Daily Tax Update - July 19, 2013: OECD Releases Action Plan on Base Erosion and Profit Shifting

OECD Releases Action Plan on Base Erosion and Profit Shifting:  Today, the OECD presented its long-anticipated action plan on base erosion and profit shifting (BEPS) to the G20 countries’ finance ministers at their Moscow meeting.  The report originated from political demands in various OECD countries to addresse highly-publicized instances in which substantial portions of some multinationals’ global incomes are treated under current tax rules as earned in jurisdictions which apply low or zero rates of taxation.  The report states that it is motivated by the intention of increasing public confidence in the “integrity” of tax rules, and in preventing what are perceived as undue leakages of government revenues, especially from developing countries.  Although the report is issued by the OECD, it reportedly has been endorsed by finance officials of all of the G20 countries, including Brazil, India and China, which have tended at other times to be critical of OECD approaches to international taxation.

The OECD’s report provides only recommendations; they must be adopted by individual governments in order to become law.  The report envisions a period of consultation among countries regarding the report’s recommendations, which will extend over several years, and will likely continue to be an important focus of discussion in countries around the world. 

The action plan flatly states that “fundamental changes are needed to effectively prevent double non-taxation as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it.”  It recommends action in 15 areas.  The 15 areas are in five groups:  international coherence (hybrid mismatches, CFC rules, interest deductibility, and harmful tax practices), treaties (anti-abuse rules and avoidance of permanent establishment status), transfer pricing (intangibles, risk, and capital), transparency (country-by-country reporting, disclosure of aggressive transactions, mutual agreement procedure, and economic analysis of corporate tax avoidance) and cross-cutting areas (digital economy and development of a multilateral convention to implement recommendations).  The report emphasizes that it is not recommending replacement of current arm’s-length transfer pricing rules with formulary apportionment; however, the report also says that “special measures … beyond the arm’s length principle” might be required in order to meet the report’s objectives.

The report can be accessed here.