BEPS – some specific issues

The BEPS project moves forward and their barely seems to be a week when there isn’t a conference or meeting about it . But all this activity does not necessarily shed much light if the shape and purpose of the project is being conducted in a manner which could not be described as transparent. There are three workstreams in the project:

1. Base Erosion

2. Transfer Pricing

3. Jurisdiction to Tax

The rumours circulating are that only those countries on each workstream see the papers for that workstream, and that the EC is only on one workstream so they only see those papers. Business appears to have very limited access to the papers. The timeline for the project (reporting to the G20) was always ambitious, but given the approach it is difficult to see how a concensus is going to be built in such a short period of time.

There is a growing questioning as to whether the project is asking the right questions. I will focus here on Base Erosion.

The focus appears to not include a review of incentive regimes but this will leave a large gap – it will also disappoint the NGOs based on my discussions.

During the revision to the MNE guidelines in 2010, the concept of adhering to the “letter and spirit” of the law was introduced. Business argued that they had to understand what the spirit of the law meant and we agreed a form of words reflecting the intention of parliament when the law was introduced. We also pointed out the difficulty in the cross border contexet where different governments might interpret the law differently. These same issues are key for the BEPS project. What is the intention of the law in terms of treaties, incentive regimes and hybrid mismatches?

If we move away from the letter and spirit of the law business will be in breach of the MNE guidelines. So we need to understand the intention of the law. What have governments intended? What do they intend now? Are all hybrids against the spirit of the law? As they clearly aren’t against the letter. A sensible way forward for BEPS would be for governments to publicise which practices they believe to be against the spirit of the law. The OECD has a database of 450 hybrids, we could start with that and some guidance as to which are against the spirit of the law.

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