«Frequently Asked Questions Table of contents A. BEPS Package General questions Action 1 Address the tax challenges of the digital economy Action 2 ...»
OECD/G20 Base Erosion and
Profit Shifting Project
2015 Final Reports
Table of contents
A. BEPS Package
Action 1 Address the tax challenges of the digital economy
Action 2 Neutralise the effects of hybrid mismatch arrangements
Action 3 Strengthen controlled foreign companies rules
Action 4 Limit base erosion via interest deductions and other financial payments.............. 10 Action 5 Counter harmful tax practices more effectively, taking into account transparency and substance
Action 6 Prevent treaty abuse
Action 7 Prevent the artificial avoidance of permanent establishment status
Actions 8-10 Assure that transfer pricing outcomes related to intangibles are in line with value creation
Action 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it
Action 12 Require taxpayers to disclose their aggressive tax planning arrangements........... 19 Action 13 Re-examine transfer pricing documentation
Action 14 Make dispute resolution mechanisms more effective
Action 15 Develop a multilateral instrument
B. Engagement with developing countries
C. Engagement with stakeholders
D. BEPS implementation phase
E. Background on BEPS
A. BEPS Package General questions
1. Which measures have been included in the BEPS Package?
A comprehensive package of measures has been agreed upon. Countries are committed to this comprehensive package and to its consistent implementation. These measures range from new minimum standards to revision of existing standards, common approaches which will facilitate the convergence of national practices and guidance drawing on best practices.
2. Has the BEPS Project delivered on its promise to put an end to double non-taxation?
The expectation is that once implemented, the measures restore taxation in a number of instances where income would otherwise go untaxed. Depending on the planning structure used, one or more of the measures developed will have an impact and ensure that income is taxed at least one time and not more than once. Rather than closing individual schemes, the measures go to their roots.
3. How will the BEPS measures be implemented?
Some of the measures may be immediately applicable such as the revised guidance on transfer pricing. Other measures require changes to bilateral tax treaties, something that can be done via the multilateral instrument under Action 15. Finally, other measures require domestic law implementation.
4. What is the nature of the BEPS outputs? Are they legally binding?
They are soft law legal instruments. They are not legally binding but there is an expectation that they will be implemented accordingly by countries that are part of the consensus. The past track record in the tax area is rather positive. Minimum standards were agreed in particular to tackle issues in cases where no action by some countries would have created negative spill overs (including adverse impacts of competitiveness) on other countries. Recognising the need to level the playing field, all OECD and G20 countries have committed to consistent implementation in the areas of preventing treaty shopping, Country-by-Country Reporting, fighting harmful tax practices and improving dispute resolution. In addition, existing standards have been updated and will be implemented, noting however that not all BEPS participants have endorsed the underlying standards on tax treaties or transfer pricing. In other areas, such as recommendations on hybrid mismatch arrangements and best practices on interest deductibility, countries have agreed a general tax policy direction. In these areas, they are expected to converge over time through the implementation of the agreed common approaches, thus enabling further consideration of whether such measures should become minimum standards in the future. Guidance based on best practices will also support countries intending to act in the areas of mandatory disclosure initiatives or CFC legislation.
5. Do the BEPS measures increase the risk of double taxation?
The aim of the measures is to realign taxation with economic substance and value creation, while preventing double taxation. The BEPS package represents the first substantial renovation of the international tax rules in almost a century. This renovation is necessary not only to tackle BEPS, but also to ensure the sustainability of a consensus-based system aimed at eliminating double taxation. As new rules always raise interpretation issues, Action 14 on improving dispute resolution is a key part of the BEPS Project.
6. Will MNEs have to restructure their business in light of the BEPS outputs?
This should not be the case for groups whose legal and tax structures reflect the underlying economic reality.
7. Will SMEs be impacted by the BEPS measures?
A number of measures have been crafted in a way that minimises the impact on SMEs with negligible BEPS risks, e.g. the measures on interest deductibility can exclude companies with interest below a certain de minimis threshold, and the new Country-by-Country Reporting template does not apply to groups with annual consolidated revenue in the immediately preceding fiscal year of less than EUR 750 million.
8. Will BEPS implementation be monitored?
Yes, it will. Monitoring the implementation of the BEPS measures includes targeted monitoring of the minimum standards on treaty shopping and on dispute resolution, the application of the criteria on harmful tax practices, as well as the implementation of the country-by-country reporting requirements. Monitoring will also focus on what countries have done to implement the BEPS recommendations and the measurement of the impact of BEPS and BEPS countermeasures.
9. Will there be other BEPS outputs in the future?
G20 and OECD countries will keep working on an equal footing to carry out follow-up work in
2016. This includes work on the transfer pricing aspects of financial transactions, finalising the guidance on the practical application of transactional profit split methods and the approach on hard-to-value-intangibles, clarifying the rules for the attribution of profits to permanent establishments in light of the changes to the definition, exploring solutions to the broader question of treaty entitlement of non-CIV funds, and finalising the details of a group ratio carve-out and special rules for insurance and banking sectors in the recommended approach for interest deductibility. Finally, the multilateral instrument to implement treaty changes is expected to be open for signature in 2016.
10. How will the success (or otherwise) of the BEPS Project be judged?
There are many ways to define the success (or otherwise). The first is whether consensus has been reached on the different measures, the second is whether the measures are actually implemented and applied according to the consensus, and the third is whether instances of BEPS still exist after implementation. The BEPS Project will also be a success if businesses do not have to comply with hundreds of different disclosure requirements or anti-avoidance measures and can therefore benefit from lower compliance costs.
Action 1 – Address the tax challenges of the digital economy
11. What is the digital economy?
The digital economy is the result of the widespread and transformative process brought on by Information and Communication Technology (ICT). All sectors, ranging from retail, financial services to education and broadcasting and media have been transformed by ICT technologies. So much so, that the digital economy is increasingly becoming the economy itself. It would therefore be difficult, if not impossible, to ring fence the digital economy from the rest of the economy for tax purposes.
12. How does this report address BEPS in the digital economy?
The report provides a detailed analysis of the digital economy, its business models, and its key features. While the digital economy does not create unique BEPS issues, some of its features exacerbate existing ones. These ones have been taken into account during the work on the definition of permanent establishment, transfer pricing and CFC rules. It is expected that these measures will successfully address BEPS issues in the digital economy once implemented.
13. Where should VAT be paid in the digital age?
In the country of consumption. The report outlines the challenges related to collection of VAT on cross-border B2C transactions. Building on the International VAT/GST Guidelines, it recommends that VAT on these transactions is collected in the country where the customer is located and provides mechanisms to do so in an efficient manner.
14. Are more fundamental changes needed to deal with the tax challenges of digital economy?
The report recognises that the changes brought about by the digital economy also raise more systemic challenges regarding the ability of the current international tax framework to ensure that profits are taxed where economic activities occur and where value is created. These challenges relate chiefly to nexus and to the role of data in the modern economy and cut across direct and indirect taxation, both in terms of the challenges and in terms of the potential solutions.
15. Is there sufficient consensus on how to tackle the tax challenges of the digital economy?
Is the report recommending the introduction of a virtual permanent establishment concept?
The work analysed potential options to deal with the broader challenges raised by the digital economy, including a new nexus based on a significant economic presence test. Under such potential option, an enterprise that generates significant revenues from in-country customers and has features indicating either targeting of customers in that country through digital means or substantial interaction with users in that country may be considered to have a taxable presence in that country based on substantial economic presence. The report is not recommending the adoption of such an option as an international standard but a country is free to do so if it considers that it is needed to tackle BEPS issues.
Action 2 – Neutralise the effects of hybrid mismatch arrangements
16. What are hybrid mismatches arrangements?
Hybrid mismatches are cross-border arrangements that take advantage of differences in the tax treatment of financial instruments, asset transfers and entities to achieve “double non-taxation” or long term deferral outcomes which may not have been intended by either country. A common example of a hybrid financial instrument would be an instrument that is considered a debt in one country and equity in another so that a payment under the instrument is deductible when it is paid but is treated as a tax-exempt dividend in the country of receipt.
17. How do the BEPS measures tackle hybrid mismatches?
The measures tackle hybrids by eliminating the tax benefit derived therefrom. The work sets out general and specific recommendations for domestic hybrid mismatch rules and model treaty provisions which will put an end to multiple deductions for a single expense, deductions in one country without corresponding taxation in another or the generation of multiple foreign tax credits for one amount of foreign tax paid. Once translated into domestic law and tax treaties, the recommended rules will neutralise the mismatch in tax outcomes and prevent these arrangements from being used as a tool for BEPS without adversely impacting cross-border trade and investment.
18. Do you expect difficulties in the implementation of the domestic law rules?
The model domestic rules are designed to co-ordinate with the rules in the other jurisdiction and the recommendations are now supported by guidance and examples illustrating how the rules should be applied. Once implemented, the rules should apply to taxpayers and arrangements automatically without the need for further intervention by the tax authority.
19. What happens if countries fail to introduce the measures?
That country will expose itself to the use of these arrangements but there will be no impact on the ability of other countries to protect themselves against them. Further, the effect of having both a primary and a defensive rule is that a country does not need to rely on the domestic laws of another country in order to neutralise hybrid mismatches. This also prevents more than one country applying the rule to the same arrangement and therefore avoids double taxation.
20. Will these rules address structures that use the US Check the Box Regulations?
Yes, it will. The rules are designed to neutralise the effect of hybrid entities. Therefore, once implemented by a country, they will neutralise the hybrid mismatch effects of check the box planning in those countries.
Action 3 – Strengthen controlled foreign companies rules
21. What is a CFC rule?
Controlled foreign company (CFC) rules are rules which respond to the risk that taxpayers with a controlling interest in a foreign low-taxed subsidiary can shift income into it and avoid taxation.
CFC rules combat this by enabling jurisdictions to tax income earned by foreign subsidiaries without waiting for an actual distribution of the income, which may be postponed indefinitely.
22. Why do we need stronger CFC rules?
Groups can create low-taxed non-resident affiliates to which they shift income. Controlled foreign company rules can combat this by enabling jurisdictions to tax income earned by foreign subsidiaries where certain conditions are met. CFC rules can therefore ensure that income that would otherwise go untaxed is subject to tax but current CFC rules may not always capture all the types of income that gives rise to BEPS concerns.
23. Will countries be obliged to introduce CFC rules?