Global Tax Alert | 11 August 2014

OECD releases report on impact of BEPS in low income countries

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Executive summary

On 1 August 2014, the Organisation for Economic Co-operation and Development (OECD) released the first part of a report on Base Erosion and Profit Shifting (BEPS) in developing countries. Part 1 of a Report to G20 Development Working Group on the Impact of BEPS in Low Income Countries (the Report) was discussed during the G20 Development Working Group (DWG) meeting in May 2014. The Report focuses on developing countries and their key challenges in addressing BEPS, their priority items in the OECD Action Plan on BEPS, released on 19 July 2013, and their other BEPS-related tax issues.

The second part of the Report will be made available to the G20 DWG in September 2014 and will describe how the DWG can assist developing countries to address the challenges posed by BEPS.

Detailed discussion

The Report states that the G20 had directed the OECD to develop a report identifying the main BEPS challenges in developing countries and determine how these challenges relate to the OECD/G20 BEPS Action. The Report was compiled based on consultations with developing countries and the experience of international organizations in working with developing countries.

The Report asserts that BEPS reduces resources available to developing countries, especially countries that disproportionally rely on tax revenue from multinational corporations (MNCs). The Report also states that BEPS undermines the effectiveness and credibility of developing countries’ tax systems. The Report notes that the BEPS challenges faced by developing countries may be different in both scale and nature than those faced by developed countries. Therefore, BEPS measures for developing countries may need to be tailored to their particular circumstance.

The Report asserts that the tax planning strategies MNCs deploy in developing countries may be less sophisticated. Legislation in those countries may be inadequate to address BEPS. The Report also states that it is difficult for tax authorities to gather relevant taxpayer information due to inadequate reporting rules, poor compliance and enforcement, and ineffective processing systems for capturing information. Tax authorities often are resource constrained, leading to inadequate staffing and the inability to retain skilled staff. Many developing countries lack effective procedures for settling tax disputes with large taxpayers related to complex cross-border transactions. Governments also may not have the political support necessary to make legislative changes and deploy resources to counter BEPS. Finally, the Report asserts that, while beyond the scope of the BEPS Action Plan, investment-targeted tax incentives granted to MNCs are eroding tax bases, often with little demonstrable benefit to the granting countries.

The Report states that developing countries have identified high-priority BEPS Actions, including excessive and unwarranted payments for intercompany financing, services (such as information technology, legal, management or technical advice services), or intangible property (IP); the contractual shifting of risk and IP in supply chain restructuring to low-tax jurisdictions; the inability to obtain the information needed to assess BEPS risk and hence to take effective action to counter such activity; and treaty shopping. The Report notes there is strong support by several developing countries for some form of a country-by-country reporting template.

The Report also discusses other BEPS-related issues that are important to developing countries. These issues include the lack of comparable data needed to apply the arm’s length principle; the loss of tax revenue from capital gains due to indirect transfers; and the erosion of the tax base from the granting of tax incentives.

The Report notes that many international organizations have provided assistance to developing countries on international tax policy and administration matters. The Report suggests that the areas where developing countries request assistance are evidence of the areas of concerns for these countries. The areas where the International Monetary Fund has provided requested assistance in the last few years include transfer pricing, tax treaty issues, cross-border capital gains, and issues regarding holding companies, related party debt and thin capitalization.

In interim conclusions, the Report finds that BEPS has the potential to have significant impact on domestic resources in developing countries. As BEPS may affect developing countries differently, they have highlighted that some of the Action items are more relevant to them than others and have identified other issues beyond the Action Plan that concern them.

In closing, the Report indicates that the second part of this report, which will be released in September 2014, will explain how the G20 DWG can assist developing countries to meet the challenges of the most relevant BEPS issues they face. That report will:

  • Confirm the Actions that are most relevant to developing countries and the outcomes of those Actions that are expected to benefit them.
  • Discuss other BEPS-related issues that have a direct impact on developing countries’ tax bases, including wasteful tax incentives, the lack of comparability data, and tax avoidance through the indirect transfer of assets.
  • Discuss capacity building initiatives to accompany regulatory measures. This will include a discussion of actions needed to ensure that developing countries can fully benefit from the BEPS Action Plan and how specific Actions may need to be adapted or supplemented to ensure they are effective for developing countries.

Implications

This Report is the first document related to the BEPS project that specifically addresses the concerns of developing countries. The OECD has stated that, in order to arrive at international consensus, the views of developing countries must be considered in the BEPS project. The second part of this report will provide insight on how developing countries may adapt recommendations from the BEPS project. Companies that operate in developing countries should continue to monitor the developments in the OECD and in relevant countries, evaluate how the recommendations may affect them, and consider participating in the dialogue regarding the OECD BEPS project and the underlying international tax policy issues.

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

EYG no. CM4651