Business Implications of BEPS
A CMS Tax Analysis
Three years ago, following the 2013 Saint-Petersburg summit, the G20 leaders made the following statement: “In a context of severe fiscal consolidation and social hardship, in many countries ensuring that all taxpayers pay their fair share of taxes is more than ever a priority. (…) We fully endorse the ambitious and comprehensive Action Plan – originated in the OECD – aimed at addressing base erosion and profit shifting with mechanism to enrich the Plan as appropriate. We welcome the establishment of the G20/OECD BEPS project and we encourage all interested countries to participate. Profits should be taxed where economic activities deriving the profits are performed and where value is created”.
Three years later, the BEPS project has made considerable progress. Among its notable achievements, on 5 October 2015, the 13 reports for the 15-point Action plan were released in their final form. Based on three core principles – coherence, substance and transparency – these Actions address a wide array of international taxation matters, but also raise numerous questions in terms of practical application. It is important to note that the BEPS project remains an ongoing work ( a work in progress) by the OECD. While the reports on the 15 Actions are final, the OECD continues to publish Discussion Drafts with requests for commentaries by tax experts (for example: Discussion Draft on the Revised Guidance on Profit Splits, Discussion Draft on the Attribution of Profits to Permanent Establishments).
The following articles, written by CMS tax experts, offer in-depth analyses of some of the major BEPS Actions, giving their insight on the applicability of these Actions, their impact on domestic tax laws (and vice-versa), and both immediate and expected consequences on the taxpayer’s day-to-day operations.
- In “BEPS Action 1 and the Digital Economy: an Unsolvable Issue?”, Raquel Fernandes (CMS Portugal), Elisabeth Ashworth (CMS France) and Stéphane Bouvier (CMS France) explain the elaborate ties between BEPS and the Digital economy, the difficulties encountered by BEPS Action 1 in addressing them, as well as various VAT issues such as the notion of Fixed Establishments when dealing with digital businesses.
- In “Hybrid Mismatch Arrangements – Interest Deductions and Other Financial Payments”, Heino Buesching (CMS Germany) presents the two BEPS Actions which most impact financing: Action 2 and Action 4, with a detailed analysis of the new rules aimed at hybrid financing instruments and hybrid legal forms as well as of the new rules proposed by Action 4 to limit the use of interest expense.
- In “Taxation of Controlled Foreign Companies: Controversies and Challenges”, Andrzej Pośniak (CMS Poland) and Arkadiusz Michaliszyn (CMS Poland) review Action 3, commenting on the general difficulties encountered when applying CFC rules, and on how the report for Action 3 proposes to deal with such issues as hybrid tax planning, defining levels of control, and use of exemptions and thresholds.
- In “BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”, Fabrizio Alimandi (CMS Italy) studies the framework of Action 6, with an in-depth presentation of the Limitation of Benefits rule and Principal Purpose Test it introduces, as well as a review of specific bilateral tax treaties which have already incorporated comparable measures.
- In “BEPS and Transfer Pricing: What Do We Do Now?”, Xavier Daluzeau (CMS France) covers Actions 8, 9, and 10 and the new guidance on the delineation of actual transactions, the renovated framework on intangibles in transfer pricing, the definition and remuneration of low value-adding services and the revisions to Transfer Pricing Documentation – including the new measures from Action 13 – before explaining which steps multinational companies should take in light of these new rules.