KPMG representatives at the meeting observed that the strategic direction on many aspects of the Action Plan were already starting to take shape and some action points, particularly regarding disclosure, were expected to be set by the end of 2013. In particular, it was noted that the OECD sees strengthening documentation rules and providing risk assessment information, or country-by-country reporting, as a crucial part of the Action Plan that is likely to advance quickly because it is less reliant on other actions.
The OECD presented their Action Plan for dealing with Base Erosion and Profit Shifting (BEPS) on July 19, 2013 which is supported by Canada and the other G20 countries. The plan establishes the areas where action will be taken to deal with perceived tax avoidance structures and will likely lead to some fundamental changes to the way both tax structuring and transfer pricing are viewed by tax authorities.
While thinking is still at a very early stage about actions to change the international tax landscape, the timetable is very tight. This timing is creating an urgency for countries' businesses, governments and other representative bodies to provide input to the OECD as soon as possible to shape the policy decisions being made.
The OECD indicated that governments have to take responsibility for setting tax policy, the consequences of which must be followed by business. The OECD said it will continue to require practical input from business in order to achieve the aim of a single set of rules which encourages cross-border investment and prevents double taxation.
The OECD sees strengthening documentation rules and providing risk assessment information, or country-by-country reporting, as a crucial part of the BEPS plan that is likely to advance quickly because it is less reliant on other actions. The OECD notes that it intends this country-by-country reporting requirement to require disclosure of information that is available. However, the OECD acknowledged that it could be challenging to draft these rules.
Hybrids and interest
Both the OECD and business representatives generally recognized that inconsistencies between national tax systems have been created through various domestic tax policy initiatives, and these now need to be addressed. Targeted solutions through bilateral treaties were proposed. Business representatives pointed out that double taxation is not the mirror image of double non-taxation, but has real cost. Some hybrid structures are expressly provided for by regulators, and the OECD agreed that bank interest cannot be treated in the same way as non-banking interest. There was some discussion about the complexity of an arm's-length test for interest, but preference was expressed for a single test based on arm's-length principles rather than a formula.
The OECD was very interested in the business models presented by business representatives, and in the conclusions that targeted measures were preferable to attempting to constrain or strengthen rules for all situations.
The OECD and business representatives seemed to agree on not developing separate rules for the digital economy, since all businesses use some aspects of the digital economy. However, there was also acknowledgement that if differentiation cannot be made, there will be a higher challenge to make the rules work well for all sectors.
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Information is current to October 08, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500