In a press release issued on 12 February 2013, the OECD announced the issue of the study Addressing Base Erosion and Profit Shifting (BEPS), commissioned by the G20.

The analysis presents the studies and data available regarding the existence and magnitude of BEPS. It contains an overview of global developments that have an impact on corporate tax matters and identifies the key principles that underlie the taxation of cross-border activities, as well as the BEPS opportunities these principles may create.

Background

There is a growing perception that governments lose substantial corporate tax revenue because of planning aimed at eroding the taxable base or shifting profits to locations where they are subject to a more favorable tax treatment.

Civil society and non-governmental organizations (NGOs) have been vocal in this respect, sometimes addressing very complex tax issues in a simplistic manner and blaming transfer pricing rules based on the arm’s length principle as the cause of these problems.

Furthermore, it is acknowledged that the international common principles drawn from national experiences to share tax jurisdiction may not have kept pace with the changing business environment.

Domestic rules for international taxation and internationally agreed standards are still grounded in an economic environment characterized by a lower degree of economic integration across borders, rather than today’s environment of global taxpayers characterized by the increasing importance of intellectual property as a value driver and by constant developments of information and communication technologies.

With this in mind, the G20 leaders meeting in Mexico on 18–19 June 2012 explicitly referred to “the need to prevent base erosion and profit shifting” in its final declaration.

This message was reiterated at the G20 finance ministers meeting of 5–6 November 2012.

Key points of the report

Some multinational enterprises (MNEs) use strategies that allow them to pay as little as 5% in corporate taxes when smaller businesses are paying up to 30%.
OECD research also shows that some small jurisdictions act as conduits, receiving disproportionately large amounts of foreign direct investment compared with large industrialized countries and investing disproportionately large amounts in major developed and emerging economies.

In addition to a clear need for increased transparency on effective tax rates of MNEs, key pressure areas include those related to:

• International mismatches in entity and instrument characterization, including hybrid mismatch arrangements and arbitrage
• Application of treaty concepts to profits derived from the delivery of digital goods and services
• The tax treatment of related party debt-financing, captive insurance and other intergroup financial transactions
• Transfer pricing, in particular in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group, and transactions between such entities that would rarely take place between independents
• The effectiveness of anti-avoidance measures, in particular General Anti Avoidance Rules (GAAR), Controlled foreign corporation (CFC) regimes and thin capitalization rules
• The availability of preferential regimes for certain activities

Because many BEPS strategies take advantage of the interface between the tax rules of different countries, in addressing these issues, governments need a comprehensive approach, globally supported, which should draw on an in-depth analysis of the interaction of all these pressure points.

It is proposed that an initial action plan be developed within the next six months, so that the CFA can agree on it at its next meeting in June 2013.

Such an action plan should:

• Identify actions needed to address BEPS
• Set deadlines to implement these actions
• Identify the resources needed and the methodology to implement these actions

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