On 5 October 2015, the OECD Secretariat published the 2015 Final Reports (the "BEPS Final Reports") to the OECD/G20 Base Erosion and Profit Shifting Project ("BEPS").
The term BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity, resulting in little or no corporate tax being paid.
In response, in September 2013, the G20 endorsed the OECD's Action Plan on BEPS. Now, two years later, the newly released BEPS Final Reports contain comprehensive measures that countries have agreed upon to combat BEPS, ranging from new minimum standards, common approaches to facilitate a convergence of national practices and guidance drawing on best practices. More than 60 countries have participated in the project. The project was described by the OECD as the "first substantial – and overdue – renovation of the international tax standards in almost a century."
These are some of the project's recommendations:
- Multinational entities ("MNEs") will be required to provide master files on their global business operations and transfer pricing policies, local files on detailed transactional transfer pricing information specific to each country and file a Country-by-Country Report annually for each tax jurisdiction in which they do business. The Country-by-Country Reports are expected to expose instances in which large profits are booked in low-tax jurisdictions where little or no economic activity takes place.
- The definition of permanent establishment in the OECD Model Tax Convention will be changed to address techniques used to inappropriately avoid tax via replacement of distributors with commissionaire arrangements or via the artificial fragmentation of business activities.
- In order to prevent the granting of treaty benefits in inappropriate circumstances, countries have agreed to include anti-abuse provisions in their tax treaties, including a minimum standard to counter treaty shopping.
- The OECD Transfer Pricing Guidelines will be changed so as to limit the use of cost-sharing arrangements and other tax planning strategies involving intangibles and other payments between members of the MNE group.
- The BEPS Final Reports propose a common approach which will facilitate the convergence of national practices by interested countries to limiting base erosion through interest expenses and hybrid mismatches.
- In order to resolve disputes between countries more efficiently, a large group of countries are committing to move quickly towards mandatory and binding arbitration. A monitoring mechanism will be established to focus on improving dispute resolution processes.
What to Expect
We expect the BEPS Final Reports to have a tremendous influence on the way countries tax MNEs. Many countries are in the process of enacting domestic legislation or regulations to implement the Country-by-Country reporting obligations and other BEPS recommendations. Over time we will be able to observe how tax authorities implement BEPS with respect to transfer pricing policies, and the impact of BEPS on existing and new tax treaties. We expect many of the BEPS project's recommendations to become new international tax norms.
China has actively participated in the project and has already started to implement parts of the project's recommendations into its domestic legislation. On 18 March 2015, the State Administration of Taxation of China (the "SAT") introduced the Bulletin on Enterprise Income Tax Issues related to Outbound Payments by Enterprises to Overseas Related Parties (SAT Bulletin  No. 16), which targets service fee and royalty payments made by Chinese companies to their overseas affiliate that do not undertake functions and risks and/or lack economic substance. Furthermore, on 17 September 2015, the SAT released the discussion draft of the revised Implementing Measures for Special Tax Adjustments (the “TP Rules”), which is another attempt to introduce the transfer pricing concepts and recommendations (including country-by-country reporting) under the BEPS project into domestic legislation. It is expected that the revised TP Rules will be finalised before the end of 2015.
We expect more legislation changes, audits and tax disputes to follow. In a meeting held by the SAT on 10 October 2015 in Beijing, the SAT emphasised that it will take this opportunity to improve China’s domestic rules and international tax administration capabilities by:
- revising the Tax Administrative and Collection Law to permit PRC tax authorities to collect more information from taxpayers (including the mandatory disclosure of aggressive tax planning schemes) so that they can effectively counter aggressive tax planning;
- establishing automatic information exchanges with more than 45 countries by the end of 2018; and
- revising Chinese treaty interpretative guidance to actively counter treaty abuses and artificial avoidance of permanent establishment status.