Base Erosion and Profit Shifting Action Plan (BEPS)

Globalization has transformed worldwide human interactions, especially the way businesses approach their activities. Countries are now connected in new ways, and that connectivity has strengthened the economies of all the countries involved. With the increase in cross-border economic activity comes the need to set guidelines that will ensure an appropriate allocation of profits between the countries. The purpose of those guidelines is to provide a framework that can help tax authorities to try and reduce profit-shifting activities.

Those guidelines are the Base Erosion and Profit Shifting Action Plan (BEPS) action plan. In 2013, the OECD published the BEPS action plan. This action plan was the basis for the 15 BEPS actions. The final BEPS report was published by the OECD and G20 in 2015.

What is the BEPS Action Plan?

BEPS refers to a tax avoidance strategy that uses a gap and a mismatch in the tax rules to artificially transfer profits to low-tax jurisdictions in which there is little or no economic activity. Those undermining the tax base of higher tax jurisdictions. The OECD and G20 countries initiated the Action Plan on Base Erosion and Profit Shifting project in response to growing concerns about large companies engaging in aggressive tax planning strategies to move profits to places with low or no taxes. This practice takes advantage of differences in tax laws and harms tax systems, especially in poorer countries.

The main objective of the project is to take all necessary measures to ensure that profits are taxed in the country of economic activity.

The BEPS project includes 15 actions, each addressing a certain BEPS-related issue.

The 15 Actions of the BEPS Action Plan

1. Address the tax challenges of the digital economy.
2. Neutralize the effects of hybrid mismatch arrangements.
3. Strengthen CFC (Controlled Foreign Company) rules.
4. Limit base erosion via interest deductions and other financial payments.
5. Counter harmful tax practices more effectively, taking into account transparency and substance.
6. Prevent treaty abuse.
7. Prevent the artificial avoidance of permanent establishment status.
8. Ensure that transfer pricing outcomes align with value creation: Intangibles.
9. Ensure that transfer pricing outcomes align with value creation: Risks and capital.
10. Ensure that transfer pricing outcomes align with value creation: Other high-risk transactions.
11. Establish methodologies to collect and analyze data on BEPS and the actions to address it.
12. Require taxpayers to disclose their aggressive tax planning arrangements.
13. Re-examine transfer pricing documentation.
14. Make dispute resolution mechanisms more effective.
15. Develop a multilateral instrument to modify bilateral tax treaties.

Unpacking BEPS: What’s Working, and What’s Changing

Since the release of the BEPS Action Plan nearly a decade ago, countries worldwide have reformed their domestic tax legislation to align it with the OECD/G20 recommendations. Being coordinated under the Inclusive Framework on BEPS, the implementation phase includes more than 140 developed and developing countries and jurisdictions. These reforms have introduced important changes in anti-avoidance regulations, transfer pricing rules, together with tax transparency.

While some BEPS are illegal, most fall within the boundaries of the law, hence posing serious challenges by allowing multinational enterprises (MNEs) to reduce their tax bills unfairly. For local businesses, especially, understanding BEPS implications is of vital importance, as a measure to preserve the fairness of tax systems. On a larger scale, it can weaken trust in the system and discourage others from paying their fair share.

One of the most distinguishable impacts has been the common adoption of Country-by-Country Reporting. Meaning MNEs must report annually if their consolidated revenue is above a certain threshold (generally 750 million EUR). For each operating jurisdiction, the MNEs must detail income, profits, taxes paid, and economic activity. This has been an empowerment for the tax authorities. They can now better assess risks within transfer pricing plus identify tax planning schemes.

Another major outcome was the implementation of the Anti-Hybrid Mismatch Rules and the strengthening of the CFC rules, respectively known as Action 2 and Action 3. These actions have reduced the instruments that, in the past, were allowing double non-taxation or deferred taxation of profits.

Additionally, another important policy has been Action 6 which prevents treaty abuse, leading to the revision of bilateral treaties; in addition, Action 15 developed the Multilateral Instrument (MLI) because of all of the renegotiations that occurred. Currently, the MLI has been signed by over 100 jurisdictions.

While these achievements are notable, the implementation has not been the same across countries. It has been noted that OECD and European Union states have made good progress, but many developing countries face challenges – be institutional or technical, in fully adopting BEPS measures. Even more, the digitalization of the economy has introduced new challenges, which are the reason for the ongoing negotiations on the Pillar One and Pillar Two solutions, aiming to introduce a global minimum tax.

It can be concluded that the BEPS initiative plays an important role in reshaping international tax rules and improving cooperation between tax authorities. In the long term, the effectiveness of these policies is dependent on some factors, such as the countries’ political commitment, or the ability to adapt to constantly changing business models.

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