The Beps report – 19 July 2013 – “You don’t need a weatherman to know which way the wind blows”

Building on my comments on 15 July, I’m now going to look at what has been said. It is pleasing that my high level summary appears to have been fairly accurate. What I’m going to do today is to focus on the what (what is proposed) the when (the timetable) and the how of BEPS (which I think is perhaps the most interesting development). In doing this I’m going to quote quite extensively and then comment. Apologies as this is quite long!

The report starts with:

“Fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it.”

“New international rules standards must be designed to ensure the coherence of corporate income taxation at the international level. “

“A realignment of taxation and relevant substance is needed to restore the intended effects and benefits of international standards, which may not have kept pace with changing business models and technological developments:”

“The actions implemented to counter BEPS cannot succeed without further transparency, nor without certainty and predictability for business. The availability of timely, targeted and comprehensive information is essential to enable governments to quickly identify risk areas. While audits remain a key source of relevant information, they suffer from a number of constraints and from a lack of relevant tools for the early detection of aggressive tax planning. As a result, timely, comprehensive and relevant information on tax planning strategies is often unavailable to tax administrations, and new mechanisms to obtain that information must be developed. At the same time, mechanisms should be implemented to provide businesses with the certainty and predictability they need to make investment decisions.”

So this is a call for a fundamental review of international tax standards of significant scope. It is interesting to quote one advisory firms view of 29 April 2013 – just 3 months ago – “The OECD’s action plan to tackle tax avoidance and profit shifting will not outline actual policies and may take as long as 18 months to draft.” Things can change quickly!


 ACTION 1 – Address the Tax Challenges of the Digital Economy

 “Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the characterisation of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector.”

 This is as expected given the political furore in Europe. But it is pretty comprehensive and will review the value of local markets in terms of taxation rights.

 ACTION 2 – Neutralise the Effects of Hybrid Mismatch Arrangements

 “Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double  deduction, long-term deferral) of hybrid instruments and entities. This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on coordination or tie-breaker rules if more than one country seeks to apply such rules to a

transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be coordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping. “

 I said this is going to be an area of action. I’ve said before that unless there is a very good tax policy reason for a hybrid, which is articulated by a government, I think business will struggle in constructing a strategy to oppose this workstream. What would be the principled reason for opposition?

 ACTION 3 – Strengthen CFC Rules

 “Develop recommendations regarding the design of controlled foreign corporation rules. This work will be coordinated with other work as necessary.”

 ACTION 4 – Limit Base Erosion via Interest Deductions and Other Financial Payments

 “Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments. The work will evaluate the effectiveness of different types of limitations. In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements. The work will be co-ordinated with the work on hybrids and CFC rules.

 ACTION 5 – Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance

 “Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.”

 I’m pleased that ICC chair Theo Keijser has said today “Governments must agree on acceptable forms of tax competition and avoid labelling businesses as aggressive tax planners or tax avoiders when using legislated tax incentives such as accelerated depreciation or patent box regimes, in return businesses must adhere to rules and principles agreed upon by and between countries.” Governments do need to get their act together about what is acceptable tax competition.

ACTION 6 – Prevent Treaty Abuse

 “Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be coordinated with the work on hybrids.

 The definition of permanent establishment (PE) must be updated to prevent abuses. In many countries, the interpretation of the treaty rules on agency-PE allows contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise without the profits from these sales being taxable to the same extent as they would be if the sales were made by a distributor. In many cases, this has led enterprises to replace arrangements under which the local subsidiary traditionally acted as a distributor by “commissionnaire arrangements” with a resulting shift of profits out of the country where the sales take place without a substantive change in the functions performed in that country. Similarly, MNEs may artificially fragment their operations among multiple group entities to qualify for the exceptions to PE status for preparatory and ancillary activities.”

On treaty shopping, business might consider seeking consistent provisions in a country’s treaties which is often one the main drivers of treaty shopping. This work will require group’s to review their group structures carefully.

ACTION 7 – Prevent the Artificial Avoidance of PE Status

 “Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.

 A major issue is transfer pricing and the enforcement of the arm’s length principle. Transfer pricing rules serve to allocate income earned by a multinational enterprise among those countries in which the company does business. In many instances, the existing transfer pricing rules, based on the arm’s length principle, effectively and efficiently allocate the income of multinationals among taxing jurisdictions. In other instances, however, multinationals have been able to use and/or misapply those rules to separate income from the economic activities that produce that income and to shift it into low tax environments. This most often results from transfers of intangibles and other mobile assets for less than full value, the over-capitalisation of lowly taxed group companies and from contractual allocations of risk to low tax environments in transactions that would be unlikely to occur between unrelated parties.

Alternative income allocation systems, including formula based systems, are sometimes suggested. However, the importance of concerted action and the practical difficulties associated with agreeing to and implementing the details of a new system consistently across all countries means that, rather than seeking to replace the current transfer pricing system, the best course is to directly address the flaws in the current system, in particular with respect to returns related to intangible assets, risk and over-capitalisation, risk and intangible assets. Nevertheless, special rules and measures, either within or beyond the arm’s length principle, may be required with respect to intangible assets, risk and over-capitalisation, risk, and intangible assets to address these flaws. “

I’m not surprised with the comments on the arm’s length principle and I’ve blogged on this subject and the efficacy of the principle  as it is under challenge from unitary taxation. I agree that for normal transactions the arm’s length principle works, what is interesting here is:  “Nevertheless, special rules and measures, either within or beyond the arm’s length principle, may be required with respect to intangible assets, risk and over-capitalisation, risk, and intangible assets to address these flaws.” This is a clear indication that apportionment may be considered as the way to deal with high value intangibles.

Action 8 – Intangibles

“Develop rules to prevent profit shifting BEPS by moving intangibles among group members. This will involve: (i) adopting a broad and clearly delineated definition of intangibles; (ii) ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation; (iii) developing transfer pricing rules or special rules measures for transfers of hard-to-value intangibles; and (iv) updating the guidance on cost contribution arrangements.”

Action 9 – Risks and Capital

 “Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation. This work will be co-ordinated with the work on interest expense deductions and other financial payments.”

 Action 10 – Other High-Risk Transactions

“Develop rules to prevent profit shifting BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterised; (ii) clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains; and (iii) provide protection against common types of base eroding payments, such as management fees and head office expenses.”

 For some time I have been arguing that there needs to be a constructive dialogue between business and governments on management fees and head office expenses. I would recommend (as I have for the last three years that a forum should explore reaching concensus on these issues.

 ACTION 11 – Establish Methodologies to Collect and Analyse Data on BEPS and the Actions to Address It

 “Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and micro-level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses.”

 ACTION 12 – Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements

“Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. One focus will be international tax schemes, where the work will explore using a wide definition of “tax benefit” in order to capture such transactions. The work will be co-ordinated with the work on co-operative compliance. It will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations.”

 The development of a template for disclosure of profits, taxable profits and tax paid to tax authorities is very significant. Again business needs to develop a strategic response to the issue of transparency. The issue has moved on over the last 12 months and there is greater recognition that it has changed from an “if” to a “when” question. If companies are required to report to tax authorities, they may wish to control how this information is used in the public arena and also seek to delineate themselves as not having anything to hide.

 ACTION 13 – Re-examine Transfer Pricing Documentation

 “Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed may include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.”

 ACTION 14 – Make Dispute Resolution Mechanisms More Effective

 “Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.”

 This is to be welcomed and what business has been asking for.

ACTION 15: Develop a Multilateral Instrument

 “Analyse the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested Parties will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution.”

 In view of what I discuss below on the How below, how this will be developed will be interesting. The European Commission is already working on this and the key challenge will be coordination.


The paper proposes the following demanding timeline.

“Amongst the actions more likely to be delivered in 12-18 months are those in the areas of hybrid mismatch arrangements, treaty abuse, the transfer pricing aspects of intangibles, documentation requirements for transfer pricing purposes, a report identifying the issues raised by the digital economy and possible actions to address them, as well as part of the work on harmful tax practices.

Actions to be delivered in two years relate to CFC rules, interest deductibility, preventing the artificial avoidance of PE status, the transfer pricing aspects of intangibles, risks, capital and high risk transactions, part of the work on harmful tax practices, data collection, mandatory disclosure rules, and dispute resolution.

Actions that may require more than two years include the transfer pricing aspects of financial transactions, part of the work on harmful tax practices and the development of a multilateral instrument to swiftly implement changes to bilateral treaties. Although these actions are considered as key items of the Action Plan, it is recognised that this work will have to be developed in different stages, starting with a thorough analysis of the issues.”

This suggests that a number of major issues of principle have been agreed by governments if this timetable is to be realistic. It also means that business will not have the luxury of the usual timescale of OECD consultations and given the scope of what is proposed a fundamental review of tax planning strategies by Groups will be required urgently.


 What I think is interesting in the next section is the how – how to make this happen. There are some fundamental changes in how this is going to happen compared to the post WW2 hegemony of the OECD club.

“The BEPS project marks a turning point in the history of international co-operation on taxation. As the current consensus-based framework is at risk, it is critical that a proper methodology be adopted to make sure that the work is inclusive and effective, takes into account the perspective of developing countries and benefits from the input of business and the civil society at large.

Accomplishing the actions set forth in this Action Plan requires an effective and comprehensive process that involves all relevant stakeholders. To this end, and in order to facilitate greater involvement of major non-OECD economies, it is proposed that the “BEPS Project” will be launched. In light of the strong interest and support expressed on several occasions by the G20, it is proposed that interested G20 countries that are not members of the OECD will be invited to be part of the project as Associates, i.e. on an equal footing with OECD Members, (including at the level of the subsidiary bodies involved in the work on BEPS), and will be expected to associate themselves to with the outcome of the BEPS Project. Other non-members could be invited to participate as Invitees on an ad hoc basis.

Developing countries also face issues related to BEPS, though the issues may manifest differently given the specificities of their legal and administrative frameworks. The UN participates in the tax work of the OECD and will certainly provide useful insights regarding the particular concerns of developing countries. The Task Force on Tax and Development (TFTD) and the OECD Global Relations Programme will provide a useful platform to discuss the specific BEPS concerns in the case of developing countries and explore possible solutions with all stakeholders. Finally, existing mechanisms such as the Global Fora on Tax Treaties, on Transfer Pricing, on VAT and on Transparency and Exchange of Information for Tax Purposes will all be used to involve all countries in the discussions regarding possible technical solutions.

Political expectations are very high in most countries and the results and impact of the BEPS work must be in line with these political expectations. The BEPS Project will draw on the expertise of the CFA and of its subsidiary bodies. While the practices of these subsidiary bodies are well-adapted to developing consensus on routine work, they require some adaptation to deliver results within the expected timelines. There is thus a need to find ways to speed up accomplish the work quickly while seeking consensus. Each subsidiary body will need to seek new ways to find consensus as quickly as possible. This may involve, for example, setting up focus groups for the actions for which it is responsible. Each focus group will could be composed of a relatively small number of delegates, with one country taking the lead and acting as co-ordinator. The focus groups would work actively in between meetings of the relevant subsidiary body, using remote working methods and reducing physical meetings to a minimum, to prepare drafts which will would be circulated to and approved by the subsidiary body.

Consultation with non-governmental stakeholders is also key. Business and civil society representatives will be invited to comment on the different proposals developed in the course of the work. The OECD’s core relationship with civil society is through the Business and Industry Advisory Committee (BIAC) and the Trade Union Advisory Committee (TUAC) to the OECD. Non-governmental organisations, think tanks, and academia will also be consulted. The OECD’s work on the different items of the Action Plan will continue to include a transparent and inclusive consultation process, and a high-level policy dialogue with all interested parties will be organised on an annual basis.”

Now this is fundamental change. No longer the OECD as the rule setter for the world per se. Note that “it is proposed that interested G20 countries that are not members of the OECD will be invited to be part of the project as Associates, i.e. on an equal footing with OECD Members, (including at the level of the subsidiary bodies involved in the work on BEPS),” and in addition  “The Task Force on Tax and Development (TFTD) and the OECD Global Relations Programme will provide a useful platform to discuss the specific BEPS concerns in the case of developing countries and explore possible solutions with all stakeholders.”

This recognises the fundamental shifts in the global economy (as it should) but it also shifts power within OECD as the dominant position of the US is now counterbalanced by G20 non OECD members. It also poses an interesting consultation issue. BIAC and TUAC are clearly the organisations which OECD consults, how will business and trade unions in G20 non OECD countries be consulted? How will they participate in “the high-level policy dialogue with all interested parties will be organised on an annual basis”.  Again ICC has today said “With business members in all G20 countries, ICC is uniquely placed to provide business comment on the OECD proposals and the current overhaul of international taxation rules which calls for an inclusive and transparent process.”

These are of course preliminary thoughts on a long document published today and I will return to some specific areas in due course. Over the course of the last year, I’ve been told by a number of experts that BEPS won’t achieve very much and that business doesn’t need to take this process seriously. I think they have underestimated the politics of the issue. Business needs to think carefully about the response. Business needs to think strategically in this situation. As Bob Dylan wrote “You don’t need a weatherman to know which way the wind blows”. I still think the market isn’t factoring in the risk for those groups with low tax rates of BEPS as described above.



  1. BEPS Part 2: international politics and developing countries « Martin Hearson - August 9, 2013

    […] developing countries very much, but there are a few things worth highlighting. I also recommend Chris Lenon’s comments on the action plan, to which I’ll refer […]

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