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The OECD’s final BEPS recommendations

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The OECD has published its final package of 13 reports constituting its base erosion and profit-shifting (BEPS) action plan for discussion by G20 finance ministers at their meeting on 8 October 2015 in Peru. The project is said to provide governments with solutions for closing the gaps in existing international rules that allow corporate profits to disappear or be artificially shifted to low/no tax environments where little or no economic activity takes place. As the project has now been finished no further recommendations are expected this year but additional work or projects are to be being pursued during 2016 on a number of issues. The significance of the BEPS outcomes is likely to vary from territory to territory. Multinational companies will be affected in different ways but there are various impacts that will be universally felt including the increased complexity generally the significant rise...

With the release on Monday of the overwhelming bulk of the OECD’s final BEPS proposals, we are now close to the end of the policy development stage of what has always been an enormously ambitious project to reform the international tax rules. In fact, the BEPS project arguably represents the most significant attempt to reform the existing international tax rules in recent decades. It has the potential to affect and fundamentally change the manner in which MNCs are taxed and the way in which taxing rights are allocated between states, not to mention its obvious impact on highly structured cross border tax arrangements, which are perceived as lacking real substance.

In the discussion that follows,we aim to comment on the key changes that are being made by the finalised BEPS papers, highlighting in particular further changes that have been made in the reports that have just been released. We then move on to look at some of the wider implications of the BEPS project.

Objectives and themes

It will be helpful first to recap the basic objectives of the BEPS project and summarise how it was intended that these would be achieved. The bulk of the detailed work carried on in the OECD’s BEPS undertaking has been grouped under three main themes – substance, coherence and transparency – each of which encapsulates a critical objective of the project.

The objective of the ‘substance’ theme is to give effect to a number of changes to the existing tax treaty rules relating to treaty access; transfer pricing (TP); and the permanent establishment (PE) threshold – in all cases with a view to ensuring that taxing rights are aligned with value adding activities.

The aim of the ‘coherence’ theme is to remove what the OECD refers to as ‘black holes’ or gaps created by the intersection of different tax regimes, so as to remove or at least reduce materially the possibility of income not being taxed in any jurisdiction. The ‘coherence’ actions are those relating to hybrids; controlled foreign companies (CFCs); interest and similar deductions; and harmful tax practices.

The ‘transparency’ theme is intended to boost significantly the level of disclosure and data available to the tax authorities, the assumption being that sunlight is the best disinfectant in relation to perceived cases of taxpayer abuse, given that full transparency can be expected to have an effect on taxpayer behaviour.

In addition to these three major themes above, the BEPS project has also set out to address the problem of ‘digital business’, i.e. the tax issues that arise from the possibility that business may, through its digital or online activity, have a significant economic presence in a jurisdiction yet without having any physical presence that would create an immediate nexus for taxation purposes. The BEPS project also set out to improve dispute resolution processes and create a multilateral instrument for the purposes of rapidly upgrading existing bilateral double tax treaty agreements with the agreed tax treaty-relevant output of the BEPS project.

The BEPS Action Plan

All of the work arising out of the above objectives has been carried out pursuant to the OECD’s BEPS Action Plan. This was released in July 2013 and organised the BEPS project into 15 action points, for each of which a workstream was created. The scale of the work was matched by the ambition of the timescale – with almost all of the work projected to be concluded by the Autumn of 2015. Contrary to the expectations of many, the OECD has now (on 5 October) delivered on that obligation, with its massive output amounting to several hundred pages of finalised proposals released on schedule. In the comments that follow, we set out the basic thrust of what is now being proposed, together with a comment on how in each case the current proposal differs from what has previously been proposed by the OECD.

Digital economy/business (Action 1)

The BEPS work on what may be loosely referred to as the digital sector represents an attempt to address some of the most difficult current international tax issues, whether relating to BEPS practices or as a result of the broader general challenges that digital business raises for tax purposes. In line with the work to date, the main conclusions on digital in the finalised report are:

  • it is impossible to ringfence the digital sector for the purposes of applying separate tax rules; and
  • business models involving the digital sector raise complex issues relating both to BEPS practices (given the exacerbating effect of digital issues on such practices) and to broader tax challenges irrespective of any BEPS issues.

In relation to the BEPS challenges of digital business, the OECD has sought to respond by a combination of its TP, PE and CFC proposals. On the broader tax challenges, there has been a VAT response, but otherwise there is no fully formed consensus on actions related to corporate income taxation that can be taken in response to digital challenges to the international tax system.

However, even though this is the conclusion of the OECD’s work, the finalised position of the OECD seems, somewhat bizarrely, open to countries adopting a variety of possible new measures in this area, with a view to monitoring individual country experience on what options might in future be worth considering more widely. The OECD position does refer to the need to comply with existing tax treaties, but the concern is that this OECD position opens the door to a range of unilateral measures based on, for example, digital nexus, data collection levies, withholding tax, etc. This suggests taxpayers will be seeing diverse unilateral measures in this area and it therefore seems likely that some of the very difficult PE attribution issues (relevant where some form of digital PE or nexus is created) may need to be explored sooner than was expected.

Hybrid mismatch arrangements (Action 2)

Work in this area set out to neutralise the effect of differences in the tax treatment of instruments and entities between jurisdictions. It was perceived that this put the collective tax base of countries at risk, even though it is often difficult to determine which individual country has lost tax revenue. A 2012 OECD report had also concluded that hybrid mismatch arrangements have a negative impact on competition, efficiency, transparency and fairness.

The recommended rules for tackling hybrid arrangements rely on counteraction, based on the nature or effect of the arrangement and the approach of the ‘other’ territory – so one side or the other may take the appropriate action. Broadly, the recommended primary rule is that countries deny the taxpayer’s deduction for a payment to the extent that it is not included in the taxable income of the recipient (deduction/non-inclusion or D/NI) in the counterparty jurisdiction or it is also deductible in the counterparty jurisdiction (double deduction or DD). If one jurisdiction does not apply the primary rule, then the counterparty jurisdiction can generally apply a defensive rule, requiring the deductible payment to be included in income or denying the duplicate deduction depending on the nature of the mismatch. An element of complexity is added when you have to look at where the effect of the mismatch has been imported into a third territory. These rules should be applied automatically, without a motive or purpose test. They should apply to ‘payments’, including interest, royalties and payments for goods.

There are proposals too for changes to the Model Tax Convention aimed at ensuring that tax treaties cannot be accessed unintentionally via hybrid arrangements or used to prevent the application of the recommended changes to domestic law.

These are likely to be the most widely adopted of the coherence actions, even though they are enormously complex (but should lead to some existing rules being replaced).

Controlled foreign companies (Action 3)

CFC rules in principle lead to income inclusions in the residence country of the ultimate parent to prevent a loss of perceived taxable revenue through activity in another country, contrary to the policy objectives of the residence country. While the BEPS Project set out to design more effective rules for CFCs, the 30 or so participating countries have different CFC rules, because they have different policy objectives and international legal obligations.

This report sets out recommendations in the form of six building blocks (covering the same definitions and attribution rules as highlighted in the early discussion in this area). These recommendations are not minimum standards, but they are designed to ensure that jurisdictions that choose to implement them will have rules that effectively prevent taxpayers from shifting income into foreign affiliates. The CFC discussions are the least likely of the coherence action points to lead to material change. Some countries may be encouraged to take up the recommendations in establishing new CFC regimes but those with existing regimes are unlikely to change.

Multinationals will be most keen to ensure that the proliferation of CFC rules does not lead to double taxation including, for example, where:

  • the attributed CFC income is also subject to foreign corporate taxes, where there has been a TP adjustment and a CFC charge arises in a third jurisdiction;
  • more than one country applies CFC rules to the same CFC income; or
  • a CFC actually distributes dividends out of income that has already been attributed to its resident shareholders under the CFC rules (or potentially where a resident shareholder disposes of the shares in the CFC).

Interest and other financial payments (Action 4)

Concerns about the deductibility of interest (and other financial) expense focused around situations in which related interest income may not be fully taxed or in which the underlying debt may be used to reduce the earnings base of the issuer or finance deferred or exempt income in a manner not commensurate with the country’s tax policy.

The final interest deductibility recommendations represent a best practice approach, so there is some flexibility in the way countries may approach their adoption. The UK is likely to consider the options very carefully because, where there is no avoidance motive, the UK’s very attractive interest relief regime has attracted multinationals and some are heavily debt financed.

The choice of a company restriction primarily based on a maximum interest/EBITDA ratio per year of between 10–30%, subject to any higher external threshold debt mix, or alternatively based on a group-wide ratio, reflects the options a number of countries have pursued in recent years, though more may be spurred into action.

The recommendations refer to interest expense and similar payments, particularly among related parties, although a de minimis monetary threshold may be applied so as to rule out smaller groups or lower debt levels from any interest cap.

More work is expected to provide additional guidance on the group-wide ratio; and transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements.

Harmful tax practices (Action 5)

This Action point focused on the need for substantial activity in relation to any preferential tax regime and with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes. There has been a chequered history of policy review in the area of tax competition between states for foreign direct investment which suggested it would be very difficult for the OECD to make broad-based progress.

The greater proliferation of patent boxes and other IP boxes, offering reduced rates of tax on income from various activities, took a lot of the working group’s initial attention. Progress made on these regimes led to a commoditisation of relevant requirements – i.e. the modified nexus approach, in which expenditure on research and development (R&D) is regarded as a proxy for activity/substance. However, this focus has come at the expense of other preferential regimes which the OECD will continue to consider following the effective end of the BEPS Project, alongside the need to refine the criteria established more than ten years ago for what should be considered ‘harmful’. The level of cooperation from states going forward is one area of uncertainty, although the political will to change has grown in recent times.

Automatic, compulsory exchange of rulings has been confirmed in relation to various named areas of particular risk, ostensibly on a three-month cycle for rulings given from April 2016. There is also a drop-dead date of 31 December 2016 by which countries must have exchanged past rulings from 1 January 2010, provided they were still in existence at 1 January 2014. Exchange will be required with the countries of the immediate parent, the ultimate parent and the residence countries of affected related parties (and those of the corresponding head office or PE in relation to PE rulings).

The OECD will also continue in 2016 to develop a strategy for wider implementation of these matters in countries which are not OECD member countries.

Tax treaty abuse (Action 6)

Treaty abuse was highlighted as one of the most important sources of BEPS concerns. Preventing the granting of treaty benefits in inappropriate circumstances included, in particular, nullifying the practice of treaty shopping (to gain access to a third country treaty benefit where a treaty did not exist or was not as beneficial), as well as other cases of treaty abuse that have given rise to double non-taxation.

Taxpayers may find treaty access constrained in future and, in particular, this may restrict or prevent access to reduced rates of withholding tax and, potentially, result in a loss of protection on capital gains.

The inclusion of a limitation on benefits (LoB) clause – where a taxpayer is not publicly owned/traded, has no active trade/business or is an intermediate holding company – is recommended as one possible option. This is unlikely to be widely adopted, with the particular exception of the US where it originated (although the US is in the process of refining its policy in this area, so the recommendation will have to be updated early in 2016 in this regard) and one or two other states. The alternative options of a principal purpose test (PPT), or both a PPT and LoB, give rise to greater subjectivity and uncertainty but are the most likely to be adopted.

A recommendation for targeted anti-abuse rules in particular areas also add to the level of uncertainty in this area, e.g. a residence tie-breaker based on competent authority and anti-branch triangulation rules.

Tax authorities are likely to devote additional resources to this area and have already been refocusing on treaty access, even under existing rules (e.g. beneficial ownership).

Permanent establishments (Action 7)

The BEPS PE work has been directed at correcting specific abuses arising from the existing terms of the threshold PE rule (in Article 5 of the OECD Model). This has, most significantly, led to specific proposals to widen the dependent agent test and narrow the independent agent exemption. Proposals have also been advanced to tighten the specific activity exemptions from PE status for facilities used for storage, display or delivery of goods, etc. (These also include an anti-fragmentation test to prevent activities being split artificially across separate legal entities for the purpose of qualifying for that exemption.) Certain measures to prevent abuse of the 12 month building site PE rule have also been proposed. The finalised PE Report is broadly in line with these earlier proposals in BEPS and therefore contains measures on all these points. However, as had already been trailed, the earlier proposal to develop a special PE rule for the insurance sector is not being progressed. It has also been re-confirmed that further work on the allocation of profits to PEs, which had originally been planned for completion with all these other PE threshold changes, will not be addressed until 2016.

The major difference in these finalised PE proposals is that the OECD has now changed its approach to the redrafting of the dependent agent rule. The previous proposal was to extend the test beyond ‘concluding’ contracts to include also certain contract negotiation activities (the previous proposal encompassed ‘negotiating the material elements of contracts’). The attempt to extend the test to include these elements of negotiation has now been dropped in favour of a new approach. The new test is arguably only a little less open ended, given that it focuses on agency activities that involve concluding contracts or playing ‘the principal role leading to the conclusion of contracts that are routinely concluded without material modification [by the principal]’. The relevant proposed guidance on what these tests amount to is not especially clear, probably because of the last minute nature of the agreement reached for this new approach. This explains why the OECD has indicated the guidance will be reviewed in 2016.

It seems likely that the lowering of the PE threshold that is the result of these finalised PE rules will, in practice, lead to significant dispute.

Transfer pricing methodologies (Actions 8–10)

By any measure, the scale of the BEPS work on TP is significant. There have been separate workstreams and reports on a number of different TP areas including: the fundamentals of the arm’s length principle; commodity transactions; profit splits; intangibles; low value-adding intra-group services; and cost contribution arrangements. The scale of the output makes it difficult to provide an overall perspective on all the TP changes, of which there are many. Nonetheless, it is perhaps useful to note that the major theme of the whole TP package relates to aligning the substance (ie the real high-value contribution activities) with what is treated as the location of profits for tax purposes. In that context, there has been a particular emphasis on the treatment of the returns associated with risks, capital and intangibles (including now a new multi-step approach to dealing with risk for TP purposes).

Two key aspects of this theme (on which the thinking of the OECD has evolved in the finalised reports) are as follows:

  • Taxpayer reliance on legal contracts alone is not enough – rather the arrangements should be tested by a focus also on the relevant conduct of the parties. Under this approach, the accurate delineation of the transaction is fundamental. Where contracts appear to be inconsistent with the conduct of the parties, the OECD papers authorise adjustments to be made based on the conduct, not legal form. The reference to the conduct of the parties is not new but it is clear that the finalised reports will elevate the importance of this perspective materially from a practical perspective.
  • The mere provision of funding alone, without the control over the underlying risks, does not entitle the funder to anything above a risk free return. In particular, the OECD has in the finalised reports gone further than in previous drafts to give specific examples of functions which do not evidence control. These include: meetings organised for formal approval of decisions that were made in other locations; finalising minutes of a board meeting and signing of the documents relating to the relevant decisions; and the setting of the policy environment relevant for the risk.

The new OECD approach on TP is intended to close off the possibility of artificial arrangements. These themes are very likely to be taken up by tax authorities in practice. In any particular case, when supporting their transfer pricing arrangements, it will therefore be important for taxpayers to put a greater emphasis on understanding and capturing the functions performed and particularly on evidencing the location in which the control of risks and intangibles, etc. is exercised. This will be of particular importance to entities which earn a return for setting group strategy/policies and place a heavy reliance on sub-contractors (e.g. sub-advisors).

Economic analysis of BEPS (Action 11)

Establishing the scale of BEPS was something which it was widely thought should have come ahead of the initiation of the BEPS Project. But there was a political will and a sufficiently strong perception that there was a problem which was sufficiently significant to warrant review.

The OECD has now carried out its own research and estimates that BEPS may result in corporate tax losses of 4–10% (which at 2014 levels it calculates as USD 100–240bn).

It is probably more important now to focus on futures estimates and to be able to show the impact of the countermeasures taken following the BEPS Project. The OECD aims to coordinate regular estimates working with governments. It will focus on new data which will be collected following the Project under actions implementing the recommendations on Harmful Tax Practices (Action 5), TP Documentation and Country-by-Country Reporting (Action 13) and, where implemented, Mandatory Disclosure Regimes (Action 12), as well as the more effective use of information already collected by tax administrations.

Since the onus is on the OECD and tax administration, this issue is unlikely in practice to be a major issue for multinationals, although it may affect the way they assess BEPS practices. The Report specifically recognises the need to maintain appropriate safeguards to protect the confidentiality of taxpayer information.

Mandatory disclosure regimes (Action 12)

The BEPS work sought to develop recommendations for the design of mandatory disclosure rules to allow tax administrations to collect, usually in advance of any tax return, information on aggressive or abusive transactions, arrangements, or structures. One focus was to be international tax schemes, where the work would explore using a wide definition of ‘tax benefit’ in order to capture such transactions more easily than under domestic rules.

True to the mandate, the work produced a modular design for domestic tax arrangements allowing for maximum consistency but allowing for country specific needs and risks. So, countries with existing regimes were largely covered by the best practice recommendations.

Initial discussions about rules targeting international tax schemes were ambitious. But a more conservative approach has prevailed. Countries are encouraged to consider the particular concerns they have in relation to cross-border BEPS outcomes in establishing their overall disclosure regimes. The report also now recommends a focus on whether a taxpayer in the reporting country will get a material tax benefit from a transaction. Further, it should only be required to report a transaction if it was aware or ought to have been aware of the associated cross-border BEPS outcome; or, in the case of an intra-group transaction, if it had made reasonable enquiries as to whether it formed part of a wider arrangement that includes a cross-border BEPS outcome that would have been domestically reportable.

Another element of the mandate was to consider how information on cross-border arrangements could be more widely shared. Greater reliance will be placed on the Joint International Tax Shelter Information Centre (JITSIC) network of tax administrations in this regard.

Transfer pricing document and country by country reporting (Action 13)

The work on TP documentation is of course part of the transparency theme of BEPS and designed to correct what is perceived as the ‘information asymmetry’ between taxpayer and tax authority. This TP documentation work was started early on in the BEPS project and has been the subject of detailed discussion in the BEPS consultation process. Not surprisingly, therefore, there are no material additional issues emerging in the finalised package of measures on TP documentation which has just been released.

Nonetheless, taxpayers now face a significant set of reporting obligations and some massive challenges in complying with the new requirements. Further, given the required timescales involved (the country by country (CbC) reporting requirements go live from 1 January 2016), this will be one of the earliest tasks that will necessarily be faced by taxpayers in getting to grips with the BEPS package.

The new reporting obligations will require a three-tiered approach to documentation. This comprises: the high-level CbC report which is to be made available to each country in which a MNE operates (a brand new report); a master file giving an overall perspective on the business; and a local file which contains specific TP information for each relevant country of operation. The OECD has released a mandatory template for the CbC report and has introduced a new master file requirement and new standards for the local file.

Many taxpayers have started work already on preparing to comply with these new reporting requirements and early feedback from these efforts indicates that most taxpayers are finding the systems tasks required to pull the relevant information together more challenging than many had initially thought.

Tax dispute resolution (Action 14)

Obstacles that prevent countries from solving treaty-related disputes under the mutual agreement procedure (MAP) include the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases. Given the significant rise in controversies and disputes that many expect post-BEPS, and the number of changes being addressed through treaty changes, it seemed appropriate that the OECD should review this area.

A minimum standard has been agreed which addresses commitments to MAP in the form of approved wording for inclusion in treaties (or the multilateral instrument overriding them) and broader requirements to make it happen fairly and effectively, including providing adequate resourcing. In addition, there are 11 best practices that cover things like training of dispute resolution staff, implementation of advance pricing agreements (APAs) and a number of items that should be included in countries’ published MAP guidance. A monitoring process will be agreed in 2016 in conjunction with the Forum on Tax Administration.

However, there was no consensus on mandatory binding arbitration and one or two other matters. A large group of states has committed to a programme of developing improved measures (including mandatory binding arbitration) and this is likely to lead to a potentially broad coverage of open issues (e.g. according to the OECD, it would cover something in the order of 90% of outstanding MAP cases).

The big question remains whether adequate resource will be deployed on a constant and enduring basis; historical experience makes it hard to be optimistic.

Multilateral instrument (Action 15)

Under its initial mandate, the OECD determined that it was feasible for an instrument to simultaneously update or override a number of bilateral tax treaties where states want to use such an instrument to implement recommended BEPS treaty wording. An ad hoc group was then established to construct such an instrument to take model treaty provisions developed through the BEPS Project and reflect them in multilateral treaty language.

Around 90 countries are currently participating in this ad hoc group, now including the US. Once the instrument is agreed, these and other countries will need to decide whether they want to apply it (there is no commitment until that stage). It is likely to be broadly adopted, especially where treaty changes are perceived as an obvious upside for tax authorities (e.g. PE, reducing treaty abuse, hybrids, etc).

Work is underway and the ad hoc group’s first plenary meeting will be on 5–6 November this year. The intention is to conclude the instrument ready for signing by the end of 2016.

One potential upside of this work is the greater consistency of implementation of the treaty based BEPS outcomes. However, there are some challenges to overcome, including the need for commentary and who will provide it and maintain it, and drafting problems in overriding bilateral treaties in different languages and framed in different ways. An ongoing problem is the concern that countries may want different outcomes, including in the way national implementation gives effect to the instrument and how it will interact with future bilateral treaties.

Future work

The original Action Plan allowed for various items to be delivered in December 2015, but the project has now been finished and we do not expect any further recommendations to be published this year.

As noted above, the multilateral instrument will be produced by a separate working group, constituted for this purpose and comprising a large number of interested countries, and it is intended that it will be ready by the end of 2016.

In addition, reference has been specifically made in the final reports or in earlier consultations to additional work or projects being pursued during 2016 on:

  • transfer pricing aspects of financial transactions;
  • attribution of profit to PEs and, in particular, guidance on how the Authorised OECD Approach (AOA) should be applied in the case of commissionaire and similar structures (though it is worth noting that no change of the AOA principles is anticipated);
  • use of profit split methods for transfer pricing, largely providing additional clarification of existing guidance; and
  • implementation of the hard-to-value intangibles proposals (Action 8), again largely clarifying existing guidance.

Further, the responsibility for the implementation of the various BEPS recommendations falls largely on countries adopting them and this will include making any necessary changes to domestic legislation to give effect to them. The OECD will also need to make the appropriate changes to the Model Tax Convention and Transfer Pricing Guidelines, and it will no doubt seek to play a role in monitoring the progress of individual states and lending a firm hand of guidance in appropriate cases.

Given the new areas of complexity (e.g. hybrid arrangements recommendations) and vagueness of the rules (e.g. what it means to have adequate substance), taxpayers will also want to see an effective process for monitoring the new rules, leading to ongoing improvements where necessary. It will be vital that such ongoing efforts ensure there is a consistent and balanced application of the new BEPS standards so that the cost of greater anti-avoidance mechanisms is not represented by incremental barriers to cross border trade, where tax avoidance is neither the intention nor the result. Continued progress in improving dispute resolution practices will be an especial area of interest for most taxpayers.

Global impact of BEPS

The significance of the BEPS outcomes is likely to vary from territory to territory. There has been a lot of consensus among G20, other OECD member states and quite a few further countries that have become part of the core team involved in framing the proposals but there remains a concern about the extent to which countries will continue to take alternative ‘unilateral’ measures.

Even allowing for a significant level of rule change following BEPS, the biggest issue may be the impact on the behaviour of tax authorities globally. We have already been seeing changes in the attitudes and practices of various tax authorities toward particular issues, like threshold PE, TP and treaty access challenges, and it seems inevitable that this will spread more widely.

We are also expecting some differences to be reflected on a regional basis and in that regard it is helpful to consider the changing pattern of BEPS engagement in a few illustrative stakeholder locations, such as the US, the EU and in emerging or developing states.

The position of the US: At the very beginning of the project, the US seemed very positive about the BEPS project, but it has latterly become one of its sternest critics. The US promotion of a largely CFC solution for BEPS has not been widely accepted, though it is clear that the final shape of BEPS (after a final round of US inspired redrafting on a number of issues – see below) is now certainly supported by the US.

By way of illustration, the US authorities have supported the overwhelming bulk of the BEPS TP work and, despite some questions being raised (e.g. in relation to confidentiality safeguards), it is also clear that CbC reporting will be introduced in the US. There are also some areas in which the US had already developed its own responses to BEPS issues and these are reflected in the options available in the BEPS reports, including the detailed LOB route to dealing with treaty abuse.

The obvious area where there had been a schism was in relation to the multilateral instrument where the US had indicated it was not ready to participate, but it is now participating. As the BEPS discussions have progressed, there have been recurrent concerns from the US regarding the subjectivity/vagueness of some of the proposed rules, e.g. on PE standards or re-characterisation for the purposes of the TP rules. A number of the significant changes in the just-released October package of BEPS papers are attributable to recent US pressure to correct this position and instil a greater level of clarity in what is being proposed. In consequence, the US position on BEPS has become more positive again.

The position in the EU: The European Commission (EC) has been an active participator in the BEPS discussions. There have, nonetheless, been concerns that some of the BEPS proposals, if implemented by EU member states, would put them in breach of the Treaty on the Functioning of the European Union (EU Treaty).

Moreover, there are views that the EU institutions should provide active leadership in the implementation of BEPS-related actions. It has been suggested that EU measures would provide the necessary co-ordination to make sure policies are implemented uniformly across all 28 EU member states.

While legislative action on tax would be constrained by the unanimity requirement for all member states to agree in the council on tax measures, there are also other avenues that may be available: the code of conduct; state aid (which falls under the Competition directorate) and transparency; and reporting or accounting action which could be put forward on a qualified majority voting basis. This introduces a further level of complexity and uncertainty as to how the full impact of the BEPS package will be seen in Europe, particularly as there is now pressure for an anti-BEPS Directive.

The position of emerging states: The huge efforts by the OECD to bring emerging states on board in the BEPS project have, in part, been successful in building a very broad-based consensus to support the work on BEPS. G20 countries which are not OECD member states have participated directly in the BEPS working groups. Also, a number of developing countries were invited and did join in and, despite some concerns that all developing countries should have had an equal voice, a useful report was produced on the developing country impact of BEPS.

A recent joint initiative of the OECD and the UN Development Program (UNDP) relating to making audits more effective in developing countries – ‘Tax Inspectors without Borders’ – has undergone pilot projects in Colombia, Albania, Ghana and Senegal and been formally launched. This new partnership will play a useful part in building capacity to tackle those parts of BEPS that are relevant to the particular developing countries in point. It is clear that the OECD has been going all-out to ensure as broad a coalition as possible of emerging/developing country states which support the BEPS project.

However, there are remaining concerns about the likely approach of some emerging/developing countries, particularly whether the direction of the BEPS work has adequately addressed the concerns of these states (e.g. about PE, and TP approaches) and therefore whether it will be effective in heading off divergent or arbitrary localised applications of BEPS which will still lead to significant disputes. There are also concerns that some states will adopt a selective ‘pick and choose’ approach to the BEPS package, taking up some but not all of the BEPS measures. One area sometimes seen as a critical issue for developing countries – whether particular tax reliefs are necessary or appropriate – was not a focus for the BEPS project.

Impact on multinationals and response

Given the breadth and complexity of the BEPS package, including the large number of action points that are leading to rule changes, it will no doubt affect taxpayers in very many different ways and with wide variations in effect from one taxpayer to another. However, there are various impacts that will be universally felt, including the increased complexity generally, the significant rise in transparency and documentation obligations, the increased importance of conduct in the TP domain and an increase in uncertainty as a result of the potential vagaries of the focus on substance.

The large number of different BEPS action points with varying impacts from taxpayer to taxpayer makes it difficult to address the question of how taxpayers might respond to the final BEPS measures. However, there are some general comments on the response to BEPS that are worth making here.

First, it is very likely there are some immediate steps which are almost bound to be required by any multinational group, given the likelihood of discrete immediate vulnerabilities in the face of the BEPS package (whether as a result of BEPS-driven rule change or behavioural changes on the part of the tax authorities). These might include a specific concern on a treaty access issue or a financing structure or a specific PE vulnerability, for example. More generally, almost all taxpayers will need to get to grips with the increased transparency obligations and this is likely to require systems modification.

Second, it will be wise to consider on a broad basis the wider business conducted in the multinational’s group, the structures operated and the general approach to tax compliance by reference to the BEPS agenda to identify wider themes that may need addressing going forward.

Third, having established the potential issues under the proposed changes (whether immediate vulnerabilities for remediation or wider areas for review), it will be necessary for multinationals to monitor the actual response/position of governments and tax authorities in the key territories in which they operate, given the possible variation in standards of enforcement/application from country to country and the possibility of unilateral actions.

Fourth, the tax function will need to ensure communication within the business on the general impacts of BEPS, so that issues like substance standards or required operating standards that follow from BEPS are understood and met in the course of business operations and deals activity.

Finally, (if it is not being too pessimistic to make the point) the tax function should ensure it is equipped for the post-BEPS environment, especially in terms of its capacity to deal with the increasing level of dispute and controversy that seems inevitable in the aftermath of the wave of change that has now been set in motion.