Global Tax Alert | 4 June 2013

OECD provides an update on base erosion and profit shifting project

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OECD provides an update on base erosion and profit shifting project

Executive summary

At the annual OECD tax conference in Washington, DC held on 3-4 June 2013, developments with respect to the OECD’s project on base erosion and profit shifting (BEPS) dominated the discussion. The OECD issued an initial report, Addressing Base Erosion and Profit Shifting, on 12 February 2013 on issues relating to BEPS and multinational businesses (see Tax Alert, OECD releases report on base erosion and profit shifting, dated 15 February 2013). The OECD has organized the BEPS project around three work clusters: Countering Base Erosion, Jurisdiction to Tax, and Transfer Pricing. The future work of the OECD in these areas will be outlined in an “action plan” document to be released by the OECD in July 2013, (see Tax Alert, OECD meets with business on base erosion and profit shifting project, dated 29 March 2013).

Pascal Saint-Amans, who is director of the OECD Centre for Tax Policy and Administration, opened the conference on Monday and other senior members of the OECD secretariat participated on panels throughout the two days. Each panel included a Treasury or IRS official who is involved in the OECD tax work. In addition, several foreign tax officials who are delegates to the OECD participated in the discussions. The OECD representatives and government officials provided insights regarding the competing considerations and interests that the OECD is balancing as they move toward finalizing the BEPS work plan for release next month in advance of the upcoming meeting of the G20 Finance Ministers.

Detailed discussion

While the agenda for the 3-4 June OECD tax conference in Washington, DC included panels on the various ongoing tax work, the BEPS project was a central focus and there were two panels devoted specifically to discussion of the BEPS work. The participants on these panels included Saint-Amans and the senior OECD delegates from Canada, Germany, the United Kingdom, and the United States, as well as business representatives.

The first panel provided a detailed overview of the BEPS project with an emphasis on issues related to Jurisdiction to Tax, including the application of the permanent establishment concept and the use of controlled foreign corporation (CFC) rules to counter BEPS activity. Key points made during the panel discussion included the following:

  • The high-level political interest in the BEPS project in OECD member countries is driving the time frame and dictating the need to act quickly. However, with the release of the plan for future work in July, the OECD will adopt its customary approach of consultation with the business community and other stakeholders. The OECD expects participants to be willing to have a dialogue about the real issues rather than merely an exchange of comments on technical discussion drafts.
  • The issues involved are difficult and the political overlay adds to the complexity. However, the OECD must resist the pressure to lower its standards for technical policy work despite the views of many countries about the urgency of this work.
  • The BEPS project is focused on addressing instances of what the OECD refers to as “double non-taxation.” The project is not intended to be a broader reexamination of basic principles of international tax.
  • The BEPS project is not just about the actions of companies with respect to their tax positions. It also is about the actions of countries with respect to their tax policies.
  • The objective is to develop one standard to provide consistent results and avoid double taxation, although that does not necessarily mean a single set of rules.
  • Where the existing rules work well, no changes should be made. Where the rules may not work so well but there is no alternative that would be better taking into account the burdens associated with transition, no changes should be made. The focus should be on proposing changes where there are real deficiencies that can be addressed.
  • With respect to the issue of the application of the permanent establishment concept to the digital economy, some OECD member countries believe that it is not necessary or appropriate to develop an entirely new set of rules for new technologies and the new economy. Other member countries believe adjustments may be needed to ensure a level playing field between digital and physical transactions. With respect to the permanent establishment concept more generally, the aim of the project is not to make wholesale revisions to increase source-country taxing rights. Moreover, any issues regarding permanent establishment should be considered in the context of the overall objective of addressing “double non-taxation.”
  • With respect to the issue of transfer pricing, the focus should be on those areas where refinements could be made to address the most difficult questions and not on a wholesale reconsideration of core transfer pricing principles.
  • While there is a strong call for more reporting of country-based tax information to tax authorities, this should be done in a way that is not overly burdensome to taxpayers. The proposed approach of greater transparency with respect to tax authorities is in sharp contrast to the calls by some interest groups for public reporting of detailed tax information.
  • The goal of the OECD should be on developing recommendations for clear technical rules that support good tax policy for the long term. The OECD can only make recommendations and activity beyond that will depend upon the will of each country that is involved.
  • Engagement with the business community is needed in the next stage of the BEPS project, as it will be important to understand the potential implications for business behavior. The “action plan” to be released in July will reflect multiple areas where the OECD will undertake further work over the next two years to develop recommendations for potential future changes. It will not be an announcement of proposed solutions.

The second BEPS panel focused on the work related to Countering Base Erosion. Key points made during the panel discussion included the following:

  • In the work cluster on measures to counter base erosion, discussion in the OECD has focused on hybrids, treaty abuse, interest deductibility, preferential tax regimes, mandatory disclosure to tax authorities, and anti-avoidance measures. There also was some discussion with respect to promoter’s penalties and the accounting treatment of tax planning, but those two areas are not being pursued further at this time.
  • Addressing hybrid instruments and entities is a top priority, with recommendations to be developed relatively quickly.
  • Dealing with inappropriate use of treaties is another top priority, with a focus on developing a treaty-based solution because any domestic law approach would be a treaty override.
  • Developing an approach for the treatment of leverage will require further work. Consideration will be given both to potential treaty rules and to potential domestic law approaches.
  • The OECD should take a holistic approach to addressing preferential tax regimes in countries, which should include engagement with countries that are not OECD members.
  • Further consideration will be given to possible mandatory disclosure approaches, such as the UTP rules in the US.
  • The use of GAARs was discussed but given the concerns about the difficulty in administering such rules, further work in this area is a relatively low priority.
  • In all these areas, the focus of the OECD work is on coordination and cooperation.

The transfer pricing element of the BEPS project was briefly discussed during panels on the ongoing OECD work on transfer pricing for intangibles. It was noted that plans for transfer pricing work in the BEPS project are still under development. It was further noted that there will be a substantial

transfer pricing component in the action plan to be released in July. In this regard, the BEPS work plan going forward is expected to include a commitment to finalize the work on transfer pricing and intangibles “with all deliberate speed.”

Implications

The discussion at the OECD conference reconfirmed the significance of the proposals and approaches that are being developed as part of the BEPS project. It also highlighted both the complexity of the matters under consideration and the wide disparity in views among the member countries on these complex issues. It will be important for companies to carefully review the action plan when it is released by the OECD next month and to evaluate the implications for their business models of the areas that are being targeted for potential change. At the same time companies should consider becoming part of the global tax dialogue on the international tax issues that are of greatest significance to them by engaging with the OECD and with tax policymakers in the countries where they operate.

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
  • Chris Faiferlick
    +1 202 327 8071
    chris.faiferlick@ey.com

EYG no. CM3500