What’s happening on BEPS?

The OECD provided an update on its work tackling base erosion and profit shifting (BEPS) in its webcast on 26 May. Whilst there were no major new developments reported, it was confirmed that the OECD is still on track to issue final reports on its 2014 deliverables in time for the G20 meeting of finance ministers on 20 and 21 September. The 2015 deliverables are being worked on in parallel.

Within the update, particular emphasis was placed on the need for engagement with developing countries to obtain their input on the BEPS priorities and their consensus with the ultimate result. This not only included looking at excessive payments to foreign affiliated companies (in respect of interest and other fees and charges), but also considering the difficulties faced by developing countries in obtaining the information needed to assess and address BEPS issues and to apply their transfer pricing rules. The webcast included an update on the following areas:

• Digital economy: There is general agreement that the digital economy cannot be ringfenced. However, VAT issues relevant to digital business are being considered separately in order to attempt to level the playing field between content purchased online and that purchased from traditional retailers.
• Hybrid mismatches: It was emphasised that the main solution will be to change domestic law (though accompanied by some treaty changes).
• Treaty abuse: Discussion is ongoing about the form of a limitation on benefits (LOB) article and the concerns that have been raised about combining LOB with a main purpose test or the potential omission of a derivative benefits test. There is a recognition that there is no ‘one size fits all’ approach to this issue and that there will be a need for flexibility in the rules, whilst ensuring that there is a standard on treaty abuse that can be adopted by all countries.
• Intangibles: There is agreement within Working Party 6 on a revised draft approach to intangibles. However, this interacts with the 2015 deliverables around risk, recharacterisation, capital and related special measures. Working Party 6 will speed up work on the 2015 deliverables and intends to issue a discussion draft in December 2014.
• Transfer pricing and country by country reporting (CBCR): These issues are seen as especially important for developing countries. There is agreement on a three-tier approach (template, master file and local file) and confirmation that the CBCR template is intended to be a high-level risk-assessment tool. It is recognised that there needs to be a uniform approach by governments, with timely information being available and commercial information being treated confidentially. Although the CBCR template will be finalised by September, a full analysis of implementation issues and filing mechanisms for the CBCR template will only be produced by January 2015.
• The use of a multilateral instrument: It was confirmed that a multilateral instrument has been examined by legal experts and found to be legally feasible.

A number of draft reports will be approved at the OECD Committee of Fiscal Affairs meeting scheduled for the end of June 2014. Following that meeting, the project will break for the summer, but a further update webcast will take place in September before the G20 finance ministers meeting.