BEPS and OECD action plans

Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop options to address them. This includes a consideration of both direct and indirect taxation.

As of 2023, over 140 countries and jurisdictions have joined the Two-Pillar Solution to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.

Pillar 1 would entail the reallocation of a share of the global residual profit of certain businesses to market countries, but this would only apply to very large global businesses.

Pillar 2 would apply where income is not subject to a minimum effective tax rate of at least 15%, in each country in which a business operates

Develop model treaty provisions and recommendations for domestic rules to neutralise the effect of hybrid instruments/entities.

Since announcement of the Action 2 recommendations, a number of Inclusive Framework countries have rapidly adopted rules to address a comprehensive range of hybrid and branch mismatches.

The United Kingdom, Australia and New Zealand have enacted legislation consistent with the common approach in Action 2 and the US Treasury has issued regulations clarifying the application of the hybrid mismatch rules introduced under the Tax Cuts and Jobs Act.

European Union Member States have adopted Council Directive (EU) 2017/952 which requires hybrid and branch mismatch rules to be effective in member states from 2020.

Controlled Foreign Company rules (CFC rules) lead to the taxation of income of controlled foreign subsidiaries in the hands of resident shareholders if certain conditions are met.

Action 3 sets out the building blocks for effective CFC rules that would enable jurisdictions that choose to implement such rules to prevent the shifting of profits to low-taxed foreign subsidiaries of a multinational enterprise.

The Corporate Tax Statistics data highlights that comprehensive and effective CFC rules have the effect of reducing the incentive to shift profits from a market jurisdiction into a low-tax jurisdiction, and that out of the 122 Inclusive Framework members surveyed, 49 had CFC rules in operation, with different approaches to the type of income covered and the presence of substantial activity tests.

Develop recommendations for designing rules to prevent BEPS through the use of interest expense.

Typically, BEPS may arise in three scenarios:

• Groups placing higher levels of third-party debt in high tax countries

• Groups using intragroup loans to generate interest deductions in excess of the group’s actual third-party interest expense.

• Groups using third party or intragroup financing to fund the generation of tax-exempt income.

The goal of Action 4 is to ensure that net interest deductions are directly linked to the level of economic activity. The economic activity is determined based on taxable earnings, before deducting net interest expense, depreciation and amortization (EBITDA).

A number of OECD and Inclusive Framework members have adopted interest limitation rules (EU member states, Argentina, India, Malaysia, Norway, South Korea etc.) or are aligning their domestic legislation with the recommendations of Action 4.

This Action is intended to deal with preferential regimes that risk being used for artificial profit shifting and a lack of transparency with regard to rulings.

The current work of the Forum on Harmful Tax Practices (FHTP) comprises three key areas.

Firstly, the assessment of preferential tax regimes to identify features of such regimes that can facilitate BEPS, and therefore have the potential to unfairly impact the tax base of other jurisdictions.

Secondly, the peer review and monitoring of the Action 5 transparency framework through the compulsory spontaneous exchange of relevant information.

Thirdly, the review of substantial activities requirements in no or only nominal tax jurisdictions to ensure a level playing field.

Develop treaty provisions and recommendations for domestic rules to prevent inappropriately granting treaty benefits.

To foster the implementation of the minimum standard and other BEPS treaty-related measures in the global treaty network, a Multilateral Instrument (the BEPS MLI) that can modify existing bilateral tax agreements was concluded.

BEPS MLI offers concrete solutions for governments to close loopholes in international tax treaties by transposing results from the BEPS Project into bilateral tax treaties worldwide.

Develop changes to the definition of PE to prevent artificial avoidance of a PE.

The changes to the permanent establishment definitions were integrated in the 2017 OECD Model Tax Convention and in Part IV of the BEPS MLI.

As on 1 January 2023, there are 100 signatories to the BEPS MLI and about half of the MLI Signatories have so far adopted the MLI articles that implement the permanent establishment changes.

Action 8 covers transfer pricing issues relating to transactions involving intangibles, as well as cost contribution arrangements (CCAs).

Action 9 addresses the contractual allocation of risks and the resulting allocation of profits to those risks, which may not correspond with the activities actually carried out. The scope of Action 9 includes the transfer pricing considerations in respect of the level of returns to funding provided by a capital-rich group company.

Action 10 focuses on other high-risk areas, such as the recharacterization of transactions, the use of transfer pricing methods in certain abusive situations, and management fees, among other things.

• Additional guidance on the attribution of profits to permanent establishments was published in March 2018.
• Revised guidance on transactional profit split method was published in June 2018.
• Additional guidance addressed to tax administrations on the application of the hard-to-value intangibles (HTVI) approach (Action 8) was finalised in June 2018.
• Transfer pricing guidance on financial transactions was published in February 2020.

Develop recommendations regarding the indicators of the scale and economic impact of BEPS and ensure the tools are available to monitor and evaluate the effect of the actions taken to address BEPS.

Corporate Tax Statistics brings together a range of valuable information to support the analysis of corporate taxation and base erosion and profit shifting (BEPS) practices. This includes data on corporate tax rates, revenues, effective tax rates, and tax incentives for R&D and innovation amongst other data series. The Fourth edition of Corporate Tax Statistics was published in November 2022.

This Action aims at providing a framework for countries to design a disclosure regime that fits their need to obtain early information on potentially aggressive or abusive tax planning schemes.

The Report sets out specific recommendations for rules targeting international tax schemes, as well as for the development and implementation of more effective information exchange and co-operation between tax administrations.

To achieve the objective of providing tax authorities with useful information to assess transfer pricing and other BEPS risks, the OECD Action 13 report put forward a three-tiered structure consisting of the following:

I. Master file: A document containing standardized information relevant for all members of a multinational enterprise (MNE) group;

II. Local file: A document referring specifically to material transactions of the local taxpayer; and

III. Country-by-country report (CbCR): A document containing certain information relating to the MNE group’s income and taxes, together with certain indicators of the location of economic activity within the MNE group.

As of 2022, more than 100 jurisdictions have laws in place introducing a reporting obligation in relation to CbCR.

Corporate Tax Statistics also includes anonymised and aggregated CbCR data providing an overview on the global tax and economic activities of thousands of multinational enterprise groups operating worldwide.

Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under the Mutual Agreement Procedure (MAP) article of the relevant tax treaty.

The Action 14 Minimum Standard consists of 21 elements and 12 best practices, which assess a jurisdiction’s legal and administrative framework in the following four key areas:

• preventing disputes
• availability and access to MAP
• resolution of MAP cases
• implementation of MAP agreements.

Analyse the tax and international law issues relating to development of a MLI to enable jurisdictions to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.

The BEPS MLI allows governments to implement agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.