The 15 BEPS action points explained

The "Base Erosion and Profit Shifting" project is a project against the reduction of the tax base and the shifting of profits. Thus, the aim is to curb the legal - but qualified as aggressive - tax structuring of multi-national corporations and to render international cooperation more efficient. In the following, we have compiled a brief overview of the 15 action points:

Action Point 1 - the tax challenges of a digital economy

Action point 1 deals with how the digital economy can exacerbate BEPS risks and aims to identify ways in which these tax difficulties caused by the digitalization of the economy can be addressed. In the 2015 Final Report, the OECD and G20 countries agreed to initially monitor developments and analyze the data that becomes available over time. By 2020, the aim was to have drawn up an inventory on this topic. An interim report was delivered by the OECD in March 2018 and a guideline on the tax challenges of a digital economy in January 2019.

Read the OECD Tax Talk #9 on the Interim report

Read the OECD Tax Talk #11 on the policy note

Action Point 2 - about hybrid designs

Hybrid structures are used in practice by multinational companies to reduce their overall tax burden by exploiting conflicts of qualification between different national tax laws. The hybrid element is either a payment, if the payment is qualified differently in different states (hybrid financial instrument), or an entity, if the states involved qualify this entity differently (hybrid legal form). Action point 2 aims to prevent these taxation incongruities and proposes detailed regulatory proposals and solutions that are to be implemented in the respective national laws and DTAs. In July 2017, another report was published within the framework of Action Item 2, which deals with industry mismatches.

Action Point 3 - about the CFC rules

Many countries had already introduced CFC rules in their national legislation before the BEPS project started. Action point 3 does not want to introduce CFC rules as a minimum standard, but gives states so-called "best practice recommendations" regarding the design of CFC rules, which they can, but do not have to, introduce. The aim is to strengthen the CFC rules internationally. States introduce an attribution tax primarily to prevent companies from shifting their income to subsidiaries in low-tax countries.

Or have the CFC rules explained to you with the help of our PP presentations

Action Point 4 - about interest and other financial payments

Companies are allowed to deduct the interest payments attributable to a loan for tax purposes. Therefore, many companies try to over-deduct interest expenses through intra-group financing or excessive leverage in order to optimise their taxes. Action Item 4 developed a common approach on how to limit the tax deductibility of interest payments in a coordinated manner, for example, depending on the level of the company's earnings or the amount of assets held. However, the OECD recognises that the special circumstances of banks and insurance companies must be taken into account and has therefore developed further recommendations in this regard, among others, in an updated report in December 2016.

Action Point 5 - against harmful tax practices and for more transparency and substance (minimum standard)

A few years ago, it was still common practice for countries to use special tax regimes and rulings to try to "lure" large multinational companies to set up operations in their own country. This was also the case in Switzerland, for example with its special regimes for holding, domiciliary and principal companies, which are now to be abolished within the framework of the Tax Bill 17 / TRAF. The OECD considers such tax practices and unbridled tax competition to be harmful, as they give taxpayers undesirable structuring options and ultimately reduce tax revenues in all countries. Action Item 5 therefore introduces an international minimum standard, which is essentially based on two points: First, the application of the so-called "nexus approach" for certain preferential regimes ("preferential regimes"), such as patent boxes. This requires a substantial business activity of the company and decisive revenue-generating activities necessary to generate the income covered by the special tax regime in order to benefit from the preferential regime. Second, the introduction of a binding spontaneous exchange of information on tax rulings. States thus undertake to inform each other in future, without prior request, about tax rulings they issue to taxpayers in advance of cross-border transactions. Switzerland provided information on advance tax rulings to partner states for the first time in May 2018. In addition, a review process has been launched under Action Item 5 to review the various tax regimes of the states and publish further new reports.

Action point 6 - to prevent abuse of agreements (minimum standard)

As there is always a risk of several countries taxing the same income in the case of cross-border economic activities, countries conclude bilateral double taxation agreements (DTAs) with each other in order to allocate taxation rights between them. However, taxpayers repeatedly try to exploit the different provisions in the DTAs and their interaction with the respective national provisions in such a way that they do not have to pay any or less tax in the respective countries. Action point 6 therefore establishes a minimum standard to prevent such treaty abuses, in particular to prevent so-called "treaty shopping". The new regulations are to be included in the OECD Model Tax Convention, which forms the basis for many DTAs, and at the same time automatically incorporated into existing DTAs by all interested states through the so-called "Multilateral Instrument" (action point 15). A review process was also initiated for action point 6 and a report on the results was published in February 2019.

Action Point 7 - against the avoidance of permanent establishment status

As a rule, DTAs provide that the profits of a foreign company are only taxable in a state if the economic commitment of the foreign company has become so concentrated in that state that a permanent establishment exists to which the profits can be attributed. The definition of a permanent establishment is therefore of crucial importance for (non-)taxation. Action Point 7 seeks to amend and expand the permanent establishment definition of Article 5 of the OECD Model Tax Convention in order to address tax arrangements that attempt to circumvent the existence of a permanent establishment and thus the tax connecting factor. Further guidance on this issue was published in March 2018.

Action Point 8 to 10 - about intangible assets, capital and risks and other transfer pricing issues

Multinational companies are economically active in different countries through legally independent companies. These companies of a multinational group exchange goods and services with each other across borders. A transfer price must be determined for each of the exchanged goods and services so that they can be taxed appropriately. The special feature of transfer prices is that they are not formed on a market through supply and demand. The internationally recognised standard for determining appropriate transfer prices is the arm's length principle, which states that groups must structure their transfer prices as if the underlying transaction of goods or services had not been agreed between companies of the same group, but between independent third parties. This is to prevent multinational companies from abusing transfer pricing and arbitrarily shifting taxable substrate between states by setting arm's length conditions. Action points 8-10 deal precisely with this problem of transfer pricing. They aim to strengthen the arm's length principle, deal in particular with transfer pricing issues related to intangibles, which are often very difficult to value, and clarify the transfer pricing guidelines regarding the allocation of risks and capital within the group. The final report also includes guidance on transactions related to cross-border commodity transactions and on low value-added intra-group services. In July 2017, the OECD published revised Transfer Pricing Guidelines and publishes further guidelines at regular intervals, e.g. on the application of the "Transactional Profit Split Method" or on "Hard-to-Value Intangibles".

Action Point 11 - about data analysis and collection regarding the scale and economic impact of the BEPS Project

Action point 11 formulates recommendations for a better use of the available tax data and an improvement of the analyses in order to be able to better measure the tax losses due to profit reduction and profit shifting as well as the effects of the BEPS countermeasures in the future. On 15 January 2019, the first edition of the corporate tax statistics based on Action Item 11 was published.

Please also read the OECD Tax Talk #11

Action Point 12 - for the disclosure of aggressive tax planning models

More and more countries are requiring taxpayers or their advisors to disclose aggressive or abusive tax planning schemes to the tax authorities. Action point 12 does not intend to make such disclosure rules a minimum standard, but merely makes recommendations on how such disclosure rules can be effectively designed. States are thus free to decide whether they want to introduce binding disclosure rules or not. In March 2018, the OECD published model disclosure rules in the spirit of Action Item 12, which are intended to prevent the circumvention of the Common Reporting Standard (CRS) of the OECD/G20 states as part of the AEOI through avoidance agreements and offshore structures.

Action Point 13 - about transfer pricing documentation and the exchange of country-by-country reports (minimum standard)

In addition to action points 8 to 10, action point 13 forms the second main pillar with regard to the transfer pricing problem and proposes a globally uniform three-tier structure for transfer pricing documentation: Countries are free to introduce a group-wide "master file" and a country-specific "local file", but "country-by-country reporting" (CbCR) is a minimum standard and must be implemented by the countries.

Read our article on Master and Local File

By means of the CbCR, large multinational companies have to provide information annually and for all tax jurisdictions in which they operate on the amount and global distribution of their income, the taxes paid and the main economic activities of the Group. The Country-by-Country Report must be submitted to the state of the ultimate parent company and is automatically forwarded to the other states concerned via the intergovernmental exchange of information, provided that these states have concluded a corresponding international agreement. The OECD constantly updates the list of signatory states to the "Multilateral Comnpetent Authorities Agreement on the exchange of Country-by-Country Reports" (ALBA agreement or CbC MCAA). In addition, in May 2018, it also published a first collection of examination reports concerning the CbCR. At the end of June 2018, Switzerland sent the first country-specific reports on the 2016 tax period to other countries. The submission of reports will become mandatory for Switzerland from the 2018 tax period onwards.

Action Point 14 - about dispute avoidance and dispute resolution (minimum standard)

Many countries agree in their DTAs that a mutual agreement procedure (MAP) can be carried out in order to arrive at a uniform interpretation in the event of disagreement on the application of the DTA or to eliminate double taxation in individual cases. Especially the measures within the framework of the BEPS project can initially lead to increased double taxation. For this reason, the OECD wants to improve the effectiveness of dispute avoidance and resolution instruments with Action Item 14, which was designed as a minimum standard, so that treaty conflicts can be resolved in a timely manner or avoided in advance. In addition, a large group of states has committed to quickly integrate binding arbitration into their bilateral DTAs so that independent arbitral tribunals decide on individual cases in which the states involved cannot agree on a solution to the double taxation conflict. An effective monitoring mechanism should ensure compliance with Action Item 14.

Action Point 15 - about the development of a multilateral instrument for the implementation of the BEPS Action Points

To ensure that the BEPS measures with regard to DTAs can become effective in practice, the existing agreements would have to be amended accordingly (in particular to implement the measures set out in the Action Points 6 and 14). Due to the large number of existing DTAs, however, this process and the bilateral negotiations required for it would be extremely lenghty. For this reason, the OECD set itself the target in the Action Point 15, to develop a Multilateral Agreement ("Multilateral Instrument"), which would supplement the existing DTAs with the BEPS recommendations in accordance with the selection decisions made by the contracting states. The number of states that have signed the Multilateral Agreement is steadily increasing and on 1 July 2018 it entered into force with the ratification of Slovenia as the fifth ratifying state.

In the final vote on 22 March 2019, Parliament adopted the Multilateral Agreement, enabling Switzerland to now ratify it as well.

Conclusion

The BEPS measures were adopted by the heads of government at the G20 summit in Turkey on 16 November 2015. Since then, the OECD has published new reports and guidelines on the implementation of the 15 BEPS Action Points at high intervals and is constantly seeking exchanges with governments, authorities and taxpayers at various meetings and via the Tax Talks. It is a successful project and clearly shows how eager the OECD is to implement the BEPS Action Points. Without a doubt, the BEPS project heralded a new "era" in the tax world. An era of transparency and international exchange that will make tax avoidance and aggressive tax planning virtually impossible in the future.