A short guide on the BEPs action plan

What is BEPS?

• BEPS is “Base Erosion and Profit Shifting”.  It is a very ambitious international tax project first announced in June 2012 spearheaded by the Organisation for Economic Co-operation and Development (OECD).

Why now?

• There has been a huge amount of recent debate, both at home and abroad, on the perceived ability for multinational corporations (MNCs) to avoid tax legally by structuring their businesses in a complex but clever way (think Starbucks, Amazon, Apple as the well publicised tip of the iceberg).  This is against a background of increased austerity and governments very keen to sharpen their pencils to collect more or at least their perceived “fair share” of tax.  Quite rightly, it has been recognised that this can never be solved in isolation or through trial by media, and the whole purpose of the BEPS project to is to move things forward globally (or as globally as possible) in a coordinated and integrated fashion to make this sort of structuring more difficult and less effective.

Where are we now?

• There are 15 separate “Action Points”.  Some overlap.  Each have their own agenda and proposed timeline.  Some are more advanced than others.  Early scepticism that this project could not gain sufficient international momentum to succeed has all but disappeared.  There is strong backing from the G20 and regular updates from the OECD on each of the 15 Action Points.  The aim is to have the Action Plan complete by September 2015, which still looks highly ambitious for some of the more troublesome areas.

Can you summarise the aim of BEPS in a sentence or two?

• Put bluntly, domestic tax rules have simply not kept up with the globalisation and digitisation of business, and the ingenuity of MNCs and their professional advisers.
• The BEPS project can be summarised as a synchronised attempt to realign taxable profits with the place where the key  activities, “value creation” and “significant people functions” of the business are located, and a coordinated effort to banish ‘clever’ structures which exploit the differences in domestic tax systems leading to “double non-taxation” or “double deductions”.  Coupled with this is a desire to find out more, through increased and mandatory reporting by MNCs, about where taxes are actually paid, where people are actually employed and where profits are actually made and to share that information more quickly and transparently between different countries.

How will the BEPS Action Points be implemented?

• It will be a combination of changes in domestic legislation (in fact we are already seeing this in the UK with the recent announcement on ‘realigning’ the UK’s Patent Box regime) together with changes in double tax treaties and standard wording for these tax treaties (together possibly with a new multilateral ‘umbrella’ tax treaty approach which will override anything else – a brand new concept on the international tax front).

If I am an international business will it definitely affect me?

• Yes it will.  Some Action Points aim to address specific structures and techniques which will have been set up deliberately.  But other Action Points (for instance a proposed new, and potentially much wider and more uncertain, definition of “permanent establishment” and proposed increased reporting requirements, and increased documentation requirements for intra-group arrangements) will affect all businesses that do or are proposing to do business in more than one jurisdiction.