Global Tax Alert | 23 January 2014

OECD provides an update on BEPS Action Plan

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Executive summary

On 23 January 2014, the Organization for Economic Cooperation and Development (OECD) hosted a webcast on the ongoing project to address base erosion and profit shifting (BEPS): BEPS Action Plan: Update on 2014 Deliverables. A replay of the webcast can be found on the OECD website. The webcast provided an overview of the OECD’s activity with respect to its July 2013 Action Plan on Base Erosion and Profit Shifting. The discussion focused in particular on those Actions with a September 2014 delivery date.

Detailed discussion

The webcast featured Pascal Saint-Amans, who leads the OECD’s tax work. Other senior members of the OECD secretariat participating in the webcast included Raffaele Russo, who is leading the BEPS project; Marlies de Ruiter, who has responsibility for the tax treaty, transfer pricing and financial transactions work; and Achim Pross, who has responsibility for the international co-operation and tax administration work.

Saint-Amans opened the webcast by describing BEPS as being about the “divorce between the location of profits and the location of value creation.” He said this has been increasing over the last 10 years and is a source of concern for governments, both from a revenue perspective and more importantly from the perspective of perceptions about the fairness of the tax system. He further noted the level playing field dimension, which he described as involving the taxation of purely domestic companies that are not exposed to international transactions as compared to the taxation of multinational companies.

Saint-Amans stressed the need for collective action and the environment of heightened political attention. He described the OECD as working at a “frantic” pace. In that regard, he said this webcast was the OECD’s effort to engage with the public in real time. Further, Russo emphasized the multiple channels that the OECD is using to engage with developing countries.

The OECD team then turned to a brief review of each of the Actions in which the OECD intends to deliver output by September 2014.

With respect to Action 1 on the tax challenges of the digital economy, Russo highlighted the ongoing work of the task force that was formed by the OECD to focus on this area. The digital economy task force had its first meeting in October 2013 and is scheduled to meet again in February 2014. An important element of the work is the identification of unique features of the digital economy and consideration of whether these features exacerbate the potential for BEPS. Russo noted that the work in connection with other Actions also will impact this area.

As the OECD announced in December, a discussion draft with respect to digital economy issues is expected to be released in March 2014, with a public consultation to be held in April 2014.

With respect to Action 6 on treaty abuse, de Ruiter noted that the model tax treaty is at the core of the OECD’s tax work. The OECD group that is responsible for the model treaty is handling this Action and is focusing on approaches for ensuring that treaty results are consistent with the bilateral intent of the treaty partners. Mechanisms under consideration include limitation on benefits provisions, main purpose tests, and other specifically-targeted rules.

A discussion draft with respect to treaty abuse issues is expected to be released in March 2014, with a public consultation to be held in April or May of 2014.

With respect to Action 2 on hybrid mismatch arrangements, Pross described the objective with respect to hybrids as “trying to eliminate the effect so that they don’t get done for tax purposes.” He noted that the OECD working group responsible for these issues has already held two meetings, in October and December of 2013, and is focused on both treaty and domestic law changes.

A discussion draft with respect to hybrid issues is expected to be released by early April 2014, with a public consultation to be held in May 2014.

With respect to Action 8 on transfer pricing for intangibles, de Ruiter noted that the media attention focused in this area has been one of the drivers for the BEPS project. She stressed that it is not the goal of the BEPS project to replace the arm’s length principle. However, she said that the OECD is considering “special measures” that may be either “inside or outside” the arm’s length principle as a way of addressing what can be serious problems and getting better alignment.

The work on the transfer pricing for intangibles is expected to be finalized during the OECD working group’s meetings in March and May 2014.

With respect to Action 5 on harmful tax practices, Pross referenced the work the OECD has done in this area in the past. He noted the “renewed focus on substantial activity and on transparency” in reviewing member countries’ tax regimes. He also highlighted the work in developing an approach under which information about countries’ preferential regimes would be provided not just on request but spontaneously “to those countries that need that information in order to apply their rules.” The OECD had a meeting on this Action in December and additional meetings are planned in February and May.

The review of OECD member countries’ tax regimes is expected to be completed in time for the output to be published by September 2014. Pross also expects the review of non-OECD member countries’ tax regimes, starting with G20 countries, to commence by September 2014.

With respect to Action 13 on transfer pricing documentation, de Ruiter reiterated that country-by-country reporting is intended as an added element and is meant to be used to assess tax risk. The goal of this Action overall is to provide recommendations on transfer pricing documentation that balance the compliance costs for taxpayers while ensuring that tax authorities receive meaningful information.

A discussion draft of the country-by-country reporting template is expected to be released in February 2014, with a public consultation in March 2014. De Ruiter expects the OECD working group to complete the work on the template by May 2014.

With respect to Action 15 on the development of a multilateral instrument, Saint-Amans indicated that the first phase of the work involves preparation of a report on feasibility of a multinational instrument. The OECD is getting input from international law experts and also is considering the political issues that arise.

The report on the multilateral instrument concept is expected to be finalized by September 2014.

At the conclusion of the webcast, Saint-Amans stated that the OECD is making good progress and is on track to meet the deadlines set forth in the Action Plan. He further noted that the outputs generally will be in the form of soft law with respect to legislation and instruments and in the case of Action 1 on the digital economy in the form of a report. Pross stressed that the interaction of the various Actions is an important element of the project as well.

The webcast closed with comments in response to several questions that had been submitted. On the participation of developing countries, it was noted that the project includes OECD members, G20 members, Colombia and Latvia, that developing countries are contributing through a variety of regional meetings, and that the UN and IMF are interested in BEPS issues as well. On the question of stakeholder engagement in the BEPS project, the opportunities to comment on discussion drafts and participate in public consultations were stressed. In response to a question about whether there may be less interest in the BEPS project as the global economy recovers, it was suggested that the focus on ending unintended results is not tied to economic conditions.

Implications

The webcast is part of an effort by the OECD to be transparent with respect to the BEPS project. OECD officials have stated that the plan is to hold this type of webcast at regular intervals. While there were neither big announcements nor extended substantive discussion, the webcast provided a clear overview of the developments to date and a preview of activity to come. The OECD also used the webcast to counter recent reports that the digital economy focus had been abandoned, stressing that the work in that area is actively continuing.

The BEPS project is unprecedented for the OECD in terms of its breadth and its timelines. Meeting the September 2014 deadlines for several key elements of the Action Plan will require that work be completed well in advance of that date in order to allow time for the OECD approval process. The compressed timelines mean that stakeholders will have limited time to consider and comment on the recommendations included in the discussion drafts. Companies will want to monitor closely 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, International Tax Services, Washington, DC
  • Barbara Angus
    +1 202 327 5824
    barbara.angus@ey.com
  • Yuelin Lee
    +1 202 327 6378
    yuelin.lee@ey.com
  • Maria Martinez
    +1 202 327 8055
    maria.martinez@ey.com

EYG no. CM4128