The BEPS survey is a comprehensive action plan of 15 points urging internationally co-ordinated measures in order to curb aggressive tax planning globally. The survey was published by OECD and the G20 countries in July 2013. As the title of the document suggests, the main purpose of the initiative is to halt the erosion of tax bases and artificial profit shifting between countries.
It is not an exaggeration to say that the BEPS survey is a milestone: the developed world launched the largest and most co-ordinated campaign against global tax evasion.
The international weight of the BEPS actions is illustrated by the fact that the OECD Committee on Fiscal Affairs is elaborating regulation with the involvement of 44 countries (including all OECD members and the G20 group). In addition, opinions were asked from a number of other countries as well as the representatives of the business sector, trade unions and civil organizations, experts and academics during the preparation of the material and comments already make up 3 500 pages.
The publication includes materials in relation to 7 actions from which two (actions 1 and 15) are final reports, one (action 4) was published as an interim report and four reports containing draft recommendations (actions 2, 6, 8 and 13).
The deadline for the elaboration of the other actions is September 2015. We must emphasize that the actions published now may still be modified to some extent during the finalization of the other actions and, for this reason, we have to wait another year until the BEPS package is published in its final form.
An interesting element of the current status report also concerns Hungary substantially. Action 5 (which examines preferential regimes of individual OECD countries as to whether these are harmful from the perspective of international tax competition or not) contains a specific list of the examined preferential regimes. This list includes, among others, Hungary with an analysis of the favourable Hungarian IP (intellectual property) Box regime for royalties and capital gains. There is a 50% tax base allowance on such income from royalty and the capital gain generated from the alienation of registered intangibles is exempt from tax. However, the study is still in progress and we will have to wait until 2015 to see the results. If the final report qualifies Hungarian rules harmful, the relevant regulations will most likely have to be modified or, in an extreme case, superseded by Hungary.
Brief description of the BEPS actions
The BEPS survey consists of the following 15 actions:
1. Address the tax challenges of digital economy.
2. Neutralize the effects of hybrid mismatch arrangements.
3. Strengthen CFC (controlled foreign company) rules.
4. Limit base erosion via interest deductions and other financial payments.
5. Counter harmful tax practices more effectively, taking into account transparency and substance.
6. Prevent treaty abuse.
7. Prevent the artificial avoidance of PE (permanent establishment) status.
8–9–10. Assure that transfer pricing outcomes are in line with value creation with special regard to the transfer pricing of intangibles, risks and capital and other high-risk transactions.
11. Establishing methodologies to collect and analyse data on BEPS and the actions to address it.
12. Require taxpayers to disclose their aggressive tax planning arrangements.
13. Re-examine transfer pricing documentation.
14. Make dispute resolution mechanisms more effective.
15. Develop a multilateral instrument for the fast and efficient modification of bilateral agreements.
Focus of the 7 actions
The 7 actions currently published focus on the following areas:
- Address the tax challenges of digital economy, including indirect taxation (Action 1).
- Development of new international standards with international harmonization of corporate tax bases (through the neutralisation of the effects of hybrid mismatch arrangements – Action 2).
- Counter tax practices harmful for international tax competition, which is also a revision of a similar publication issued by OECD in 1998 with several references. The survey contains a country-by-country study on which OECD member states have a harmful tax law environment or techniques (Action 5).
- Prevention of double tax treaty abuse and illegitimate use of double non-taxation and benefits (Action 6).
- Assure that transfer pricing outcomes are in line with value creation in the area of intangibles. The survey mostly proposes amendments to the parts of the OECD Transfer Pricing Guidelines relating to IP (Action 8).
- Re-examination of transfer pricing documentation and proposal for the elaboration of a template for country-by-country reporting. The goal is to achieve higher level of transparency for tax administrations (mostly in respect of international transactions) and better consistency of requirements applicable by taxpayers (Action 13).
- Action 15 deserves special attention as it envisages a multilateral instrument for the fast and efficient modification of the current bilateral double tax treaties (the many thousands of treaties currently in force would not have to be re-negotiated one-by-one).
The package published on this Tuesday contains planned and proposed steps in respect of 7 actions (and of different levels of preparation at the moment) and a document summarizing these was prepared also. This package will first be presented to the Finance Ministers of the G20 countries in September 2014 and later to the leaders of the G20 in November 2014. OECD Committee on Fiscal Affairs plans to publish 2015 deliverables with the finalized version of the 2014 BEPS package.
The 15 BEPS actions basically cover 3 different areas: recommendations and models for domestic tax regulations, amendment of the OECD Model Convention on Double Taxation and guidelines for the implementation of the amendment and other reports. The measures formulated in the BEPS actions will probably be implemented either through the amendment of bilateral double tax treaties or through the multilateral instrument (Action 15) and the modification of internal domestic tax regulations.
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In the upcoming period I will post a more detailed blog entry each week on the results and recommendations relating to each action addressed in the currently published package.