Following two years of work, this weekend in Antalya, Turkey, the Organization for Economic Cooperation and Development (OECD) will present G20 leaders with the results and final package of measures of their Base Erosion & Profit Shifting (BEPS) project.
Close to 90 countries have been hard at work on this project, a worldwide effort to curtail aggressive corporate tax avoidance and to be incorporated into already existing tax treaties.
According to Grace Perez-Navarro, Deputy Director for the OECD’s Centre for Tax Policy and Administration, the BEPS project is important given its global nature and reach.
In an interview with Business Standard, she said “The most important difference [with other efforts] is the very broad involvement of countries and the highest level of political support for the BEPS Project. With the political impetus from the G20 you already have a very powerful motor behind it. We already have over 62 countries that have directly worked on the BEPS Project - and over 90 involved in the follow up work on a multilateral instrument.”
She also added, “BEPS will affect around 9,000 companies globally.”
Following this weekend’s big reveal, the project will move on to its implementation phase, which includes setting up monitoring and support mechanisms with the assistance of any jurisdiction interested in participating in this process.
More specifically, the next step, according to the OECD, is to build “a new framework for monitoring BEPS [that] will be conceived and put in place, with all interested countries participating on an equal footing. Monitoring the impact of the BEPS measures will likely include assessing the implementation of the minimum standards agreed in the areas of treaty abuse, dispute resolution, country-by-country reporting and harmful tax practices, as well as of the other BEPS measures, together with the monitoring of their overall impact and effectiveness.”
BEPS Country-by-Country Reporting
One of the highlights of the BEPS package is the call for country-by-country reporting, a measure that will give tax authorities a better understanding of the activities of multinational companies both within their jurisdictions and internationally.
Deloitte recently polled business executives on their BEPS-related priorities and results showed that 30.6 percent of the participants prioritized country-by-country reporting followed by the cost of compliance of this sort of reporting at 26.8 percent.
Covered by Action 13, the country-by-country reporting clause targets multinational companies with an annual consolidated revenue surpassing 750 million Euros.
This measure creates a specific template to be used by the multinational companies when reporting their financial information.
According to Action 13, information to be submitted includes “the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNEs to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in. “
These filings would be due no later than December 31st, 2017.
Challenges to the Implementation of BEPS
The Deloitte poll mentioned above also highlighted the major challenges or concerns regarding the implementation of the BEPS package of measures.
Close to thirty-eight percent of the participants stated an increased compliance burden as their main worry, while 17 and 14.9 percent cited “double taxation of income” and “an increased effective tax rate in income from cross-border transactions,” respectively, as primary concerns.
Additionally, many NGOs and analysts have been critical of the OECD’s BEPS package of measures, particularly its lack of concern for the developing world and smaller nations with little international clout.
According to the BEPS Monitoring Group, a collection of scholars, activists and researchers in favor of greater tax justice, “the BEPS outputs mainly aim at patching up the existing system, making the rules even more complex and in many cases contradictory. They will provide considerable strengthening of the existing rules, giving better tools to tax authorities, but only if they have the capacity and will to use them. The subjective and discretionary nature of many of the principles will make them hard to administer especially for smaller countries, and increase the likelihood of conflicts. They do little to stop the competition between states to offer corporate tax breaks to attract multinationals, involving beggar-thy-neighbour policies which damage all.”
Furthermore, with regards to the country-by-country reporting, Porter McConnell of the Financial Transparency Coalition says, “Multinationals will file these reports with their home country governments, most of the time within the OECD. But the governments of developing countries, where many MNCs have extensive operations, won’t have access to the information, thus making it all that much harder for them to tackle the growing problem of tax dodging.”
The BEPS Monitoring Group also believes “a key unresolved issue is the development of principles for allocation of profits, including the profit split method for transfer pricing.”
Question: What questions do you have about BEPS? How do you see it affecting your business?