Global Tax Alert | 29 March 2013

OECD meets with business on base erosion and profit shifting project

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Executive summary

On 26 March 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 project on base erosion and profit shifting (BEPS). The OECD issued an initial report, Addressing Base Erosion and Profit Shifting, on 12 February 2013 on issues relating to BEPS and multinational businesses (for more information regarding the OECD report please see EY Global Tax Alert, Addressing Base Erosion and Profit Shifting, dated 15 February 2013). The OECD-BIAC meeting was intended to allow business to provide perspectives on the issues outlined in the Report as the OECD develops plans for its work in this area going forward. The future work of the OECD on BEPS issues will be outlined in an “action plan” to be released by the OECD in July 2013. While the opportunity for the global business community to engage formally with the OECD on this project has been limited due to the accelerated timeframes for the initial phases of the work, the OECD confirmed at this week's meeting that there will be consultation with business as the next phase of the project moves forward following release of the action plan.

Detailed discussion

A broad range of business representatives from around the world participated in the 26 March meeting of BIAC and the OECD on the BEPS project, including several representatives of EY. The OECD was represented by officials from a dozen of the member countries, including Canada, Denmark, France, Germany, Italy, the Netherlands, the United Kingdom and the United States. India, which participates in the OECD tax work through partner status, also was represented. In addition, key members of the OECD secretariat attended the meeting, including Pascal de Saint-Amans who directs the OECD's tax work.

The 12 February BEPS Report served as the base for the discussion at the meeting. The Report describes studies and data available regarding the perceived magnitude of BEPS and provides an overview of global developments that have had an impact on corporate tax matters. It focuses on the key principles that underlie the taxation of cross-border activity and describes BEPS opportunities that these principles may create. The Report reflects the view that current international tax standards may not have kept pace with changes in global practices, in particular in the areas of intangibles and e-commerce. The Report identifies relevant work that has already been done by the OECD, but states that a holistic approach is needed to properly address the issue of BEPS. It identifies six key pressure areas:

  • Mismatches in entity and instrument characterization
  • Application of treaty concepts to profits derived from the delivery of digital goods and services
  • Tax treatment of related party debt-financing, captive insurance, and other intra-group financing
  • Transfer pricing, in particular in relation to the shifting of risk and intangibles, the artificial splitting of ownership of assets between group legal entities, and group transactions that would rarely take place between independent entities
  • Effectiveness of anti-avoidance measures such as GAARs, CFC regimes, thin capitalization rules, and rules to prevent treaty abuse
  • Availability of harmful preferential regimes

The Report indicates that the OECD intends to develop an action plan to be finalized in June 2013 and released publically in July 2013.

The OECD has organized the BEPS project around three work clusters that are chaired by officials from key member countries: Countering Base Erosion, chaired by Germany, Jurisdiction to Tax, co-chaired by France and the United States, and Transfer Pricing, chaired by the United Kingdom. The discussion at the meeting first focused on the BEPS project in general and then proceeded to focus on each of these areas in turn. The meeting concluded with a discussion of the next steps with respect to the BEPS project.

The discussion began with a reiteration of the strong political-level interest in member countries in the BEPS project, which is driving the urgency and accelerated time frames. The importance of a coordinated approach, rather than unilateral action by individual countries, was stressed. OECD representatives indicated that constructive involvement by the business community is key as the project moves forward. Concern about occurrences of double non-taxation was described as the main focus of the project, with a particular focus on situations where there is significant profit but little substance in a low or no tax jurisdiction. A central aim of the project will be to develop approaches for addressing this situation. The inherent link between tax competition by countries for business and opportunities for BEPS was acknowledged. OECD representatives also expressed the view that claims by some groups that the current international tax system is “completely broken” were overstated and indicated an intention to focus attention on what are seen as particular problem areas in an effort to improve the operation of the rules.

In the discussion of the work cluster on Countering Base Erosion, the OECD project was described as a “plumbing” project with the aim of “plugging the holes” that lead to double non-taxation. Focus areas that were identified included hybrid mismatches, the inappropriate use of tax treaties, and deductibility of interest. Hybrid mismatches were described as essentially a design issue. The treaty discussion focused on the need for limitation on benefits type rules to prevent situations of double non-taxation. On interest deductibility, OECD representatives expressed the view that countries cannot allow unlimited interest deductions and that rules are needed to address excess leverage. There also was discussion of the need for better procedures for resolving disputes between countries, including more effective mutual agreement procedure approaches.

In the discussion of the work cluster on Jurisdiction to Tax, the focus again was on addressing double non-taxation. One particular area for work going forward is the permanent establishment concept and whether the technical details should be modified to address modern business models including e-commerce models. Another focus area is withholding taxes and the retention of taxing rights in the source country. The role of CFC rules and the potential for coordination across countries and development of common approaches were also discussed.

In the discussion of the work cluster on Transfer Pricing, the discussion focused on where the existing transfer pricing rules may not work well so that modifications may be needed. OECD representatives indicated that the intention was not to abandon the traditional arm's length standard but rather to make refinements to the existing regime. They identified the focus areas as intangibles, treatment of risk, and potential recharacterization of transactions. There also was discussion of the interplay between transfer pricing rules and general anti-avoidance rules. OECD representatives also stressed the need for some advances in this area in terms of improvement of the existing rules. Finally, the need for improved documentation was noted.

The meeting concluded with a discussion of next steps with respect to the OECD project. As noted above, the OECD will develop an action plan that will be released publicly in July 2013. Like the Report issued in February, the timing of the release of the action plan will coincide with a meeting of the G20 countries. The action plan will lay out with some specificity the particular technical areas under each of the three work clusters that the OECD then will pursue over the next one to two years. The OECD intends to provide for processes for consultation with business on these specific projects going forward, although the timelines for these projects also are expected to be fairly accelerated.


As the discussion at the OECD-BIAC meeting underscored, the BEPS project involves a reexamination of some fundamental elements of the international tax system. Moreover, there is keen interest in this project and in the underlying tax issues at the highest political levels in many countries around the world. While the Report and the current discussions do not yet reflect specific technical proposals with respect to potential changes in international tax laws or tax treaties, they do provide a window into the areas where countries may consider changes in the coming months and years. Thus, it is important for companies to stay informed about developments in the OECD and in the countries in which they do business. Companies should also consider how to participate most effectively in discussions on these important international tax policy issues with the OECD and with tax policymakers in their home countries and the countries where they invest.

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
EY Belastingadviseurs LLP, Amsterdam
  • Ronald van den Brekel
    +31 88 40 79016
  • Simone Admiraal
    +31 88 40 71242

EYG no. CM3315