Tackling BEPS: Chris Sanger examines how some countries are going it alone
Download our special report, Tackling BEPS: one year on, in its entirety as a PDF
The unilateral policy changes being made by some countries risk undermining the coherent approach to reform which the BEPS project is seeking to achieve.
A key driver behind the OECD/G20 BEPS project was to change the international tax architecture in unison and thereby reduce risks to international trade. Unilateral action risks creating double taxation, something that the OECD has long sought to avoid.
However, since the action plan was published, we have seen a range of BEPS inspired policy changes across the globe and across the broad categories of cross-cutting, coherence, substance and transparency. To some extent, this is to be expected, as the BEPS discussions have helped to ensure a shared understanding of tax risks.
We might be forgiven for thinking that action 1 – on the digital economy – is among the least well suited to unilateral action, given how quickly the sector changes. But at the same time, digital is one of the sharpest political pressure points around BEPS, with key players featuring prominently in the public debate. To date, we have seen various changes, from adopting a broader interpretation of the permanent establishment (PE) rules in countries such as Spain and India, to the consideration of a tax on the purchase of online advertising space in France. This idea has not been pursued, but the government has called for the OECD to redefine PE at a treaty level.
Going solo on actions 2 and 4 (hybrid mismatches and interest deductibility) always looked more likely, as a number of countries already operate rules in this area. The risk, of course, is that moving first will expose movers to competition from non-movers, with diversions in investment flows. Nevertheless, we have seen unilateral action through tax reform in Mexico, which included rules targeting certain interest, royalty and technical services payments to related parties where payments are not taxed. Elsewhere, the Board of Taxation in Australia released a consultation paper inviting comment on whether improvements can be made to address any inconsistencies between debt and equity rules in other jurisdictions. Proposals in Japan include denying participation exemption of foreign source dividends that are deductible in the source country. And in a show of mini-multilateralism, the EU has amended the Parent and Subsidiary Directive to address hybrids.
Action 3 – strengthening controlled foreign companies (CFC) rules – is another case where the risk of unilateral action exists and we have seen new or strengthened CFC rules coming in across a slew of countries, including Australia, Chile, China, Greece, Israel and New Zealand. Russia has proposed CFC rules applying to entities in which the Russian taxpayer (individual or legal entity) has an influence or a direct or indirect holding of more than 10%, and which are resident in specific ‘blacklisted’ countries.
Action 6 covers treaty abuse and we have seen an increased focus here in jurisdictions as diverse as China, Israel and Vietnam (all have issued anti-treaty shopping guidance with strict beneficial ownership criteria). Meanwhile, India has seen an increased focus by tax authorities on claims for treaty benefits. Mexican tax reform also includes a provision that could restrict access to treaties or impose additional administrative requirements.
On the definition of permanent establishments (PE) – action 7 – there have been national moves in Belgium and the Slovak Republic where the permanent establishment definition has been broadened, including by introducing the concept of a service PE.
There has been a good deal of activity on transfer pricing (actions 8, 9 and 10), with changes in Poland, Mexico, France, Australia and the Netherlands. While these may not stem directly as a result of the BEPS project, they are generally consistent with its goals. Moreover, the BEPS influence is clear in the generally heightened scrutiny being applied to intangibles, business restructurings and/or high-risk transactions.
This area of disclosure of avoidance schemes (action 12) has been one of the quieter areas for unilateral moves. The French Finance Bill 2014 provisions to introduce an obligation to disclose aggressive tax planning arrangements have given rise to difficulties with the Constitutional Court. Even so, both the Czech Republic (requiring taxpayers to disclose their aggressive tax planning arrangements and
In contrast, country by country (
What this leaves us with is a very mixed picture where different jurisdictions are moving forward at different speeds and to different destinations. The result may be a whole that is much less than the sum of its parts.
So why is this happening? To a certain extent, it was inevitable that once BEPS had raised the profile of base erosion issues, pressure would build for early action. Faced with this, national governments may well be tempted to act, rather than waiting for BEPS actions to gain approval.
It does matter, and potentially quite a lot. If the real value of BEPS lies in its capacity to deliver a coherent, comprehensive framework that will offer certainty to both
Tackling BEPS: Chris Sanger examines how some countries are going it alone
Download our special report, Tackling BEPS: one year on, in its entirety as a PDF
The unilateral policy changes being made by some countries risk undermining the coherent approach to reform which the BEPS project is seeking to achieve.
A key driver behind the OECD/G20 BEPS project was to change the international tax architecture in unison and thereby reduce risks to international trade. Unilateral action risks creating double taxation, something that the OECD has long sought to avoid.
However, since the action plan was published, we have seen a range of BEPS inspired policy changes across the globe and across the broad categories of cross-cutting, coherence, substance and transparency. To some extent, this is to be expected, as the BEPS discussions have helped to ensure a shared understanding of tax risks.
We might be forgiven for thinking that action 1 – on the digital economy – is among the least well suited to unilateral action, given how quickly the sector changes. But at the same time, digital is one of the sharpest political pressure points around BEPS, with key players featuring prominently in the public debate. To date, we have seen various changes, from adopting a broader interpretation of the permanent establishment (PE) rules in countries such as Spain and India, to the consideration of a tax on the purchase of online advertising space in France. This idea has not been pursued, but the government has called for the OECD to redefine PE at a treaty level.
Going solo on actions 2 and 4 (hybrid mismatches and interest deductibility) always looked more likely, as a number of countries already operate rules in this area. The risk, of course, is that moving first will expose movers to competition from non-movers, with diversions in investment flows. Nevertheless, we have seen unilateral action through tax reform in Mexico, which included rules targeting certain interest, royalty and technical services payments to related parties where payments are not taxed. Elsewhere, the Board of Taxation in Australia released a consultation paper inviting comment on whether improvements can be made to address any inconsistencies between debt and equity rules in other jurisdictions. Proposals in Japan include denying participation exemption of foreign source dividends that are deductible in the source country. And in a show of mini-multilateralism, the EU has amended the Parent and Subsidiary Directive to address hybrids.
Action 3 – strengthening controlled foreign companies (CFC) rules – is another case where the risk of unilateral action exists and we have seen new or strengthened CFC rules coming in across a slew of countries, including Australia, Chile, China, Greece, Israel and New Zealand. Russia has proposed CFC rules applying to entities in which the Russian taxpayer (individual or legal entity) has an influence or a direct or indirect holding of more than 10%, and which are resident in specific ‘blacklisted’ countries.
Action 6 covers treaty abuse and we have seen an increased focus here in jurisdictions as diverse as China, Israel and Vietnam (all have issued anti-treaty shopping guidance with strict beneficial ownership criteria). Meanwhile, India has seen an increased focus by tax authorities on claims for treaty benefits. Mexican tax reform also includes a provision that could restrict access to treaties or impose additional administrative requirements.
On the definition of permanent establishments (PE) – action 7 – there have been national moves in Belgium and the Slovak Republic where the permanent establishment definition has been broadened, including by introducing the concept of a service PE.
There has been a good deal of activity on transfer pricing (actions 8, 9 and 10), with changes in Poland, Mexico, France, Australia and the Netherlands. While these may not stem directly as a result of the BEPS project, they are generally consistent with its goals. Moreover, the BEPS influence is clear in the generally heightened scrutiny being applied to intangibles, business restructurings and/or high-risk transactions.
This area of disclosure of avoidance schemes (action 12) has been one of the quieter areas for unilateral moves. The French Finance Bill 2014 provisions to introduce an obligation to disclose aggressive tax planning arrangements have given rise to difficulties with the Constitutional Court. Even so, both the Czech Republic (requiring taxpayers to disclose their aggressive tax planning arrangements and
In contrast, country by country (
What this leaves us with is a very mixed picture where different jurisdictions are moving forward at different speeds and to different destinations. The result may be a whole that is much less than the sum of its parts.
So why is this happening? To a certain extent, it was inevitable that once BEPS had raised the profile of base erosion issues, pressure would build for early action. Faced with this, national governments may well be tempted to act, rather than waiting for BEPS actions to gain approval.
It does matter, and potentially quite a lot. If the real value of BEPS lies in its capacity to deliver a coherent, comprehensive framework that will offer certainty to both
