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Overview of the OECD/G20 BEPS Project

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Session by Raffaele Russo, Head, BEPS Project, OECD Centre for Tax Policy and Administration, Meeting of the OECD Parliamentary Group on Tax, 19 Oct 2015

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Overview of the OECD/G20 BEPS Project

  1. 1. FINAL BEPS PACKAGE - DELIVERED 19 OCTOBER 2015 Raffaele Russo – Head of the BEPS Project
  2. 2. 2 Why the BEPS Project?  Need to update the rules for the taxation of multinationals to • Reflect changes in the underlying, digitalised, economy • Ensure that system ‘is’ and ‘is perceived to be’ fair • Maintain long-standing consensus-based framework  It is a matter of trust / integrity / economic efficiency / equality
  3. 3. Addressing Base Erosion and Profit Shifting (Feb 2013) • Identified main pressure areas leading to opportunities for BEPS • Noted the need for a holistic and coordinated approach • Called for an Action Plan to tackle BEPS From inception to action and delivery 3 Action Plan on Base Erosion and Profit Shifting (July 2013) • Called for 15 actions organised around the following three main pillars: − The coherence of corporate tax at the international level − A realignment of taxation and substance − Transparency, coupled with certainty and predictability • Targeted work on digital economy, and development of a multilateral instrument to implement the measures developed under the action plan
  4. 4. 4 The BEPS Project has been … • 2-year time-bound Fast-pace • OECD and G20 countries working together on an equal footing • 14 Developing Countries, ATAF, CREDAF and CIAT participating directly • Other 60 Developing Countries participating via Regional Networks in Asia, Africa, Latin America and Eurasia Inclusive • 23 Discussion Draft published • 12,000 pages of comments received • 11 public consultations with stakeholders and regular webcasts Transparent
  5. 5. • Explanatory statement (consensus document as the rest) • Reinforced international standards on: – Tax treaties: abuse, PE, MAP – Transfer pricing: delineation transaction, risk, intangibles, commodities, services, profit splits, documentation – Harmful tax practices: nexus plus exchange of rulings • Common approaches (Hybrids and Interest deductibility) and best practices (CFC and MDR) for domestic law measures • Analytical reports with recommendations (digital economy and multilateral instrument) • Data and Economic analysis on BEPS 5 What’s in the final BEPS package?
  6. 6. BEPS in a nutshell Parent Co Intermediate Co 2 Intermediate Co 1 Ultimate Residence Country (High Tax) Low Tax Intermediate Country High Tax Intermediate Country Market or Production Country (High Tax) Local Activity • Avoid Taxable Presence or • Minimise Assets/Risks Low or no Withholding tax • Hybrid Mismatch • Preferential Regime • Maximise Deductions Maximise Assets/Risks • Ineffective/No CFC Rules • Maximise Deductions • Minimise Assets/Risks HQ Expected impact on BEPS … in a nutshell
  7. 7. 7 • Hybrid Mismatch • Preferential Regime • Maximise Deductions BEPS in a nutshell 7 Parent Co Intermediate Co 2 Intermediate Co 1 Ultimate Residence Country (High Tax) Low Tax Intermediate Country High Tax Intermediate Country Market or Production Country (High Tax) Local Activity • Avoid Taxable Presence or • Minimise Assets/Risks Low or no Withholding tax Maximise Assets/Risks • Address techniques used to avoid the PE status • New agency PE definition • Preparatory or Auxiliary Activities • Fragmentation Align substance with value creation through revised/new guidance for applying the ALP: delineation of actual transaction, risk allocation, intangibles including HTVI, CCA, commodity transactions and services Limit interest deductibility: Common approach on net interest deductions limited to a percentage (between 10%-30%) of EBITDA plus optional group wide ratio Address treaty abuse through a minimum standards on treaty shopping (e.g. LOB and/or PPT) and other anti-abuse clauses Action 7 Action 8-10 Action 4 • Nexus approach uses expenditure on R&D as a Proxy for Activity in IP regimes. • Compulsory spontaneous exchange of information on rulings Common approach to introduce coordination tools. Combination of primary and defensive rules. Ordering rule that avoids double taxation while preventing double non-taxation Action 8-10 Include income creating BEPS concerns in the definition of CFC income, e.g. income from digital sales • Ineffective/No CFC Rules • Maximise Deductions • Minimise Assets/Risks Action 5 Action 2 Action 8-10 Action 4 Action 3 Action 6 Action 13 Action 12 Expected impact on BEPS … in a nutshell Action 14 TP master file TP local file CbC report Mandatory Disclosure
  8. 8. Market / Production Country Avoid Taxable Presence OR Minimise Assets/Risks Maximise Deductions Intermediate Country 1 Ultimate Residence Country Intermediate Country 1 Local Activity Or Sub Intermediate Sub 1 Intermediate Sub 2 Parent Co Low or no Witholding tax Preferential Regime OR Hybrid Mismatches OR Base Eroding Payments Low or no Withholding tax Maximise Assets/Risks Ineffective/No CFC Rules Minimise Assets/Risks Maximise Deductions BEPS in a nutshell 8
  9. 9. WHAT’S NEXT
  10. 10. In addition to some technical follow-up work, for example: – Profit split and TP aspects of financial transactions – Finalise LOB and clarify attribution of profits Focus turns to: – Supporting and Monitoring Implementation What’s next?
  11. 11. 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 11
  12. 12. Developing an inclusive framework We will continue to work on an equal footing as we monitor the implementation of the BEPS project outcomes at the global level […] and we 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 […] G20 Finance Ministers and Central Bank Governors, 4 - 5 September 2015, Ankara 12
  13. 13. • A system meant to eliminate double taxation cannot itself generate double non-taxation – Close loopholes to ensure sustainability – Ensure improvements in the resolution of disputes • New environment will be one of increased transparency – Those who continue to take aggressive position will have a hard life and be subject to scrutiny – Those who do not deserve certainty and predictability • The BEPS Project is a won bet – G20 and OECD plus developing countries demonstrated how governments can work together and achieve tangible results in short timeframes Concluding remarks (1) 13
  14. 14. • A lot has been done – Consensus achieved on key international corporate tax issues • A lot still needs to be done – Implementation is key and BEPS work should provide basis to advance your agenda domestically • Prioritisation probably warranted – TP doc and CBC – Multilateral instrument – HTP – Hybrids and Interest deductibility – CFC and Mandatory disclosure Concluding remarks (2) 14

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