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The Base Erosion & Profit Shifting project: A fundamental change to the taxation of international companies

The BEPS project led by the OECD and G20 has an Action Plan being implemented from 2016-17 in cooperation with national governments to address flaws in international tax rules, specifically the perceived avoidance of tax by companies trading internationally.

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The media spotlight continues to focus on the tax arrangements and alleged tax avoidance of large corporates such as Amazon, Google and Starbucks. However, Alliott Group’s International Corporate Tax Group last week highlighted to member delegates from all over the world that at least one or two of the 15 Action points set out in the BEPS Action Plan will apply to any business that operates across borders, whatever its size.

The biggest change to taxation in a generation

The BEPS plan addresses concerns that current principles of national and international corporate taxation have failed to keep up with the modern global economy. BEPS is happening – it is the biggest change to the basis of corporate taxation in a generation and companies must keep an eye on the developments and which Actions might affect them.
David Gibbs, partner, chair of International Tax Group Alliotts

The Action Plan is based on three core concepts: cohesion; restoring the principles of international frameworks; and greater transparency. It also introduces changes to address the challenges presented by the digital economy.

Every country wants to protect the amount of tax it can collect. However, the G20 and OECD estimate that between US$100-240 billion is lost in corporate income tax annually on a global basis. The overall aim of the BEPS project is to enable every country to tax the profits of business done within their borders, where the value is actually added, and to prevent the avoidance of tax through use of artificial arrangements in low tax jurisdictions.

The 15 Action Points arising from the BEPS project

  • 1. Address the challenges of the digital economy to existing international tax rules
  • 2. Neutralise the effects of complex financing arrangements that result in ‘double non-taxation’
  • 3. Strengthen Controlled Foreign Company rules to prevent routing income through subsidiaries in low tax jurisdictions
  • 4. Limit base erosion via excessive interest deductions and other financial payments
  • 5. Counter harmful tax practices more effectively, taking into account transparency and substance. The main focus has been on intangible regimes such as patent boxes (intellectual property)
  • 6. Prevent treaty abuse
  • 7. Prevent the artificial avoidance of permanent establishment status
  • 8. Assure that transfer pricing outcomes are in line with value creation (Actions points 9 & 10 also)
  • 11. Establish methodologies to collect and analyse data on BEPS and the actions to address it
  • 12. Require tax payers to disclose their aggressive tax planning arrangements
  • 13. Re-examine transfer pricing documentation
  • 14. Make dispute resolution mechanisms more effective so that countries can resolve treaty-related disputes under mutual agreement procedures
  • 15. Develop a multilateral instrument to enable countries to modify bilateral tax treaties.

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Around 60 countries from the OECD and G20 plus a number of developing countries are now committed to the plan.

The issue of ‘substance’ will be a key consideration for tax authorities - this will be looked at more closely in terms of what value was really added in the jurisdiction where a company is proposing to pay tax on its profits. Furthermore, there are different tax rules in each country on how profits are taxed. For example, in some countries revenues from patents are not taxed, but in others they are. Therefore, companies will be obliged to undertake country by country reporting of taxable profits and the method of calculating taxable profits for such reporting purposes will need to be harmonised.
Jamie Towers, partner Hanrick Curran, Brisbane, Australia

For more information on BEPS

Alliott Group's International Tax Group is monitoring what is happening at the global level and how different countries around the world are implementing the Action Plan and how that may affect clients.

If any clients are concerned about the impact of BEPS on their business, they are invited to contact Alliott Group's Executive Office directly so that we can coordinate advice from our international tax and transfer pricing experts in specific countries.