The OECD, which is leading the work, outlined today what has been agreed so far with the G20 and the work that remains to be done in the two-year BEPS project, which got under way after it was endorsed by finance ministers in September 2013.
Three key elements will enable implementation of the BEPS project, the OECD said:
a mandate to launch negotiations on a multilateral instrument to streamline implementation of tax treaty-related BEPS measures;
an implementation package for country-by-country reporting in 2016 and a related government-to-government exchange mechanism to start in 2017;
criteria to assess whether preferential treatment regimes for intellectual property (patent boxes) are harmful or not.
"These are important steps forward, which demonstrate that progress is being made toward a fairer international tax system," OECD Secretary-General Angel Gurria said. "These decisions signal the unwavering commitment of the international community to put an end to base erosion and profit shifting, in line with the ambitious timeline endorsed by G20 leaders."
Certainty and predictability
The BEPS project aims to help governments protect their tax bases and offer increased certainty and predictability to taxpayers, while guarding against new domestic rules that result in double taxation, unwarranted compliance burdens or restrictions to legitimate cross-border activity. The OECD presented seven of the 15 elements of the BEPS Action Plan to the G20 Leaders' Summit in Brisbane, Australia in November 2014, and is scheduled to present the remaining elements by the next Leaders' Summit in Antalya, Turkey in November 2015.
The OECD said the implementation of the plan will require modifications to the existing network of more than 3,000 bilateral tax treaties worldwide. "The planned multilateral instrument will offer countries a single tool for updating their networks of tax treaties in a rapid and consistent manner," today's statement said.
An OECD-hosted ad hoc negotiating group, open to participation from all states, will come together to begin the work on the multilateral instrument. The group will hold its first meeting by July 2015 and aim to conclude the drafting by December 31 2016.
Transfer pricing
Increased transparency through improved transfer pricing documentation standards is another important part of the BEPS project. Part of this drive will require multinationals with a turnover of more than €750 million (€854 million) in their countries of residence to start using a country-by-country reporting template from the start of 2016, to provide tax administrations with information on revenues, profits, taxes accrued and paid, along with some activity indicators. Tax administrations will begin exchanging the first country-by-country reports in 2017.
The primary method for sharing such reports between tax administrations is through automatic exchange of information, pursuant to government-to-government mechanisms such as bilateral tax treaties, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, or tax information exchange agreements (TIEAs). In certain exceptional cases, secondary methods, including local filing can be used.
Patent boxes
Determining which intellectual property regimes (patent boxes) and other preferential regimes can be considered harmful tax practices is another key objective of the BEPS Project. Every OECD and G20 country has endorsed a proposal from Germany and the UK, based around a "nexus approach", which allows a taxpayer to receive benefits on IP income in line with the expenditures linked to generating the income, on how to assess whether there is substantial activity in an IP regime. "Transitional provisions for existing regimes, including a limit on accepting new entrants after June 2016, have been agreed, and work on implementation is ongoing," the OECD said.
Today's statement added that the participation of more than a dozen developing countries in the discussion of the new BEPS implementation guidance, a key demand of non-governmental organisations, will be complemented by dialogues with tax administration and policy officials from all countries in each region, as well as regional tax organisations.
"The guidance sounds helpful in theory, but will it work in practice?" asked Anton Hume, leader of BDO's global transfer pricing team. "Multinational companies will continue to have concerns around data disclosure - they will want to be confident that the confidentiality promised will be rock-solid across multiple markets. They will also be concerned about how tax authorities will interpret the information disclosed through CbC reporting – making the danger of multi-jurisdictional and prolonged tax controversy a real possibility. Businesses now need to prepare themselves for a whole new world of scrutiny from tax authorities. The OECD will believe that transparency starts here.”
