Base Erosion and Profit Shifting - BEPS -Summary

The debate over BEPS tax planning strategies has reached last few years the front pages of the newspapers (i.e. Luxembourg leaks, Apple, Starbucks) and also the agendas of the OECD and non-OECD member countries governments. Upon request of the G20, the OECD published in July 2013 a document identifying the 15 Actions through which these BEPS tax strategies can be tackled. These 15 Action Plans are focused on :

1. establishing coherence in international taxation,
2. aligning taxing rights with substance and
3. improving transparency.

In essence, the BEPS project pretends to align taxation with activity. Companies should be taxed in the country/ies in which the activities are developed.

Recommendations to modify domestic law and tax treaties

The outcome of the BEPS projects would be the deliverable of recommendations per each of the 15 detailed Action Plans. Part of these deliverables has been published in September 2014 while others will be published in September and December 2015.

The BEPS recommendations will be modifications of domestic tax laws of each country or their bilateral tax treaties. 

Also a multilateral instrument will be developed in order to swiftly implement the tax treaty related BEPS measures in a rapid and consistent manner with respect to potentially more than 3000 tax treaties currently in force.

The G20 endorsed during various recent occasions the BEPS action plans and is pushing all developed countries and also developing countries to participate. Already 60 countries participate to the BEPS project.

Tax professionals have expressed their concerns regarding the uncertainty of timing and level of implementation of the BEPS recommendations by each of the countries in the foreseeable future. While there are countries that are already introducing tax reforms in line with BEPS initiatives, other countries may postpone such implementation and / or may only partially implement recommended adjustments.

Impact to many tax planning structures

The implementation of the BEPS recommendations will be a game changer in international taxation. The BEPS project would not only spread its effects on the biggest multinational groups such as Apple or Starbucks, it would also affect almost all the multinational groups (i.e. groups with entities in more than one jurisdiction).

Holding, royalty and finance structures which lack economic substance and are set up for treaty shopping purposes may be impacted by the recommended introduction of Limitation on Benefits provision (LoB) and/or the Principle Purpose Test (MPT) in tax treaties. Hybrid mismatch arrangements and thinly capitalised entities will be combatted. 

Transfer pricing structures the allocation of taxable profits needs to be aligned with economic activities and value creation in the respective countries. Aggressive structures have to be disclosed and transfer pricing transactions needs to be properly documented and filed to give tax authorities more transparent information.