Wolters Kluwer in-house subject matter expert, Cindy Chan, takes you through the progress made to date with BEPS.
The Base Erosion and Profit Shifting (BEPS) project was commenced in 2013 by OECD and G20 countries to address fiscal losses caused by BEPS which is defined by the OECD as: “tax planning strategies used by multinational companies to exploit gaps and differences between tax rules of different jurisdictions internationally to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity”.
The BEPS project has resulted in the development of 15 actions in a 2013 action plan to tackle base erosion and profit shifting, as well as the signing by a majority of the members of a statement in October 2021 on a two-pillar approach to address the tax challenges arising from the digitalisation of the economy. These developments are further discussed below.
2013 BEPS Action Plan
The OECD’s 2013 report Addressing Base Erosion and Profit Shifting set out an action plan to address BEPS that detailed 15 actions. In 2015, the OECD released a final package of tax reform measures including 13 final reports addressing the 15 Actions of the BEPS Action Plan. Since then, measures proposed in the final reports have been adopted progressively by G20, OECD and other countries.
Australia has adopted many of the recommendations. For information on developments concerning the BEPS project, see Australian Federal Income Tax Reporter ¶620-223. The following table lists the 15 Actions of the BEPS project.
|BEPS Action item||Scope of the action item|
|Action 1: Tax challenges of the digital economy||Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop options to address them. This includes a consideration of both direct and indirect taxation.|
|Action 2: Hybrid mismatch arrangements||Develop model treaty provisions and recommendations for domestic rules to neutralise the effect of hybrid instruments/entities.|
|Action 3: Controlled Foreign Corporation (CFC) rules||Develop recommendations regarding the design of CFC rules.|
|Action 4: Interest deductions and other financial arrangements||Develop recommendations for designing rules to prevent BEPS through the use of interest expense.|
|Action 5: Harmful tax practices||Reform the existing framework on harmful tax practices. Priorities are placed on: improving transparency, including compulsory spontaneous exchange on rulings on preferential regimes and on requiring substantial activity for any preferential regime.|
|Action 6: Prevent treaty abuse||Develop treaty provisions and recommendations for domestic rules to prevent inappropriately granting treaty benefits.|
|Action 7: Artificially avoiding permanent establishment (“PE”) status||Develop changes to the definition of PE to prevent artificial avoidance of a PE.|
|Actions 8-10: Aligning transfer pricing outcomes with value creation||These action items considered the development of rules to prevent BEPS for intangibles, risks and capital and other high risk transactions.|
|Action 11: Measuring/monitoring BEPS||Develop recommendations regarding the indicators of the scale and economic impact of BEPS and ensure the tools are available to monitor and evaluate the effect of the actions taken to address BEPS.|
|Action 12: Disclosure of aggressive tax planning||Develop recommendations for the design of mandatory disclosure rules for aggressive tax transactions.|
|Action 13: Transfer pricing||Develop transfer pricing rules to enhance transparency for tax administrations.|
|Action 14: Dispute resolution mechanisms||Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under the Mutual Agreement Procedure (MAP) article of the relevant tax treaty.|
|Action 15: Develop a multilateral instrument (“MLI”)||Analyse the tax and international law issues relating to development of a MLI to enable jurisdictions to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.|
OECD statement on the “two-pillar solution” to the digitisation of the economy
Australia was among the 136 countries and jurisdictions to join the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy in October 2021 to finalise a July 2021 agreement between members of the OECD/G20 Inclusive Framework on BEPS. See OECD’s media release International community strikes a ground-breaking tax deal for the digital age (8 October 2021) and Highlights brochure: Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (8 October 2021).
The Two-Pillar Solution establishes a new framework for international tax and detailed plan for implementation by 2023.
Pillar One would reallocate some taxing rights over large multinational enterprises (MNEs) from their home countries to markets where they have businesses activities and earn profits, regardless of their physical presence. These rules would apply to MNEs with global turnover above €20 billion and profitability above 10%, with 25% of profit above the 10% threshold to be reallocated. Regulated financial services and extractives (eg mining) would be excluded.
Draft Rules for Nexus and Revenue Sourcing illustrate the framework for identifying the relevant market jurisdictions from which revenue is derived for Pillar One purposes. They were released in February 2022 to obtain public comments and do not necessarily reflect consensus regarding the substance of the document.
Draft Model Rules for Domestic Legislation on Scope under Amount A of Pillar One were released in April 2022. “Amount A” of Pillar One serves to introduce a new taxing right over a portion of the profit of large and highly profitable enterprises for the market jurisdictions. The scope rules aim to determine whether a Group will be in scope of Amount A. They are designed to ensure Amount A only applies to large and highly profitable Groups and have been drafted to apply in a quantitative manner, such that they are readily administrable and provide certainty as to whether a taxpayer is within scope. The concept of a Group is specifically prescribed for Amount A purposes and is broadly defined by reference to an Ultimate Parent Entity (UPE) that is set at a level where Consolidated Financial Statements are commonly prepared under financial accounting standards.
On 11 July 2022, the OECD released a Progress Report on Amount A of Pillar One containing a draft of the technical model rules to introduce a new taxing right allowing market jurisdictions to tax profits from some of the largest multinational enterprises. Another progress report was subsequently released on 6 October 2022. The OECD was interested to understand if any additional guidance is required to improve application of the rules, and if any information is missing or incomplete.
A public consultation document was released on 8 December 2022 on the main design elements of “Amount B”, which provides for a simplified and streamlined approach to the application of the arm’s length principle to in-country baseline marketing and distribution activities, in order to enhance tax certainty and reduce resource-intensive disputes between taxpayers and tax administrations.
On 20 December 2022, a public consultation document was released on the Draft Multilateral Convention (MLC) Provisions on Digital Services Taxes (DSTs) and other Relevant Similar Measures. The draft MLC has been released in order to obtain public comments, but the substance of the document does not reflect consensus.
The new multilateral convention to implement Pillar One was scheduled to be finalised by mid-2023 for entry into force in 2024 under a revised timeline.
Pillar Two would introduce a global minimum corporate tax rate of 15% to put a floor on competition over corporate income tax for companies with revenue above €750 million. It would include the following 2 interlocking domestic rules (together the Global anti-Base Erosion Rules (GloBE) rules):
- An Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity
- An Undertaxed Payment Rule, which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR
In addition, a treaty-based “subject to tax rule” (STTR) will protect the right of developing countries to tax certain base-eroding payments, such as interest and royalties, where they are not taxed up to the minimum rate of 15%. The STTR will be creditable as a covered tax under the GloBE rules. Model rules to give effect to the minimum corporate tax rate and the model treaty provision to implement the STTR were to be developed by November 2021, to be effective in 2023. A multilateral instrument to facilitate the implementation of the STTR in bilateral treaties was scheduled to be released by mid-2022.
Pillar Two model rules were released in December 2021 to ensure certain MNEs are subject to a minimum 15% tax rate from 2023. They provide a template to assist jurisdictions in implementing Pillar Two into domestic legislation, setting out:
- The Global Anti-Base Erosion (GloBE) rules to introduce a global minimum corporate tax rate
- Treatment of acquisitions and disposals of group members, including specific rules to deal with particular holding structures and tax neutrality regimes
- Administrative considerations and transitional rules for MNEs that become subject to the global minimum tax
Detailed commentary and illustrative rules were released in March 2022. The detailed commentary provides guidance on the interpretation and application of the GloBE rules. It also explains the intended outcomes under the Rules and clarifies the meaning of certain terms. The illustrative examples show the application of selected articles in the GloBE rules to various fact patterns. The full text of the model rules, as well as an overview, fact sheets and frequently asked questions, are available on the OECD website. For an article on the model rules, see CCH Tax Week article ¶76 (2022).
An implementation framework will be developed to support tax authorities in the introduction and administration of the GloBE Rules. Public consultation is being undertaken on the mechanisms required to facilitate application of the GloBE Rules in a consistent and coordinated manner while minimising compliance costs. On 20 December 2022, an implementation package was released, which included the following:
- Guidance on safe harbours and penalty relief
- Public consultation document on the GloBE Information Return
- Public consultation document on Tax Certainty for the GloBE Rules
In addition, a new report on Tax Incentives and the Global Minimum Corporate Tax was released on 6 October 2022 to assist emerging and developing countries review the design of their tax incentives, as they prepare for implementation of the GloBE rules.
Technical guidance was released in February 2023 to assist governments to implement the GloBE rules. The Agreed Administrative Guidance for the Pillar Two GloBE Rules clarifies the interpretation of the GloBE rules to ensure coordinated implementation in domestic legislation and provide greater certainty for businesses. The document includes guidance on recognition of the United States’ minimum tax (Global Intangible Low-Taxed Income or GILTI) under the GloBE rules and on the design of Qualified Domestic Minimum Top-up Taxes. The document will be incorporated into a revised version of commentary on the GloBE rules originally issued in March 2022. Further Agreed Administrative Guidance will be released on an ongoing basis to ensure the GloBE rules continue to be implemented and applied in a coordinated manner.
Australian position: consultation paper released
As part of its commitments for the 2022 Federal election, the Australian Labor Party indicated its support for the OECD’s 2-Pillar solution to addressing challenges from digitalisation in April 2022. In particular, the Labor party would implement the 2 Pillar plan and join other OECD members in implementing the arrangements in line with global action.
In October 2022, Treasury released a consultation paper seeking input on the domestic implementation issues of the reforms. The paper explains the proposed measures and lists numerous broad and specific questions around design features, issues arising from interaction with existing tax laws, the impact on investment decisions, additional compliance requirements, business-readiness, time lines and if Australia should be an early or late adopter of the reforms.
Meanwhile, Australia will continue negotiations and consultations with the OECD to work towards implementation and further consultation is also expected prior to final decisions.