The Organization for Economic Cooperation and Development has offered the Group of Twenty nations a comprehensive and coordinated action plan for addressing gaps in international tax rules that motivate corporate taxpayers to shift profits to lower-tax jurisdictions.
Requested by the G20, the OECD’s final package of measures -- called the Base Erosion and Profit Shifting measures -- includes action items that would need to be undertaken on a coordinated, global basis to plug the holes that enable companies to engage in offshore tax planning that reduces the total global tax base. The package includes minimum standards on country-by-country reporting to give tax administrators a better view of the operations of multinational enterprises, and treaty shopping, to put an end to the use of conduit companies to channel investments. It also features minimum standards to curb harmful tax practices, establishing effective mutual agreement procedures.
In addition, the package revises guidance on the application of transfer pricing rules to prevent corporate taxpayers from sheltering profits in low-tax or no-tax jurisdictions, a common concern among U.S. authorities, including the Securities and Exchange Commission. It also redefines the concept of “permanent establishment” to curb arrangements that avoid creating a taxable presence in a country by relying on an outdated definition and offers jurisdictions new measures to implement through changes to domestic law. That includes strengthening rules on controlled foreign corporations, limiting base erosion through interest deductibility, and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through complex financial instruments.
OECD developed the recommended BEPS measures over two years working with G20 and developing countries and stakeholders in business, labor, academics, and civil society groups. G20 leaders will review the measures at their annual summit in November in Turkey.
The recommendations will likely meet skepticism on Capitol Hill, “particularly with respect to whether the Treasury Department has the legal authority to implement country-by-country reporting,” says Jon Traub, managing principal in tax policy with Deloitte Tax. “What has been driving the debate on international tax reform in Congress is the need to fund our highways. With that effort currently stalled, it may be some time before we see any legislative changes addressing concerns of U.S. based companies competing globally in a post-BEPS environment.”
Keith O’Donnell, global real estate tax service line leader with global tax firm Taxand, says the changes recommended with the BEPS measures will be profound. “Fundamental to its success will be the challenge to piece together the jigsaw of various elements into the clarity of actions which reduce unfair outcomes, doesn’t lead to double taxation and increases transparency without leading to excessive reporting requirements that harm international trade,” he said.
O’Donnell is concerned the varying perspectives and interests of different countries is hampering agreement to implement the BEPS plan simultaneously, which is necessary for the plan to work. “We have already witnessed 30 unilateral measures implemented by 19 countries, illustrating the varying impetus of each country involved,” he said. “It is important that there is time for companies to adjust, and for co-ordinated introduction across jurisdictions. If measures are introduced on an à la carte basis, allowing countries to select the actions most pertinent to them, it will create a high level of complexity and uncertainty, deterring international businesses from taking action.”