion recommendation in the OECD’s linking rule model.


This webcast was part of a series hosted by the OECD in its effort to be transparent with stakeholders as the BEPS project progresses. The OECD is planning for an additional webcast later this summer before the September G20 Finance Ministers’ meeting. The webcast provided some insights into the current thinking of the OECD on the various Actions that have September 2014 target dates and the process for finalizing the work in these areas by that deadline. Some updated information also was provided with respect to Actions on which the OECD now expects to produce output by the end of 2014 or early 2015. Companies should continue to monitor closely the developments with respect to the BEPS project, both in the OECD and in the countries that are relevant to their businesses.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, Washington, DC
  • Barbara Angus
    +1 202 327 5824
  • Yuelin Lee
    +1 202 327 6378
  • Maria Martinez
    +1 202 327 8055

EYG no. CM4451