Challenges and Opportunities
The OECD/G20 BEPS Project reached a milestone in October 2015, with the publication of 13 Final Reports making recommendations covering 15 Action Plan topics, which modernise the entire international tax framework. The OECD member states and other G20 economies had reached an impressive consensus on how to curb aggressive tax planning.
Some of the measures recommended are "minimum standards", which all the original BEPS Project members - and some 40 other developing countries that are now within the OECD’s BEPS "inclusive framework" - have committed to implement without delay. Existing OECD standards have also been augmented and updated - for example, the OECD Transfer Pricing Guidelines, significantly rewritten and strengthened with text coming from the October 2015 Final Reports, were formally approved by the OECD Council in May 2016. Many other recommendations were for changes to be made to domestic tax legislation, to make this more internationally consistent and coherent, and to clamp down on tax avoidance.
2016 has already seen much action to implement BEPS. For example, nearly 50 jurisdictions have already acted to introduce the "minimum standard" country-by-country reporting (CbCR) obligations. CbCRs should allow tax authorities to see much more clearly on a global basis where large multinational companies have activities, report their profits, and pay their taxes, and hence to evaluate more effectively the validity of their transfer pricing and other tax planning.
The EU regards the BEPS conclusions as a central plank in its own action plan, instituted in June 2015, for fair and efficient corporate taxation across the EU. EU Directives are seen by the Commission to be the preferred vehicle for implementing these conclusions.
The EU's Anti Tax Avoidance Directive follows several of the BEPS Project recommendations, dealing with "hybrid" mismatches between individual country tax treatments of entities and financing instruments, controlled foreign companies, and base erosion through interest expenses. It also imposes a common general anti-avoidance rule (GAAR). This Directive is now largely final, with text being adopted at the EU Council in July 2016. Further proposals for extra tightening of the measures on "hybrids" then came out in October 2016. Member States must now legislate the Directive's measures, mainly to be effective no later than 1 January 2019. The fact that the text of a wide-ranging Directive was agreed unanimously by the 28 EU Member States, in less than six months, shows how strong and uniform the political will for action on tax avoidance has been within the EU during the last three years. The corporate world cannot ignore this.
Other BEPS measures require double tax treaties to be amended. In particular, new rules that counter tax treaty shopping - a key "minimum standard" of the BEPS Project - need treaty change before they can apply.
As foreseen under the BEPS Project, the OECD is has co-ordinating work by over 90 countries (including the US) to agree the text of a Multilateral Instrument to amend the existing network of bilateral treaties between its signatories, and notably to adopt the new OECD model text on treaty shopping. The text was released publicly at the end of November 2016, and G20 countries have committed to sign it in the first half of 2017. A major signing ceremony is planned to take place in Paris next June.
For businesses, the most important consequence of the BEPS measures is the need for behavioural change, at all levels.
Building on media pressure, many tax administrations will not only introduce tougher measures and seek to restrict tax treaty benefits, but will also challenge more and more often any arrangements that, in their view, lack real substance or a truly commercial principal purpose. Many groups will have to reshape their business models, and most will potentially have to adapt their practices, or at least to evaluate where they stand in this new international tax environment.
Greater transparency is the other main theme of the BEPS Project. This of course brings with it new reporting obligations - for example with CbCR - and here organisations must be comfortable that they have systems in place to comply. Transparency also means having to anticipate the outcomes of the extra disclosures made - do these potentially lead to extra transfer pricing challenges, or even possible adverse publicity?
As the pace of the implementation of BEPS now quickens, organisations increasingly need to track how BEPS-driven new EU Directives, changes to domestic laws and transfer pricing practices, and revised double tax treaties will affect them.
All these changes will require the allocation of more resources to the tax function. Timely and well-executed reaction to new measures will not just avoid many difficulties - it will leave organisations better placed to manage tax burdens, and perhaps open the way to more streamlined and cost-beneficial operational models.
We have direct and indirect tax experts, as well as transfer pricing experts with an industry focus who have been following closely the BEPS Project from the start. We understand your challenges which are driven by a constantly changing business and regulatory environment.Have a look at our dedicated teams to help identify both risks and improvement and find the solution that is best suited to your unique business requirements:
Tax Partner, Tax policy, PwC Luxembourg
Tel: +352 49 48 48 2568