Base Erosion and Profit Shifting and likely Impact on Entities and Structures

Base Erosion and Profit Shifting

The Base Erosion and Profit Shifting (BEPS) project that is being developed by the OECD and sponsored by the G20 has gained considerable momentum in the last few weeks.

On October 5, 2015 the OECD delivered the final package of measures for each of the 15 action plans of the BEPS project.

BEPS refers to tax planning strategies that exploit gaps, mismatches and loopholes in tax laws and tax treaties in order to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real activity but where taxes are low, resulting in little or no overall corporate tax being paid.

Aminews BEPS
15 BEPS Action Plans

The debate over BEPS tax planning strategies has been well publicized over the last few years on the front pages of newspapers – think of the Luxembourg leaks, Apple, Starbucks - and also the agendas of both OECD members and non-OECD countries.

The OECD has identifying 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 objective of the BEPS project is to align taxation with activity. Companies should be taxed in the country/ies in which the activities take place.

The BEPS project has been developed over the last three years by the OECD, each phase was endorsed by the G20 and has brought together some 90 countries. A list of participating countries can be found at www.OECD.org.

Measures to modify domestic law and tax treaties

The final package delivered by the OECD include recommendations, or measures about each of the 15 Action Plans. These measures are a result of consensus among the participating countries. The BEPS final measures are endorsed by the G20 Finance Ministers on October 8th in Lima (Peru).

Some of the BEPS measures should result in modifications to domestic tax laws of each country, while other BEPS measures should result in amendments of clauses in bilateral tax treaties.

In order to incorporate the tax treaty-related BEPS measures into the existing network of bilateral treaties, nearly 90 countries are working together on the development of a multilateral instrument. This multilateral instrument should be ready by the end of 2016 and may potentially affect more than 3,000 tax treaties currently in force.

Impact on many tax planning structures>

The implementation of the BEPS measures will be a game changer in international taxation. The BEPS project will not only impact the biggest multinational groups such as Apple or Starbucks, it will 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 Principal Purpose Test (PPT) in tax treaties. Hybrid mismatch arrangements and thinly capitalized entities will be combatted.

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

Amicorp BEPS Services

It is now time to analyze the level of substance of the entity(ies) and the potential impact of BEPS actions on your structures and implement improvements where needed. For example, your client entities may be affected by any of these Action Plans:

  • Action Plan 2: Hybrid Mismatch Agreements
  • Action Plan 3: Controlled Foreign Corporation rules
  • Action Plan 4: Excessive interest deductions
  • Action Plan 5: Harmful Tax regimes
  • Action Plan 6: Abuse of Tax treaties
  • Action Plan 7: Artificial avoidance of Permanent Establishment status
  • Action Plans 8, 9, and 10 Transfer pricing (Intangibles, risk and capital, high-risk transactions)
  • Action Plan 12: Disclosure of aggressive tax planning arrangements

We recommend that you have your structure reviewed by your tax advisor and to contact us should any adjustments be required. We would be happy to assist on any decisions following your tax advisors recommendations and to implement any improvement / modification of the structure to mitigate any BEPS related risk.

  • Determining in more detail which of the BEPS action plans may affect your structure by performing additional checks and reviews;
  • Improving factual and economic substance and alignment of taxation with economic activities and value creation;
  • Restructure to alternative solutions which are more robust in view of the BEPS recommendations;
  • Complying with the reporting and documentation requirements, including some of the Transfer Pricing documentation that will be required (i.e. master file, local file, country by country reporting).

For more information on how to respond to the global BEPS project, and take advantage of Amicorp’s services, please contact your Amicorp Account Manager, Sales Manager or your nearest Amicorp office.