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Reforms to International Tax Rules

28 November 2014


In conjunction with the G20, other States and various interested parties, the Paris-based Organisation for Economic Co-operation and Development (“OECD”) is currently in the middle of a major international project under the aegis of the G20 to counter Base Erosion and Profit Shifting (“BEPS”). 

The BEPS project is part of wider developments in the international tax field, including plans for automated exchange of information between tax authorities and efforts to improve transparency on tax matters (for example, on 29 October 2014, fifty one tax jurisdictions, including the UK, signed the OECD’s Multilateral Competent Authority Agreement, which provides for automated annual exchange of information between tax authorities from, in most cases, September 2017). 

Ultimately, the possible impact of the BEPS project is a re-write of many of the principles of international tax which, in turn, could have a significant impact on how, in particular multinational enterprises, choose to conduct their activities.

The BEPS project itself is doubly ambitious. First, there is the challenging timescale: the OECD is currently on target to produce all “deliverables” by December 2015.  Second, the broad scope and extent of the changes to international tax rules now being contemplated, when taken together, represent the most significant change to international tax rules in almost one hundred years.

OECD’s September 2014 Reports

The BEPS project as a whole has been divided into 15 “Actions”. In September 2014, the OECD published seven detailed reports (running to around 750 pages in total) which address seven of the actions, namely:

  • tax challenges of the digital economy (Action 1)
  • neutralising the effects of hybrid mismatch arrangements (Action 2)
  • preventing the granting of treaty benefits in inappropriate circumstances (Action 6)
  • guidance on transfer pricing aspects of intangibles (Action 8)
  • guidance on transfer pricing documentation and country-by-country reporting (Action 13)
  • counteracting harmful tax practices more effectively, taking into account transparency and substance (Action 5), and
  • developing a multilateral instrument to modify bilateral tax treaties (Action 15). 

The OECD has published a calendar outlining its ongoing programme of work on the BEPS Project. This ongoing programme has already, subsequent to the September 2014 Reports, included:

  • on 31 October 2014, publication by the OECD of a discussion draft paper for Action 7 (preventing the artificial avoidance of permanent establishment status), and
  • on 3 November 2014, publication by the OECD of a discussion draft paper for Action 10 (proposed modifications to the Transfer Pricing Guidelines relating to low value-adding intra-group services).

More generally, the OECD intends to publish a series of further reports on the other Actions, further discussion draft papers and other documents between now and the end of 2015.   

As there is significant overlap and interaction between the various “Actions”, the OECD acknowledges that the further work on other BEPS Actions planned for 2015 is likely to result in some of the proposals set out in the September 2014 reports having to be revisited.

To a significant extent, therefore, the September 2014 reports contain “draft” recommendations.

Political Agreements

As changes to the international tax rules are likely to result in some significant “winners” and “losers” amongst States in terms of their overall tax revenues, the OECD acknowledges that substantial international political negotiation and compromise will be required if consensus is to be reached by the end of 2015 on all 15 Actions. 

To give but one example, having been placed under considerable international political pressure by other States, on 11 November 2014, the UK Treasury confirmed that the current UK Patent Box will be closed down, subject to transitional rules. 

Discussions are ongoing, as part of the OECD/BEPS project, concerning a new preferential tax regime for intellectual property, with the hope that a new tax regime can be agreed in 2015. 

Although the BEPS project has strong ongoing support from the G20, it is currently unclear whether the necessary political agreements can be reached in respect of all 15 Actions by the end of 2015.

Future Implementation

Even if all the necessary political agreements are reached and the OECD is therefore able to publish reports containing its final recommendations on all 15 Actions by the end of 2015, there will remain the all-important stage of implementation. 

Although certain changes to tax treaties may be possible using the proposed multilateral instrument, many of the BEPS proposals would require each State to amend its domestic tax legislation. 

For example, the United Kingdom would probably include agreed BEPS proposals in Finance Act 2016.

Summary of the Current Position

The current position is that:

  • significant reforms of the international tax rules (potentially the most far-reaching changes in almost one hundred years) are under discussion 
  • if international political agreement is reached in time, the OECD should publish its final recommendations for the 15 BEPS “Actions” by December 2015, and
  • implementation of the OECD’s recommendations by each State in its domestic tax rules should then follow in 2016 (or shortly after).

Consequently, companies which operate internationally may within a few years from now find they are operating in a significantly different international tax environment.

As the total “package” of BEPS proposals becomes clearer towards the end of 2015 (with the last of the OECD’s reports due to be published in December 2015), companies which operate internationally should then be in a position to assess the overall impact of the new international tax rules and, if need be, to consider how they should respond to the new tax environment.

As and when key aspects of final proposals become clearer, Charles Russell Speechlys intend to publish further updates concerning the BEPS project. 

This article was written by Martin Griffiths.

For more information, please contact Martin on +44 (0)20 7203 8886 or martin.griffiths@crsblaw.com