Q&A on the OECD's base erosion and profit shifting project

On 12 February the OECD published a 91-page report titled Addressing Base Erosion and Profit Shifting (available via www.lexisurl.com/2xHgB). The report was commissioned by the G20 as part of a project looking at whether, and if so why, the current rules allow for the allocation of taxable profits to locations different from those where the actual business activity takes place.

What concerns have sparked this initiative by the OECD?
There are various reasons behind the BEPS project. There is the fundamental concern that the international tax rules have not kept pace with the increased globalisation of business. This also includes concerns that the tax rules are not appropriate for digital business carried on over the internet. There are also various concerns that the tax rules operate in a way which is simply not fair.

All of these reasons lead to the conclusion by the tax authorities that governments are losing substantial corporate tax revenue because of planning by corporates, which is eroding the taxable base and/or shifting profits to locations where they are subject to a more favourable treatment.

Why is the topic so politically charged?
Most of the recent interest in this area is fuelled by the financial crisis and the resultant climate of austerity.

In that context, there has been a much greater focus on the contribution made by corporates and this has led to questions as to why, in many cases, corporates are paying relatively low levels of tax in jurisdictions in which they operate.

Why is the OECD leading this discussion and can it deliver?
There are a number of reasons as to why the OECD is the best placed organisation to lead this work including its standing as the premier tax supranational, the resources available in its tax secretariat and existing work already in progress on specific issues such as transfer pricing and permanent establishments (PEs), etc, as well as its long-standing role in relation to the OECD model, which forms the basis of most bilateral double tax treaties.

However, the OECD is unlikely to move away fundamentally from some of the key concepts of the international tax rules and is also constrained by the consensus approach that is adopted for changes in the tax domain.

Together, these factors mean that the OECD-led response is likely to reflect various anti-avoidance measures together with a modification of the existing rules to address digital business.

What are the main changes that you think the OECD work on BEPS will lead to?
There are various areas of focus that the OECD is working on, including the use of hybrid financial instruments and entities; the shifting of mobile resources such as capital and intangibles; specific tax issues relating to digital business; use of tax incentives; use of low tax jurisdictions and it is also considering whether tax authorities have adequate resources and information to target areas of perceived abuse.

The OECD work is likely to lead to a number of proposed changes relating to transfer pricing, PEs, substance in arrangements and general anti-avoidance provisions.

What is the relevant timeframe?
The OECD intends to develop an action plan by June 2013, which is a very short period given the scale of the issues involved. Developing and implementing any of the OECD response is likely to take appreciably longer, particularly if amendments need to be made to existing double tax treaties or domestic law changes are involved, and it is likely that both of these will be included in the OECD proposals.

What concerns might business have in relation to the BEPS project?
There will clearly be an impact on existing structures, although it is hard to assess precisely what that impact will be in advance of the release of the OECD package of measures later this year.

There are also open questions in relation to the ‘migration’ process by which the new rules are enacted, particularly in relation to concerns that there may be some attempts at retrospective taxation.

One immediate concern is at the speed of the proposed changes and whether this allows any meaningful contribution by business.

The OECD has already stated that it will be important that all stakeholders have a say in any changes that are made but it is not obvious how this process will be dealt with in the speedy timetable that is being followed over the next few months.

Richard Collier is a tax partner at PwC.