In the previous article a short history leading to the launch of the Base Erosion and Profit Shifting (BEPS) project has been provided. But what exactly is the BEPS project?
In September 2013 the G20 Leaders have endorsed the BEPS Action Plan, developed with OECD members. On the basis of this Action Plan the OECD and G20 countries developed and agreed on an equal footing upon a comprehensive package of measures in just two years. These measures were designed to be implemented domestically and through tax treaty provisions in a coordinated manner, supported by targeted monitoring and strengthened transparency.
An important notion is that the project is on an equal footing. All countries and jurisdictions in the project are treated equal, meaning that small countries have as much power in the project as large ones. The timelines of 2 years have been set ambitious, which underpins the OECD and G20s political urgency in getting the project implemented. Lastly the project is of an advising nature, it is not law. It is a package that helps countries and jurisdictions to implement measures in the domestic tax laws. This means that from country to country there can be differences in implementation for legacy, political or other reasons. To ensure success of the project monitoring and increasing intra-country, intra-jurisdictional transparency are key. To make this happen the project has established a project body called the Inclusive Framework.
Aim of the BEPS Plan
The aim of the plan is to:
- Improve the coherence of tax rules across borders
- Reinforce substance requirements, and
- Enhance transparency and certainty
The BEPS Action Plan is targeted at countries and jurisdictions. The aim of the project should be seen in this perspective as well. When the aim is to improve coherence of tax rules across borders then this means to improve the consistence of tax regimes on a global scale. This addresses the gaps and mismatches between the various tax regimes. Reinforcing substance means to address empty shell constructions allowed by certain tax regimes. And enhancing transparency and certainty is to increase collaboration and sharing of information on a supranational tax level in a standardized way.
The target of the BEPS Action Plan being the countries and jurisdictions will be reflected in local tax laws. Tax regimes will change when BEPS Actions are being implemented. The end result will be that corporates will be impacted by the BEPS Action Plan through changing local tax laws even when they are not directly targeted. How they will be impacted is depending on how exactly the tax laws will change in the various jurisdictions.
As with every project there should be deliverables. And in the case of the BEPS project there are quite a few. The project has defined 4 new minimum standards, updates of the existing standards, agreed common approaches and guidance that draws on best practices. The package also takes a holistic look at the tax challenges raised by the evolving digitalization of the economy, and set the basis for negotiation of a multilateral instrument that will allow countries to rapidly update their tax treaty network in line with the BEPS measures.
The deliverables of the BEPS project are the below 15 measures:
- Address the Tax Challenges of the Digital Economy
- Neutralise the Effects of Hybrid Mismatch Arrangements
- Strengthen CFC Rules
- Limit Base Erosion via Interest Deductions and Other Financial Payments
- Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
- Prevent Treaty Abuse
- Prevent the Artificial Avoidance of PE Status
- 9. 10. Assure that Transfer Pricing Outcomes are in Line with Value Creation
- Measuring and Monitoring BEPS
- Require Taxpayers to Disclose their Aggressive Tax Planning Arrangements
- Re-examine Transfer Pricing Documentation
- Make Dispute Resolution Mechanisms More Effective
- Develop a Multilateral Instrument
The minimum standards are, like the name says, a minimum that participants in the project should implement in local tax laws. The four BEPS minimum standards are:
- To address harmful tax practices
- To prevent tax treaty shopping
- To ensure Country-by-Country Reporting
- To improve the effectiveness of cross-border tax dispute resolution
In October 2015 the BEPS package with the above 15 measures has been delivered by the OECD. The G20 Leaders Summit has in November 2015 endorsed the delivered BEPS package. Also in November 2015 the OECD and G20 members established an inclusive framework which allows interested countries and jurisdictions to work on an equal footing with OECD and G20 members in the next phase of the BEPS project.
The mandate of the framework is to:
- Complete the remaining standard-setting work required under the BEPS Action Plan
- Review the implementation of the 4 BEPS minimum standards through peer-review process
- Monitor new developments relating to the other BEPS measures and to measure the impact of those measures
- Support jurisdictions in the implementation of the BEPS measures
With the deliverance of the package within two years and the establishment of the Inclusive Framework the project has delivered what was agreed back in 2013. That in itself highlights once more how high the topic is on the agenda of policymakers worldwide.
Summary of Important Events in the BEPS Project
The importance and significance of the BEPS project can best be visualized in a timeline that clearly shows that momentum has picked up between 2013 until now.