Amidst G20 discussions, much media analysis, and government debate internationally, “BEPS”, has progressively been making its way onto the boardroom agenda. The BEPS project, led by the OECD’s Pascal Saint-Amans, represents the most fundamental change to the international tax landscape in decades, and will have a significant impact on the way in which companies carry out their day-to-day business. In addition, the EU is working in parallel on its own BEPS Directive which is expected to be released later this year. The degree of the impact and the pace with which the changes will take effect is something that all companies and countries will be intensely working on over the coming months. At the Institute we are delighted to be part of that work by way of hosting the Harvard Kennedy-Irish Tax Institute Global Tax Conference in Dublin next March.
BEPS, or Base Erosion and Profit Shifting, which seeks to address the inadequacies of the international tax framework that did not keep pace with the evolution of globally integrated business models, came to the forefront once again in recent months with the OECD’s release of the final package of BEPS measures in October 2015. These measures were subsequently endorsed by the G20 heads of state at their Summit in Turkey in November 2015. The package provides a comprehensive framework of international standards and recommendations to help address the BEPS concerns.
The project overhauls existing tax principles to ensure that there is a greater alignment of profits with the location of real economic activity, meaning that there could be a substantial shift in the way a company’s profits are taxed across the jurisdictions in which it operates.
Increased transparency is also one of the centre pieces of the new set of OECD rules, for example, the BEPS project has introduced a “country-by-country reporting” requirement whereby companies will be required to clearly disclose where profits, sales and employees are located and where taxes are paid. In addition, tax authorities will be required to automatically exchange tax rulings provided to companies. The process of gathering this data will require multiple stakeholder involvement across corporations and data reporting tools may need to be modified to produce the relevant detail.
Furthermore, these measures will give tax authorities greater visibility of a corporation’s global tax position, a consequence of which may be an increase in the level of audit interventions. In preparation for engagement with tax authorities, companies will need to consider where their profits are generated and whether the local economic substance is reflective of that level of profit.
While the release of the final BEPS reports marks a significant milestone in the project, it by no means represents the end of the process. Will Morris, Tax Committee Chair of BIAC – an advisory committee to the OECD -, believes that much work remains; “Business does still have concerns that some of the recommendations may lead to double taxation of income, and many important details remain to be worked out”.
Pictured : Martin Lambe Chief Executive Irish Tax Institute
The OECD will continue work in 2016 to finalise the output of a number of the actions, particularly as regards transfer pricing. For the other actions, the focus has now switched to the implementation, a phase which Morris describes as “crucial”. We have already seen many countries make changes to their domestic law to underpin the BEPS measures. For example, Ireland has just introduced a new intellectual property regime (Knowledge Development Box) and country-by-country reporting, both of which comply with OECD standards.
Other BEPS measures will be enacted by way of a Multi-lateral Instrument, which will enable global tax treaties to be amended simultaneously. The instrument is currently being developed by an OECD working group lead by Mike Williams, Director of Business and International Tax at HM Treasury, and is expected to be finalised later this year.
As the BEPS project moves towards completion, it is important that companies assess the impact of these changes on their tax and communications strategies. Corporate governance is key to ensuring that these new tax rules are adhered to, meaning that boards will now be required to play a greater role in the design, implementation and ongoing monitoring of corporate tax policies. With the reports published and the proposals approved by policy makers globally, the real work of implementation for companies and tax advisers is just about to begin.
Both Will Morris and Mike Williams will be speaking at the Global Tax Policy Conference which is being jointly hosted by the Irish Tax Institute and the Ash Center at the Harvard Kennedy School. The conference takes place in Dublin Castle, Ireland, from 9-11 March 2016.