Commenting on the Action Plan on Base Erosion and Profit Shifting
, David Francescucci, Tax Partner, KPMG, said, "Updating 75 years of international tax law within the 24 month timetable set out on July 19 is without a doubt a very ambitious undertaking. While prompt action is required, modernizing fundamental international tax principles in a coordinated fashion, while incorporating the aspects of the current tax system that work, will not be straightforward."
The 15 actions presented in the Action Plan focus on a number of key areas including the digital economy, hybrid mismatch arrangements, controlled foreign corporation rules, excessive intercompany interest payments, harmful tax practices, treaty abuse, avoidance of permanent establishment status, transfer pricing, aggressive tax planning and greater transparency and disclosure. The following issues are particularly notable:
- The "digital economy" in its broadest sense presents difficult and complex issues and we welcome the planned holistic approach to understanding the business models in this sector before making specific proposals.
- The call for action to address what the report refers to as "hybrid mismatches" was anticipated and will likely have a significant impact on multinational companies. This is also likely to be one of the most ambitious areas of the plan as it will require changes to domestic law and extensive coordination among countries.
- The Action Plan also calls for revamping the work on what it describes as "harmful tax practices" adopted by certain jurisdictions, with a particular focus on transparency and substance. We believe providing clarity and establishing consensus around the criteria for identifying these practices versus acceptable tax competition would be welcome.
- The Action Plan recommends significant work in relation to transfer pricing matters to ensure transfer pricing outcomes among the various constituents of a multinational are in line with value creation (i.e. substance), notably in the areas of intangibles, allocation of risks and capital, and what the Action Plan has labelled as "other high risk transactions".
- The Action Plan calls for improving mechanisms for "dispute resolution". We encourage the widespread adoption of mandatory arbitration and recommend the OECD go further in opening up access to the Mutual Agreement Procedure (MAP) to facilitate earlier and swifter resolution of disputes.
There are certain areas of the report which raise some concerns and present practical difficulties for implementation:
- In its earlier report issued in February, the OECD indicated it did not intend to depart from the arm's length principle in transfer pricing. However, this Action Plan suggests that consideration is now being given to measures which go beyond the arm's length principle. A departure from this universally established standard raises serious concerns.
- The Action Plan proposes changes to domestic legislation to require greater "disclosure" to global tax authorities of certain "aggressive transactions". Providing clear definitions and establishing consensus as to which transactions this will apply to will be essential to the effectiveness of this proposal.
- The Action Plan calls for enhanced "transfer pricing documentation requirements". "The proposals around 'Re-examination of transfer pricing documentation' seem to aim at a level of disclosure that amount to country-by-country reporting to tax authorities, " said Francescucci. "While the underlying intention may be to ensure greater transparency and facilitate transfer pricing administration initiatives, it will be important to ensure that the practical considerations and costs to the taxpayer are fully assessed and appropriately taken into account relative to the potential benefits such reporting would serve in addressing BEPS."
- The Action Plan proposes "adoption of a multilateral convention" among participating governments to implement a number of the proposed actions. This will present some considerable challenges, but it may be the only realistic mechanism for effecting change within the proposed time frames.
This report proposes significant changes to the international tax landscape in a very short period of time. It is thus very encouraging that the OECD is emphasizing the importance of consulting with a range of non-governmental stakeholders in moving forward. "We believe open dialogue with the business community is critical in this case," said David Francescucci. "It certainly proved to be a very positive experience in other recent work by the OECD, notably on transfer pricing aspects of intangibles. We look forward to engaging constructively with the OECD during the consultation process."
On July 19, the Canadian government released a press release stating that it has taken action to crack down on international tax evasion and tax avoidance.The release notes that Finance Minister Jim Flaherty will encourage the G20 to provide further leadership in developing a cohesive international approach to address these issues. In May 2013, the House of Commons Standing Committee on Finance issued a report that made 11 recommendations to combat tax evasion and aggressive tax planning, including that the government should work with the G20 countries and the OECD to develop measures addressing base erosion and profit shifting. Until Canada formally responds to the Action Plan, it remains to be seen what steps may be taken to adopt certain OECD recommendations and to meet the deadlines outlined by the OECD.
To learn more about the Action Plan in greater detail, please read KPMG's TaxNewsFlash.
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