OECD Base Erosion and Profit-Shifting – First Recommendations

The OECD, on 16 September 2014, released its first set of recommendations for combating tax avoidance by Multi-National Enterprises (MNEs). These recommendations require a coordinated approach by countries. These recommendations were introduced through a speech by Secretary-General Angel Guirria. The claim made is that these recommendations will put an end to base erosion and profit shifting that erode the integrity of national tax systems.

The OECD Committee on Fiscal Affairs brought together 44 countries – consisting of all OECD members, G20 countries, and Accession Countries – so as to gain consensus on the recommendations.

The first recommendations cover seven (7) elements of the BEPS Action Plan:

• ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralise hybrid mismatch arrangements (Action 2);
• realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties (Action 6);
• assure that transfer pricing outcomes are in line with value creation, through actions to address transfer pricing issues in the key area of intangibles (Action 8);
• improve transparency for tax administrations and increase certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting (Action 13);
• address the challenges of the digital economy (Action 1);
• facilitate swift implementation of the BEPS actions through a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties (Action 15); and
• counter harmful tax practices (Action 5).

ITA-Annotated will deal with these first recommendations separately and in detail. The recommendations do address some issues of global tax justice, but avoid (by nature of the very structure of the BEPS project) many others. The biggest question, left perhaps for another day, the question of the equitable distribution of revenues and income as among nations: The question of source vs residence. The BEPS project was only meant to address the exploitation, though ‘abusive tax planning’ and ‘aggressive tax avoidance’ of existing gaps and loopholes in the current international tax regime only. For an analysis of the use of the terminology and unexamined assumptions and ideology involved, and the need to examine these, see this paper by Prof Allison Christians.

This post will provide an overview of the first seven recommendations. Later posts will examine each in detail, taking both an international and a Canadian perspective. The BEPS project requires nations to buy in and implement the recommendations in domestic law (domestic coordination) and changes to existing treaties through a multi-lateral treaty.

The explanatory statement issued by the OECD sets out the recommendations in broad strokes. The aim of the OECD project is to create consensus-based international tax rules that protect the tax bases of, mainly, developed and capital exporting countries. The new rules aim to avoid double taxation of international income without allowing for artificial shifting of profits to low/no-tax countries or double non-taxation.

The first seven recommendations aim to:

1. Neutralise hybrid mismatch arrangements – prevent multiple deductions for a single expense, deduction in one country without inclusion in another, and generation of multiple foreign tax credits for one amount of tax paid.
2. Address treaty shopping and treaty abuse – seen as undermining tax sovereignty by avoiding the bilateral nature of tax treaties, and addressed by introducing anti-treaty abuse provisions in treaties
3. Reduce transfer-pricing abuses using intangibles – rules that address the separation of the location of returns from the location where the intangible is used to create profits and create value.
4. Require country-by-country reporting of economic activity, profit attribution, and taxes of MNEs – to improve transparency, improve transfer pricing documentation, and increase the quality of information available to tax authorities by clearly indicating where profits, sales, employees, and assets are located and where the taxes are paid and accrued.

The overall aim of the project is to tax profits where the economic activity giving rise to the profits occur and where value is actually created.

– Sas Ansari, JD LLM PhD (exp)

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