OECD BEPS Initiative Explained

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Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually. Working together within OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.

BEPS ACTIONS

Developed in the context of the OECD/G20 BEPS Project, the 15 actions set out below equip governments with domestic and international rules and instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.

Action 1: Tax Challenges Arising from Digitalisation – Dealing with a large range of tax challenges arising from the digitalisation of the economy to develop a consensus-based solution by end of 2020;

Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements – Preventing hybrid mismatch arrangements from being used for BEPS while minimising impact on cross-border trade and investment;

Action 3: Controlled Foreign Corporations – Reducing the incentive of taxpayers to reduce income from a market country into foreign subsidiaries in low-tax jurisdictions;

Action 4: Limitation on Interest Deductions – Establishing rules that link an entity’s net interest deductions to its level of economic activity within a jurisdiction;

Action 7: Permanent Establishment Status – Preventing of artificial avoidance of permanent establishment status in tax treaties through commissionaire structures and other arrangements;

Actions 8 to 10: Transfer Pricing – Guidance for applying the market price, arm’s length, principle;

Action 11: Data Analysis – Collecting and analysing data on the economic and fiscal effects of tax avoidance behaviours and on the impact of measures proposed under the BEPS project;

Action 12: Mandatory Disclosure Rules – Requiring taxpayers and advisors to disclose aggressive tax planning arrangements to tax authorities;

Action 15: Multilateral Instrument – Implementing the tax treaty related BEPS recommendations to address vulnerabilities to existing tax treaties;

Minimum Standards

Action 5: Harmful Tax Practices – Countering harmful tax practices (competition) with a focus on improving transparency;

Action 6: Treaty Abuse – Developing model treaty provisions and recommendations to prevent treaty abuse, treaty shopping;

Action 13: Transfer Pricing Documentation – Improving tax transparency with country-by-country reporting;

Action 14: Dispute Resolution – Making dispute resolution between jurisdictions more timely, effective and efficient;

 

This article is only intended to give a general overview of the legislation. Professional advice should be separately sought on the applicability of these rules to any actual company structure or situation.

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