Global Tax Alert | 4 October 2013

OECD meets with business on base erosion and profit shifting action plan

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Executive summary

On 1 October 2013, the Organisation for Economic Cooperation and Development (OECD) held a meeting with the Business and Industry Advisory Committee (BIAC) to the OECD on the Action Plan on Base Erosion and Profit Shifting (BEPS). The Action Plan, which identifies 15 focus areas for OECD work on BEPS over the next two and a half years, was issued by the OECD on 19 July 2013 in connection with a meeting of the G20 Finance Ministers and Central Bank Governors.1 The OECD issued more detailed documents on two of the Action Plan focus areas, transfer pricing for intangibles and enhanced transfer pricing documentation, on 30 July 2013.2 The OECD-BIAC meeting was the first formal opportunity for business representatives to engage with the OECD on the Action Plan and the 15 focus areas. In the Action Plan, the OECD expressed a commitment to consult with the business community as it works to develop recommendations in each of the focus areas.

Detailed discussion

Business representatives from around the world and from a range of industries participated in the 1 October meeting of BIAC and OECD on the BEPS Action Plan, including several representatives of EY. The OECD was represented at the meeting by officials from 16 of the member countries, including Australia, Canada, France, Italy, Mexico, the Netherlands, Spain, and the United Kingdom. Key members of the OECD secretariat also participated in the meeting, including Pascal Saint-Amans, who is the Director of the OECD's Centre for Tax Policy and Administration, and Joe Andrus, who leads the OECD's transfer pricing work.

The Action Plan reflects the OECD's view that gaps in the interaction of domestic tax rules of various countries, the application of bilateral tax treaties to multijurisdictional arrangements, and the rise of the digital economy with the resulting relocation of core business functions, have led to weaknesses in the international tax system. The OECD acknowledges that in many circumstances existing domestic law and treaties yield the correct result, but states in the Action Plan that without coordinated action in the areas that give rise to policy concerns, countries that wish to protect their tax base may resort to unilateral action that could result in a resurgence of double taxation as well as global tax uncertainty. The Action Plan thus concludes that fundamental, consensus-based changes are needed to address double non-taxation and cases of no or low taxation where taxable income is artificially separated from the activities that generate it.

The 15 focus areas – or Actions – set forth in the Action Plan, each of which is linked to specific outputs that are to be completed in 2014 or 2015, are as follows:

1. Address the challenges of the digital economy

2. Neutralize the effects of hybrid mismatch arrangements

3. Strengthen CFC rules

4. Limit base erosion via interest deductions and other financial payments

5. Counter harmful tax practices more effectively, taking into account transparency and substance

6. Prevent treaty abuse

7. Prevent the artificial avoidance of permanent establishment status

8. Assure that transfer pricing outcomes are in line with value creation – intangibles

9. Assure that transfer pricing outcomes are in line with value creation – risks and capital

10. Assure that transfer pricing outcomes are in line with value creation – other high-risk transactions

11. Establish methodologies to collect and analyze data on BEPS and actions to address it

12. Require taxpayers to disclose aggressive tax planning arrangements

13. Re-examine transfer pricing documentation

14. Make dispute resolution mechanisms more effective

15. Develop a multilateral instrument for amending bilateral treaties

The discussion at the OECD-BIAC meeting covered all 15 of the Actions at a high level and like the Action Plan itself was organized around four groupings of the Actions. The meeting began with comments from OECD and BIAC leadership. From the BIAC side, there was a reiteration of the importance of the BEPS project and an expression of the interest of the business community in actively consulting with the OECD throughout the process. It was noted that BIAC would not be producing a single set of consensus comments because there are a range of business views on the different Actions and it is important for the OECD to receive all perspectives. From the OECD side, there was a reiteration of the strong political level commitment to the BEPS Action Plan from both OECD countries and G20 countries. It was further noted that the BEPS project is about developing new tax policy tools that can be used to address deficiencies in the current system that may allow what the OECD refers to as “double non-taxation” while maintaining the historic focus on addressing double taxation.

The discussion first focused on Actions 2 through 5, which are grouped in the Action Plan under “Establishing International Coherence of Corporate Taxation.” OECD representatives stated that inconsistencies have appeared in the global tax system and that no one is to blame for this but it must be addressed. With respect to Action 2 on Hybrids, it was noted that the work in this area will build on work done in developing the OECD's 2012 report on hybrid mismatch arrangements. With respect to Action 3 on CFC rules, it was noted that while CFC regimes are provisions of domestic law, the OECD's involvement here is because of the cross-border impact. With respect to Action 4 on limits on deductibility of interest expense, it was noted that the OECD's objective is to address base erosion without creating adverse side effects. With respect to Action 5 on addressing harmful tax practices, it was noted that the OECD has previously done work in this area, that the work here also will involve non-member countries, and that the goal is to develop common rules allowing countries to design their own tax rules “without harming their neighbors.”

The comments from business representatives focused in particular on the need for clarity and certainty in the rules that are to be developed. It was also stressed that any new rules must be prospective in effect. Examples were provided on the non-tax reasons for use of debt instead of equity and the role of the arm's length standard in the debt-equity area was emphasized. With respect to the Actions on hybrids and interest deductibility, business representatives noted that the results of hybrid treatment often are intended by a government and that both the level of debt and the use of hybrid instruments can be impacted by the applicable regulatory regimes for industries such as banking and insurance. A similar comment was made in the context of CFC rules regarding the special considerations for certain industries such as financial services. In the discussion of Action 5 on harmful tax practices, it was noted that the substantiality test for exclusion from treatment as a harmful tax practice should be a relative standard rather than an absolute standard and that the substantiality standard must be clear. In this regard, it also was suggested that exchange of information between countries on the details of their regimes, rather than on rulings, issued would provide the most useful information.

The meeting discussion then turned to Actions 6 through 10, under the heading of “Substance.” With respect to Action 6 on preventing treaty abuse, OECD representatives noted that rules like the limitation on benefits tests used by the United States and the main purpose tests used by the United Kingdom would be considered as the OECD develops its recommendations for anti-abuse rules. With respect to Action 7 on permanent establishment (PE), it was noted that the focus would be on commission type arrangements that do not make commercial sense based on the functions performed. In this regard, the OECD representatives indicated that the OECD will be issuing a paper in the next few weeks requesting information on strategies used to avoid PE status. With respect to the three Actions on transfer pricing, OECD representatives stated that work is the most advanced on the intangibles Action because of the pre-existing OECD project, but that the OECD working party would also be turning its attention to the other two transfer pricing Actions on risks and capital and high-risk transactions. Importantly, OECD representatives reiterated the commitment to extensive consultation on all the transfer pricing items. This will begin with the consultation on intangibles which is scheduled for 12-13 November. Finally, OECD representatives expressed an interest in exploring more targeted approaches to addressing governments' transfer pricing concerns.

Business representatives began their discussion by expressing the importance of maintaining the arm's length standard for transfer pricing. With respect to Action 6, it was noted that the focus should be on treaty-based solutions and that domestic law provisions, including domestic general anti-abuse rules, should not be used to override treaties. With respect to Action 7, business representatives stressed the potential for double taxation that would be created if the PE standard were lowered or were made less clear, reiterated the need for certainty and provided illustrations of where activities are done in different entities for business reasons that are unrelated to the PE threshold. With respect to the transfer pricing Actions, several business representatives provided explanations of their business models as illustrations of the kinds of substance involved and the complexity that would arise from any significant move away from the traditional transfer pricing approaches in these areas.

Next the meeting discussion focused on to Actions 11 through 14, grouped under the heading “Transparency and Certainty.” The bulk of the discussion in this grouping related to Action 13 on transfer pricing documentation. OECD representatives stressed the critical importance of increased information reporting. The greatest political imperative is around developing a new template for country by country reporting to tax authorities of high-level information regarding income, activities and taxes. This information is to be used for risk assessment purposes only and thus should be distinguished from the more detailed reporting that is proposed to be done through a new two-tier master file and local country file approach. Work on both these initiatives will proceed in tandem and will the subject of discussion during the November consultation with business. As was indicated during the meeting discussion on the proposal for country by country reporting, the OECD on 3 October issued a short document listing a series of key points on which business input is requested to be provided at the November consultation, including:

  • What types of information regarding income should be required;
  • What of information regarding taxes should be required;
  • What other categories of location information, such as data on revenue by customer, tangible and intangible assets, employees and management, and research and marketing expenditures, should be required; and
  • What mechanisms should be used for reporting and sharing this information.

With respect to Action 11 on gathering and evaluating data on BEPS activity, OECD representatives indicated that this work has already begun and will focus on both macro and micro level information. With respect to Action 12, it was noted that there is a strong link between increased reporting with respect to aggressive tax planning and the OECD Forum on Tax Administration's ongoing work on “cooperative compliance.” With respect to Action 14 on improving the Mutual Agreement Procedure (MAP), OECD representatives stressed the commitment to this work, which is important because of the increasing inventory of unresolved cases, the staffing shortages in various governments, and the potential today for denial of access to relief under MAP.

Business representatives stressed the importance of close consultation and input from the business community during the development of the approaches for increased transfer pricing documentation and country by country reporting. It was noted that high level information must be used only for risk assessment purposes. The critical need to ensure the confidentiality of business information reported under these new approaches was stressed. Business representatives also expressed appreciation for the OECD's commitment to working on improving MAP.

The meeting discussion concluded with Actions 1 and 15. With respect to the digital economy, OECD representatives discussed the OECD's earlier work on ecommerce but indicated that governments believe the world has changed and that it is much harder to impose tax on new business models under the current rules. It was noted that many governments believe changes are needed. With respect to Action 15, OECD representatives focused on the need for a multilateral instrument so that every potential change does not have to be addressed through a separate bilateral action and also noted that such a multilateral instrument also could serve more global purposes as well.

Business representatives talked quite extensively regarding the business models used in the digital economy and the difficulty in trying to draw a line between digital activity and more traditional business activity. The importance of taking a cautious approach in developing any changes to the PE standard was stressed. The complexity of the related profit attribution issues was also noted.

At the close of the meeting, OECD representatives expressed appreciation for the productive dialogue, underscored the short timetable for the OECD to complete its work, and reiterated the need for input from the business community on many of the Actions. They indicated that they look forward to written submissions and other input into the drafts that are produced by the OECD as the project goes forward.


The discussion at the OECD-BIAC meeting highlighted the breadth and complexity of the work to be done by the OECD in connection with the Action Plan. While the project is extremely ambitious, the political level interest in this work and the commitments of all OECD and G20 countries mean that the work will advance consistent with the timetable set by the OECD. With the due dates for the first outputs from the OECD just one year away, it is important for companies to be focused now. Companies must keep informed about developments in the OECD and, importantly, about the perspectives of the countries in which they have operations or plan to invest. Companies also should consider how to participate in the broader global debate regarding the full range of potential international tax changes by engaging with OECD and country tax policy makers. Finally, companies should begin evaluating the impacts for their business models and structures of potential changes in the areas under consideration by the OECD in connection with the Action Plan.


1. For more information regarding the Action Plan, see EY Global Tax Alert, OECD releases Action Plan on Base Erosion and Profit Shifting (BEPS), issued on 19 July 2013.

2. For more information see EY Global Tax Alerts, OECD issues Revised Discussion Draft on the Transfer Pricing Aspects of Intangibles, issued on 31 July 2013 and OECD invites public comments on the White Paper on Transfer Pricing Documentation, issued on 1 August 2013.

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
  • Chris Faiferlick
    +1 202 327 8071
Ernst & Young LLP, International Tax Services, Rotterdam
  • Ronald van den Brekel
    +31 88 40 79016

EYG no. CM3845