Base Erosion and Profit Shifting
One of the most important recent developments in international transfer pricing is the “Base Erosion and Profit Shifting” (BEPS) project that is being developed by the OECD and sponsored by the G20.
What is the BEPS Project?
In recent years, governments of countries both included in and outside of the OECD have increasingly focused on closing gaps and loopholes in tax legislations that allow the shifting or hiding of corporate profits to locations where taxes are low, resulting in little or no corporate tax levies. The G20 requested that the OECD come up with a plan, which has resulted in the July 2013 publication of 15 actions to combat BEPS. The most important component of the BEPS Action Plan concerns aligning taxation with value creation, which means that companies should be taxed and pay tax in the country/countries where their activities take place. In addition, The BEPS Action Plan addresses coherence in international taxation, improving transparency, and aligning taxing rights with substance.
What is changing under the BEPS Actions?
So far, the outcome of the BEPS action plan has been a set of recommendations, published in September 2014, to modify existing domestic tax laws and/or bilateral tax treaties in various G20 countries. More recommendations are expected to follow in September and December 2015, in addition to a multilateral instrument that will allow governments to consistently implement the BEPS measures that are related to tax treaties (which would apply to the more than three thousand tax treaties that are currently in effect). Encouraged by the G20’s active promotion of the plan for both developed and developing countries, a growing number are participating in the BEPS project (see www.OECD.org for participating countries).
How does the BEPS Project affect your company?
While the introduction and adoption of tax reforms as a result of the BEPS project may vary in the many participating countries, and while there will undoubtedly be uncertainty about the timing and level of implementation, it is undeniable that the BEPS project will have an enormous effect on international taxation and on the transfer pricing requirements facing multinational groups.
How can BaseFirma help?: Pre-BEPS Analysis
At BaseFirma, we strongly feel that a proactive approach on behalf on our clients creates the strongest position for them with the lowest risk profile, and we like to anticipate our clients’ needs in the light of the most up-to-date developments with the production of a Pre-BEPS Analysis. These are a few of the elements in your company’s tax structure that may need re-evaluation under our Pre-BEPS Analysis:
• holding, royalty and finance structures that lack economic substance and are set up for treaty shopping purposes which may be impacted by the recommended introduction of Limitation on Benefits provision (LoB) and/or the Principle Purpose Test in tax treaties;
• hybrid mismatch arrangements and thinly capitalized entities;
• transfer pricing structures and the allocation of taxable profits which need to be aligned with economic activities and value creation in the respective countries; and
• aggressive transfer pricing structures that will have to be disclosed and properly documented and filed to give tax authorities more transparent information.
The BaseFirma experts can guide your company through the BEPS changes!
With the implementation of BEPS Actions in the near future, it is important that you have a clear understanding of how your company’s tax structures will be affected. To be properly prepared and to ensure compliance with changing documentation requirements, don’t wait to contact BaseFirma for made to measure, up to date advise.