The BEPS Project (Project), launched in February 2013 and finalised in October 2015, translated into a package of final reports, comprises 15 actions covering a comprehensive range of issues such as the digital economy, anti-abuse rules in domestic law and tax treaties, harmful tax competition, transfer pricing etc. The work on the BEPS Project is still ongoing, requiring the completion of certain un-finished rules, as well as the supervision and assessment of the implementation of the Project in countries participating in the Project.
BEPS deals with the erosion of the tax base of one jurisdiction by shifting the profit to another, possibly low or no tax base. This international character will have various implications in identifying, understanding and dealing with BEPS concerns, as the main concern relates to the circumstance that the schemes adopted have been considered legal so far.
For example, BEPS Action 2 identifies six types of hybrid mismatch. This may be generated by (i) hybrid entities, for example, entities which are regarded as transparent in one jurisdiction and opaque in another, or (ii) hybrid instruments, for example, a profit sharing loan, the payment out of which is considered interest in one jurisdiction and dividend in another. The result might be double deduction of expenses in both jurisdictions, or deduction in one jurisdiction and non-inclusion in the taxable income in another. If we stand in the shoes of only one of the two jurisdictions, no problem of tax avoidance will be identified, as these arrangements are all perfectly consistent with the relevant domestic laws. The BEPS issue can only be seen when we have a holistic view and take the results in both jurisdictions into account. Consequently, the solution put forward by the BEPS Action 2 Report is two-fold, requiring, in most of cases, the payer jurisdiction to deny the deduction, and if this is not done, requiring the receiver jurisdiction to take responsive measures.
However, it should be noted that despite the international characteristics of BEPS issues as mentioned above, most of the proposals put forward in the BEPS Report need to be implemented by domestic legislation, with the exception of Actions 6 and 7, which concern provisions under bilateral tax treaties, and Action 15, which concerns developing a multinational instrument to modify bilateral tax treaties. For example, the BEPS Project gives states the discretion to decide on the amount of administrative resources they want to spend on the issue of attacking schemes falling within the scope of the Project. In other words, states need to strike a balance between the administrative resources contributed to tackling BEPS and the benefits obtained. A good example in this regard is the exemption for small multi-national enterprises (SMEs) referred to in several Actions. For example, in the Action 13 Report, SMEs with annual consolidated group revenue in the immediately preceding fiscal year of less than EUR 750 million or a nearly equivalent amount in domestic currency as of January 2015 are exempted from the obligation to submit country- by-country reports. In Action 4 Report, it is suggested a de minimis monetary threshold be included to carve out entities that have a low level of net interest expenses from the rules of interest deduction limitations. The Actions 8 – 10 Reports provide an option to set a threshold for the application of the simplified approach to low-value-adding services provided for by associated enterprises within the same group, i. e. only MNEs not exceeding the threshold can benefit from the simplified approach for their low-value-adding services.
Nevertheless, not all the actions in the BEPS Project provide exemption for SMEs, and it might happen that SMEs that are not conducting any activities involving BEPS issues would bear a heavier compliance burden due to the implementation of the Project. This concerns, mostly, the added administrative burden in documentation and reporting, e. g. under the limitation of liability provisions proposed in Action 6, or transfer pricing documentation requirements proposed in Action 13.
Whilst SMNEs may qualify for exemption from anti-abuse rules under their domestic jurisdiction, given the disproportionate administrative burden entailed, it is advisable for those SMNEs expanding their cross-border activities to acquire a proper understanding of how international tax rules are applied.
Action Contents
1 Address the tax challenges of the digital economy
2 Neutralise the effects of hybrid mismatch arrangements
3 Develop recommendations regarding the design of controlled foreign company rules
4 Limit base erosion via interest deduction 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 PE status
8 -10 Assure that transfer pricing outcomes are in line with value creation
11 Establish methodolgies to collect and analyse data on BEPS and the actions to address it
12 Require taxpayers to disclose their aggressive tax planning arrangements
13 Reexamine transfer pricing documentation
14 Make dispute regulation mechanisms more effective
15 Develop a multilateral instrument
“At the end of the day, taxation is within the fiscal sovereignty of states, and they enjoy their own discretion regarding how and to what degree they are going to implement the proposals under the BEPS Project.”
Author:
Giammarco Cottani
Vice President ECOVIS International, L.L.M, Lawyer
BEPS deals with the erosion of the tax base of one jurisdiction by shifting the profit to another, possibly low or no tax base. This international character will have various implications in identifying, understanding and dealing with BEPS concerns, as the main concern relates to the circumstance that the schemes adopted have been considered legal so far.
For example, BEPS Action 2 identifies six types of hybrid mismatch. This may be generated by (i) hybrid entities, for example, entities which are regarded as transparent in one jurisdiction and opaque in another, or (ii) hybrid instruments, for example, a profit sharing loan, the payment out of which is considered interest in one jurisdiction and dividend in another. The result might be double deduction of expenses in both jurisdictions, or deduction in one jurisdiction and non-inclusion in the taxable income in another. If we stand in the shoes of only one of the two jurisdictions, no problem of tax avoidance will be identified, as these arrangements are all perfectly consistent with the relevant domestic laws. The BEPS issue can only be seen when we have a holistic view and take the results in both jurisdictions into account. Consequently, the solution put forward by the BEPS Action 2 Report is two-fold, requiring, in most of cases, the payer jurisdiction to deny the deduction, and if this is not done, requiring the receiver jurisdiction to take responsive measures.
However, it should be noted that despite the international characteristics of BEPS issues as mentioned above, most of the proposals put forward in the BEPS Report need to be implemented by domestic legislation, with the exception of Actions 6 and 7, which concern provisions under bilateral tax treaties, and Action 15, which concerns developing a multinational instrument to modify bilateral tax treaties. For example, the BEPS Project gives states the discretion to decide on the amount of administrative resources they want to spend on the issue of attacking schemes falling within the scope of the Project. In other words, states need to strike a balance between the administrative resources contributed to tackling BEPS and the benefits obtained. A good example in this regard is the exemption for small multi-national enterprises (SMEs) referred to in several Actions. For example, in the Action 13 Report, SMEs with annual consolidated group revenue in the immediately preceding fiscal year of less than EUR 750 million or a nearly equivalent amount in domestic currency as of January 2015 are exempted from the obligation to submit country- by-country reports. In Action 4 Report, it is suggested a de minimis monetary threshold be included to carve out entities that have a low level of net interest expenses from the rules of interest deduction limitations. The Actions 8 – 10 Reports provide an option to set a threshold for the application of the simplified approach to low-value-adding services provided for by associated enterprises within the same group, i. e. only MNEs not exceeding the threshold can benefit from the simplified approach for their low-value-adding services.
Nevertheless, not all the actions in the BEPS Project provide exemption for SMEs, and it might happen that SMEs that are not conducting any activities involving BEPS issues would bear a heavier compliance burden due to the implementation of the Project. This concerns, mostly, the added administrative burden in documentation and reporting, e. g. under the limitation of liability provisions proposed in Action 6, or transfer pricing documentation requirements proposed in Action 13.
Whilst SMNEs may qualify for exemption from anti-abuse rules under their domestic jurisdiction, given the disproportionate administrative burden entailed, it is advisable for those SMNEs expanding their cross-border activities to acquire a proper understanding of how international tax rules are applied.
Action Contents
1 Address the tax challenges of the digital economy
2 Neutralise the effects of hybrid mismatch arrangements
3 Develop recommendations regarding the design of controlled foreign company rules
4 Limit base erosion via interest deduction 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 PE status
8 -10 Assure that transfer pricing outcomes are in line with value creation
11 Establish methodolgies to collect and analyse data on BEPS and the actions to address it
12 Require taxpayers to disclose their aggressive tax planning arrangements
13 Reexamine transfer pricing documentation
14 Make dispute regulation mechanisms more effective
15 Develop a multilateral instrument
“At the end of the day, taxation is within the fiscal sovereignty of states, and they enjoy their own discretion regarding how and to what degree they are going to implement the proposals under the BEPS Project.”
Author:
Giammarco Cottani
Vice President ECOVIS International, L.L.M, Lawyer
