BEPS for a better international tax system

27 October 2017

The OECD’s Base Erosion and Profit Shifting (BEPS) initiative continues to move forward with new guidance on the implementation of key outputs designed to deliver a better international tax system. Pascal Saint-Amans, the OECD’s director for tax policy and administration, considers the growing acceptance of BEPS and the latest milestones in implementation.

No one doubts the sizeable blow tax avoidance delivers to authorities around the world. However, the estimate from the Organisation for Economic Co-operation and Development (OECD) that up to $240 billion in tax is lost each year – through practices including the use of tax havens – has firmly focused the minds of the international community on the issue. For three years, the OECD’s Base Erosion and Profit Shifting (BEPS) plan has been looking at how to solve the problem of national tax laws lagging behind the pace of corporate globalisation and the digital economy.

BEPS is huge in scope, as it aims to level the playing field for all countries including the developing economies in Africa, for example, and the more mature economies in Europe and North America. The project quickly identified 15 key action points and has continued to make remarkable progress in each area. The latest steps forward have come in action five: countering harmful tax practices more effectively, taking into account transparency and substance; action six: preventing the granting of treaty benefits in inappropriate circumstances; action 13: transfer-pricing documentation and country-by-country reporting; and action 14: making dispute resolution mechanisms more effective.

“We have now put in place an inclusive framework, so there are 90 countries on an equal footing,” says Pascal Saint-Amans, director of tax policy and administration at the OECD. “Soon, BEPS will be in the hands of 100 countries. Nations have implemented minimum standards, and we have a peer-review mechanism in place for those four key actions. That process has started now and is very important.

“Country-by-country reporting is one of them, and the OECD has published recommendations on how to implement it efficiently and cost-effectively, so BEPS is progressing very well. The first review for mature government processes is about to be released and there has been tremendous progress on action six.

“In June this year, many countries will also sign item 15, which deals with a multilateral instrument to modify bilateral tax treaties, and we will cover more than 1,000 bilateral treaties in one signing. What is also pleasing is that the global contract includes 18 African countries. More than 95% of the world’s economy is covered; everything is very much on schedule.”

Steady as she goes

Progress on BEPS has been steady and, in February, the OECD released more documents approved by the inclusive framework that formed the basis of the peer-review process for action 13 on country-by-country (CbC) reporting and the transparency framework outlined in action five that covered the compulsory spontaneous exchange of information on tax rulings. These are two of the four minimum standards outlined in BEPS and all members of the framework must commit to implementing them.

The next big deadline is for the implementation of action 13 on CbC reporting requirements for multinational enterprises (MNEs). It requires an MNE group’s reporting entity to collect and file information for each jurisdiction in which it does business. This gives tax authorities a view of its global allocation of group income, to provide a basis for deciding whether this is in line with where business is conducted, assets used and risks assumed.

The automatic exchange of CbC reports between tax authorities comes into force this year. It is a tool that allows those authorities to perform high-level transfer pricing risk assessments and to evaluate other BEPS-related risks. It is a key tenet of the BEPS reforms’ intention to identify ‘stateless income’ and ensure that profits are reported in the jurisdictions in which economic activities are carried out.

The response from MNEs has changed over time. Now, attitudes are maturing and the reception is much more positive than when BEPS was in its earliest stages of development. This is due in no small part to the efforts of the OECD team to ensure that all interested parties have input into the development process and to provide clarity about how BEPS is evolving at every stage.

“The OECD consults very broadly and gets very practical questions from the industry. Input from every country is received and consensus is achieved. The team is very focused on engagement with tax authorities and industry.

“When it was developing BEPS, it got many comments on the principles, but the implementation phase has been reached and no one is saying that it is not right or practical. Now, the focus is very much on implementation issues,” Saint-Amans remarks.

“Some questions remain about transfer pricing, and the OECD has not yet issued guidance on profit splits or allocation. The broad opposition to the changes proposed by BEPS has faded and given way to more practical questions. The organisation remains very sensitive to the issues people raise.

The OECD must be very pragmatic and respond to what happens on the ground, but there will be no big shock for MNEs. They have been informed about what the process involves.”

The determined effort to be transparent and to foster engagement has been richly rewarded. At first, some corners of the business world were actively hostile to BEPS, largely due to fears that it would have a dramatic impact on earnings.

Many companies were quick to factor in warnings to shareholders about the project’s impact on profitability, but some of their concerns have been tempered as a clearer picture of the post-BEPS world has emerged.

“There is a transparent action plan with clear deadlines,” says Saint-Amans. “Companies have said that the more advanced the project becomes, the more certainty it brings. You must remember that, at first, many technology companies formed a coalition against BEPS, but now they want the measures adopted consistently by all countries. So, that is a reversal of their position. It is a real turnaround.”

A key factor that has swayed opinion among MNEs is the recognition that companies want to have a way to predict what will happen to their tax bills under the new guidelines. Tax certainty has been a priority for the OECD team, and its release of documents in October 2016 to form the basis of the mutual agreement plan (MAP) peer-review and monitoring process for action 14 concerning dispute resolution for tax treaty-related disputes signalled a recognition that actions to counter BEPS must be complemented by actions that ensured certainty and predictability for business.

“Everything is on schedule, but what matters in the end is the impact BEPS has on the planning of companies, and we are already seeing some signs of that,” Saint-Amans explains.

“Companies are becoming more conservative and there is also an impact on governments. In action 14, for instance, a balanced approach with tax authorities is evident. The OECD has also launched work on tax certainty in the G20 context: at the next G20 meeting in Baden-Baden, it will deliver some significant impact on tax certainty, which is just as important as reducing tax avoidance.”

Keep nation states in control

While MNEs have to deal with a new reality, so do tax authorities in nations with their own unique tax laws. Nation states have to make changes and Saint- Amans recognises that there have been some minor hiccups. France, for instance, has not yet dismantled its patent box – a special tax regime for intellectual property revenues that falls under BEPS action five regarding countering harmful tax practices more effectively – informal discussions suggest that the legislation may eventually evolve.

Nevertheless, the about-face that Saint- Amans describes among MNEs is typical of how the perception of BEPS has evolved as the programme has moved forward and he expects a similar change in attitude when it comes to concerns over tax sovereignty among nations.

In the current political climate, where economies such as the UK and the US have taken a direction that is seemingly more nationalist and isolationist, sovereignty is a delicate issue, but Saint-Amans believes that as soon as you peel back the veneer of BEPS you find that it is far from being any threat to tax sovereignty. Taxation is at the core of countries’ sovereignty, and each nation will still be free to set up its own corporate tax system. BEPS will not restrict that freedom in any way.

In fact, it intends to restore and strengthen sovereign tax rights by ensuring that countries can tax the profits arising from the economic activities undertaken there.

“Given the results of recent elections, you have to look at this issue carefully,” he says. “The long-term trend, however, is towards tax cooperation but not tax harmonisation. In fact, BEPS allows countries to protect their sovereignty as some countries are moving to do.

“Tax cooperation helps to protect a country’s sovereignty. Countries will have control over their tax laws. Tax reform in the US, for example, will come, and is much needed to lower tax rates and broaden the base.

“Many countries want to deepen their cooperation, but BEPS may not be a priority for some developing economies. We are now at a point at which many countries have been thinking about BEPS for a very long time. There will be no shocks for them, and the OECD has trust among many nations, which is why I have a lot of confidence in the programme’s progress.”

Tax certainty is a key priority for the OECD and its planning.