Panel 7 : Base Erosion & Profit Shifting (BEPS) - By Ms. Grace Perez-Navarro (Dy. Director, OECD’s Centre for Tax Policy and Administration)

1. BEPS: THE FINAL PACKAGE
Grace Perez-Navarro, Deputy Director
OECD Centre for Tax Policy and Administration

2. 15 Actions around 3 main pillars
2
Coherence
Hybrid Mismatch
Arrangements (2)
Harmful Tax
Practices (5)
Interest
Deductions (4)
CFC Rules (3)
Substance
Preventing Tax Treaty
Abuse (6)
Avoidance of
PE Status (7)
TP Aspects of
Intangibles (8)
TP/Risk and
Capital (9)
TP/High Risk
Transactions (10)
Transparency
Methodologies and
Data Analysis (11)
Disclosure
Rules (12)
TP Documentation
(13)
Dispute
Resolution (14)
Digital Economy (1)
Multilateral Instrument (15)

3. “no or low taxation associated
with practices that artificially
segregate taxable income from
the activities that generate it”
BEPS Action Plan, chapter 3
location of third
party interest in
high tax countries
quantity of related
party interest, in
excess of group’s
actual interest cost
use of interest
expense to fund tax
exempt income
3
Action 4 – Interest deductibility
What is the problem?

4. Action 4 – Interest deductibility
The key building blocks
4
• Allows net interest deductions up to a fixed net interest/tax EBITDA ratio
• Applies to interest paid to third parties and intragroup
• Fixed ratio between 10%-30%
• Factors assist countries in setting ratio
Fixed ratio rule
• Allows interest deductions up to net interest/EBITDA ratio of group
• Countries may instead apply a different group ratio rule (e.g. equity
escape) or no group ratio rule
Group ratio rule

5. Harmful Tax Practices
Action 5
5
Action 5 - Countering harmful
tax practices more effectively

What we have delivered:
• An agreed approach on defining substance for all preferential regimes,
whether IP regimes or non-IP regimes
• A completed review of 43 regimes in OECD and G20 countries
• An agreed framework for the exchange of rulings in 5 clearly defined risk
categories pursuant to agreed deadlines and in an agreed format
• Agreement on integrated approach for engagement with third countries
• Agreement that revisions or additions need to take account of impact of
work on substance and transparency




6. Harmful Tax Practices
Action 5
6
Action 5 - Countering harmful
tax practices more effectively
Transparency – Compulsory spontaneous exchange
1. Rulings related to preferential
regimes
2. Unilateral APAs and other TP rulings
3. Rulings given a unilateral downward
adjustment
4. Permanent establishment (PE)
rulings
5. Related party conduit rulings
6. Other rulings subsequently agreed to
give rise to BEPS concerns
1. Countries of residence of related
parties with a transaction covered by
the ruling, or in the case of PE ruling
country of head office/PE as case
may be
2. Country of Immediate Parent Co
3. Country of Ultimate Parent Co
Categories of rulings To be exchanged with

7. 77
• Action 6 report includes a minimum standard on preventing
abuse through treaty shopping:
− an express statement that countries common intention when
they enter into a tax treaty is to eliminate double taxation without
creating opportunities for non-taxation or reduced taxation through
tax evasion or avoidance
− inclusion in tax treaties of:
• a combined approach of an LOB and PPT rule
• the PPT rule alone,
• the LOB rule supplemented by a mechanism that would deal with
conduit financing arrangements
− a number of specific anti-abuse provisions to tackle commonly-
used structures
Actions 13
7
Treaty Abuse

8. These changes address techniques used to inappropriately
avoid being taxed in a State, including
Replacing a distributor with
a “commissionnaire
arrangement” through
which a local member of a
multinational group sells
products belonging to
foreign members of that
group
Taking advantage of
exceptions that were
initially adopted to prevent
the taxation of mere
preparatory or auxiliary
activities carried on by
foreign enterprises, in
particular by artificially
fragmenting business
activities between parts of
a multinational enterprise
Splitting-up construction
contracts in order to qualify
for an exception based on
the time during which an
enterprise is active on a
construction site
8
Action 7 – Prevent the Artificial
Avoidance of PE Status

9. 9
Action 12 – Mandatory
disclosure rules
• Tax authorities face a lack of timely, comprehensive and relevant
information on aggressive tax planning which can be addressed
by mandatory disclosure rules (“MDR”).
• MDR requires disclosure, often before returns are filed, of certain
transactions, by promoters, taxpayers or both
• Advantages over other disclosures:
• Information received early
• Disclosure mandatory but no ruling on substance.
• Can apply to a broad range of taxpayers including promoters of
schemes as well as users
• Can be targeted at risks / transactions of particular concern (via
“hallmarks”)
• Report suggests greater information sharing and cooperation via JITSIC

10. • Master file: high level info on global
business operations and TP policies
• Local file: detailed transactional info
• CBC: applies only to MNEs with annual
consolidated group revenue equal to or
exceeding EUR 750 million
• How many Indian MNEs does that cover?
10
Action 13: TP Documentation

11. Mandatory binding
MAP arbitration
Supplementary commitment
Over 20 countries
>90% of MAP
cases
Minimum Standard
Peer review
+
+
Action 14: Dispute Resolution

12. Technical Follow up!
12
Transfer pricing aspects of Financial Transactions
Finalise group ratio rule and special rules dealing with the financial
sector
Action 4
Engagement with third countries
Action 5
Possible revisions to existing criteria
Work on treaty entitlement of non-CIVs
Action 6
Finalise aspects of the model provisions, LOB and its Commentary
Guidance on profit attribution to PEs resulting from the changes
proposed
Action 7
Integrate changes resulting from Action 7 report into the Multilateral tax
instrument
Clarify new treaty wording introduced by the Report
Address any unintended consequences of the changes resulting from
that Report
Revising guidance on and practical examples of application of profit-
split methods Actions 8, 9 and 10
Develop implementation guidance on Hard to Value Intangibles.

13. Implementation!
Other recommendations
1. Hybrid entities
2. LOB and/or PPT
3. Preamble
4. Other treaty anti-abuse
measures (e.g. dividend
washing, etc.)
5. Permanent Establishment
definition
6. Minimum standard on
Dispute Resolution
(Arbitration)
Changes to MTC
1.Country-by-Country Reporting
and TP Documentation
2.Harmful tax practices
3.Hybrid mismatches
4.Interest deductibility
5.CFC rules
6.Mandatory disclosure rules
1. Chapter I: recognising actual
transactions; allocations of risk;
group synergies, location savings
and other local market features;
assembled workforce
2. Chapter II : Commodities
3. Chapter V TP documentation and
CbC report
4. Chapter VI: Intangibles
5. Chapter VII: Low value-adding
services
6. Chapter VIII: Cost contribution
arrangements
Maybe immediately applicable
depending on the legal and tax
system
Amend bilateral treaties
Multilateral instrument to be
open for signature in 2016
Changes to domestic laws or
practices depending on the
system
Changes to TP Guidelines
13

14. • Effectiveness of project will be determined by its widespread and consistent
implementation
• Monitoring implementation key also to ensure level playing field
• G20 FM Ankara: We will continue to work on an equal footing as we monitor the
implementation of the BEPS project outcomes at the global level, in particular, … call
on the OECD to prepare a framework by early 2016 with the involvement of
interested non-G20 countries and jurisdictions, particularly developing
economies, on an equal footing […]
• Monitoring may take different forms depending on the item concerned
• Capacity building will also be a key element of the monitoring framework.
• Interest of non-OECD non-G20 countries is clear: 14 already happily participate in
the work and around 120 in total participated. More than 90 countries are
negotiating the multilateral instrument.
• Proposal for an inclusive framework in early 2016 and then set up in 2016.
Monitoring!
14

15. 15 - 16 Nov. 2015 G20 Leaders Summit - Endorsement of BEPS Package
January 2016 MCAA (on exchange of country-by-country reports) open for signature
February 2016 Report to G20 Finance Ministers on an inclusive framework for the
implementation of the BEPS Project
End of Q1 2016 Terms of Reference and Assessment Methodology developed for the
monitoring of implementation of Action 14 (Peer monitoring begins 2016)
First part of 2016 Finalise work on LOB (and related commentary) in light of new U.S.
model; finalise work on treaty entitlement of non-CIV funds in Action 6
1 April 2016 Exchange of information on future rulings begins (Action 5)
October 2016 Delivery of 2 transfer pricing toolkits to G20 Development Working Group
By 31 Dec. 2016 Multilateral instrument under Action 15 open for signature
By 31 December
2016
Exchange of information on past rulings for Harmful Tax Practices
in Action 5 must be completed
15
Key implementation dates (1)

16. By end of 2016 Work on the operation of group ratio rule and design of special
rules for interest deductibility for Action 4 to be completed
By end of 2016 Guidance on follow up work on attribution of profits in Action 7
By end of 2016 Follow up work on design of threshold for the simplified approach
for low value-adding approach under Actions 8 - 10
During 2016 Mandate to be developed in the context of designing an inclusive post-
BEPS monitoring process for the digital economy (Action 1)
2016 - 2017 Regularising legal instruments, consolidating Model Tax Convention and
Transfer Pricing Guidelines changes
2016 - 2017 Further guidance will be provided on the economically relevant
characteristics for determining the arm’s length conditions for
financial transactions.
First half of 2017 Mandate for follow-up work on transactional profit split method
finalised Actions 8 - 10
16
Key implementation dates (2)

17. End of 2017 Publish first reports of peer monitoring process conducted
by FTA MAP Forum in Action 14
2017 - 2018 On-going monitoring: Hybrid mismatch arrangements (Action 2),
Interest deductions (Action 4), Harmful tax practices (Action 5), Treaty
Abuse (Action 6), Measuring and Monitoring BEPS (Action 11),
Country-by-country reporting (Action 13), Mutual agreement
procedure (Action 14)
By 2020 Review country-by-country reporting under Action 13
By 2020 Review of practical application of hard-to-value-intangibles
exemptions, including the measurement of materiality and time
periods (Actions 8 - 10)
By 2020 Review of the corridor for setting a benchmark fixed ratio and the
optional exclusion for interest funding certain public-benefit projects
under Action 4
17
Key implementation dates (3)