The OECD has published the final package of measures under the BEPS (Base Erosion and Profit Shifting) Project.
The Project was commissioned in 2013 by G20 and OECD countries to provide governments with solutions to close the gaps in existing international tax rules, so that profits are reported by corporate entities where the economic activities that generate them are carried out.
The final package of measures includes 15 ‘Actions’, each with accompanying recommendations. Some of the Actions include:
- addressing the tax issues raised by the digital economy, including internet search providers and companies selling digital devices, which were front and centre of the media coverage about BEPS;
- rules about hybrid instruments and hybrid entities, which allow an instrument or entity to be treated as debt in one jurisdiction but as income in another;
- rules about controlled foreign companies, which use non-resident affiliate companies in low tax jurisdictions to avoid tax;
- limiting the interest deductions an entity can make to a percentage of that entity’s earnings before interest, taxes, depreciation and amortization (EBITDA);
- changing the definition of ‘permanent establishment’ to stop entities from avoiding PE status using agency arrangements or exemptions from the current definition;
- to prevent entities from ‘treaty shopping’ (investing in another entity located in a jurisdiction which does benefit from a treaty);
- introducing new transfer pricing rules which prevent intangible assets from being moved amongst members of a corporate group; and
- mandatory disclosure rules for entities.
The final package of measures will be discussed by the G20 Finance Ministers on 8 October 2015 in Lima, Peru.
Although the BEPS reform measures are now final, many of the actions rely on G20 and OECD countries incorporating the new rules into domestic law.
It remains to be seen which countries will choose to actually implement the recommendations, and to what degree domestic politics will either facilitate or inhibit the full implementation of the measures on a country-by-country basis.
If implemented, the recommendations may have a significant impact on many corporate entities, even those which only operate nationally.
On that basis, companies that currently access tax treaty benefits, use hybrid instruments or entities, or escape permanent establishment status by virtue of an exemption, should start considering the potential impact of this final tranche of measures on their tax liabilities.