A Call To Rewrite The Fundamentals Of International Taxation: The OECD BEPS Action Plan

The Organization for Economic Co-operation and Development has released its ambitious action plan to address base-erosion and profit-shifting. Whilst the action plan leaves many questions unanswered and may fall at the first hurdle if the assumed political support for change turns out to be lacking, multinationals need to be aware of its content and should be monitoring developments closely

Background

In February 2013, the Organization for Economic Co-operation and Development (OECD) released its long-awaited report on base-erosion and profit-shifting (BEPS). The topic had become high on the political agenda in the preceding months owing to intense media scrutiny of the current principles of international taxation. Please see our previous coverage on the BEPS Report on the Transfer Pricing 360 blog.

Key Findings in the BEPS Report

The BEPS Report concluded that there was no empirical evidence that proved either the existence of BEPS or how BEPS could be affecting the tax-take of any given country. It also recognized that multinationals have a duty to their shareholders to minimize their tax bills, and it conceded that the planning strategies being castigated in the press simply involved multinationals legitimately using the current rules made available to them, such as the principle of separate legal personality.

The report concluded, however, that the current rules on international tax are outmoded because they have failed to keep pace with the way multinationals now do business. It recommended the development of an action plan to address BEPS and the underlying legal and tax bases that facilitate it. That action plan was released on 19 July 2013.

The Action Plan: Overview

The action plan can be found by following this link. In a preview meeting about its content on 17 July 2013, Pascal Saint-Amans (Director of the OECD's Centre for Tax Policy and Administration) stated that the action plan "represents a unique opportunity that comes along once in a century to rewrite the principles of international taxation" and said the OECD's vision is to facilitate the creation, via the action plan, of a set of principles "that will last for the next 100 years". Viewed against that background, it is clear that the OECD has high hopes for this initiative and the action plan itself certainly does not disappoint in terms of ambition from a content or timing perspective.

The Action Plan: Contents and Proposed Steps

The action plan identifies an extensive list of international tax principles for overhaul, ranging from the transfer pricing policies applicable to intangibles, to the introduction of model "controlled foreign company" codes and changes to the "permanent establishment" definition. It also contains a timetable for the envisaged reform, with proposed deadlines for each action point. Most of these fall within the next 12 to 24 months, with the OECD playing a facilitative role in the process.

Viewed in isolation, the ambitious content of the action plan does not particularly set it apart from similar initiatives that have gone before, including, for example, the OECD's previous work on "Harmful Tax Practices". What does...