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June 2, 2014
News Analysis: A Quick Overview of the BEPS Project
by Mindy Herzfeld

Full Text Published by Tax Analysts®

The OECD's base erosion and profit-shifting project is approaching a major milestone in June. The OECD's Committee on Fiscal Affairs will vote on the first set of deliverables on the BEPS action items.
For those who don't spend all of their time keeping up with the BEPS project's various releases and deadlines, the following summary might be helpful.


The OECD has seven BEPS deliverables due to the G-20 by September:
  • Digital Economy (action item 1): The scheduled deliverable is an in-depth report identifying tax challenges raised by the digital economy and the actions needed to address them.
  • Hybrid Mismatches (action item 2): The OECD will recommend changes regarding the design of domestic and tax treaty measures to neutralize the effects of hybrid mismatch arrangements, from both a domestic and a treaty law perspective.
  • Treaty Abuse (action item 6): The OECD will make recommendations to prevent the abuse of tax treaties.
  • Transfer Pricing Documentation Requirements (action item 13): This will include proposed changes to transfer pricing documentation guidelines, including recommendations on country-by-country reporting.
  • Harmful Tax Practices (action item 5): The OECD will finalize a review of member country regimes, with a priority on transparency. It will discuss the compulsory exchange of rulings and the requiring of substantial activity for preferential regimes.
  • Intangibles Transfer Pricing (action item 8): The OECD will recommend finalizing transfer pricing guidelines on intangibles that were proposed in 2012 and 2013.
  • Multilateral Instrument (action item 15): The OECD will issue a report on the development of a method to multilaterally implement the BEPS recommendations.

The OECD will hold a BEPS conference on June 2 and 3 in Washington. The meeting will be hosted jointly with the U.S. Council for International Business and the Business and Industry Advisory Committee.

The Committee on Fiscal Affairs will meet to vote on the 2014 deliverables in late June. The committee usually produces a consensus vote, with the possibility for reservation on some issues. Given the contentiousness over some of the action items and the fact that non-OECD G-20 members are participating, the outcome of the meeting is unpredictable. The BEPS agenda may have to be scaled back for the final reports to represent consensus views.

The OECD will not be releasing to the public any of the final reports before the September G-20 meeting in Australia.

A Political Process

The BEPS project is being driven by the political agendas of the G-20 members. It began in response to the fiscal pressures being faced in many G-20 countries, the tension between the developed and developing world over transfer pricing rules, and the public outcry over the low effective rates paid by some large multinationals.

The political nature of the project explains the short timeline mandated by the G-20. There is a tension between the need for technical excellence and the political mandates of those working on the project. The OECD and the working party have been relying heavily on the comments provided by stakeholders, including businesses and nongovernmental organizations.

The OECD has said that it is not trying to use BEPS to dictate a global income tax rate. The project is supposed to address double nontaxation, while in theory preventing double taxation. However, the discussion so far has focused very little on double taxation, and its action items may aggravate what is already an acute problem for multinationals.

Different Goals

Many OECD members have different goals in mind for the BEPS project. The United Kingdom has been one of its fiercest proponents, while at the same time touting competitive tax rates as a key driver for economic growth. The country's 21 percent corporate tax rate will soon drop to 20 percent. Its controlled foreign corporation rules have been revised to significantly reduce the scope of passive includable income. It also has a patent box with a 10 percent rate that has been attractive to multinationals.

While a strong advocate of tax competition when beneficial to its own fisc, the United Kingdom also wants to ensure that transfer pricing rules are applied in such a way to prevent intellectual property from leaving its tax jurisdiction.

France has very different goals. It wants to capture revenue from large, primarily U.S. multinationals whose services are used by French residents but who lack a significant tax presence in the country. France also wants rules that allow it to tax multinationals that collect data from French residents. The French would like special rules for digital companies and to revise the OECD model treaty to reflect the digitalization of the economy.

Italy agrees and argues that new options are needed to put all businesses on the same footing.

China and India have a more holistic view. They want to ensure that they are allocated their fair share of a multinational's taxes, regardless of the technicalities of transfer pricing or nexus rules. As economies rich in labor with large numbers of consumers, they want to change definitions of transfer pricing returns to increase value associated with those economic drivers, and move away from allocating an economic return to risk.

The United States is home to many multinationals that effectively use mismatches in foreign rules to shift profits into low-tax jurisdictions. It has little incentive to change the rules to penalize its tax residents because an increase in foreign tax paid means less revenue for the U.S. treasury.

Many smaller developing countries view the BEPS project with suspicion and resent the fact that an organization representing only 34 countries is purporting to write rules for the whole world.

The Digital Economy

On March 24 the OECD released a draft report, "Tax Challenges of the Digital Economy," that resulted in 463 pages of comments. A public consultation was held on April 23, and the final report is expected to lay out options rather than conclusions.

The digital economy discussion draft highlights the division between countries like the United States, which prefers minimal changes to existing rules, and France, which seeks dedicated rules for digital companies that would radically alter some fundamental principles of the international tax system. One significant change that may result is a broadening of the definition of permanent establishment. Other key items in the draft include a withholding tax on digital sales and suggestions for changing the VAT rules.

Many of the issues identified by the digital economy discussion draft are addressed in other action items. Commentators have made strong arguments for not tackling digital economy problems separately from the other action items.

As a result, it does not seem likely that the final report will recommend specific digital economy rules. Any options proposed would likely be tabled until the remaining items are completed.

Hybrid Mismatches

On March 19 the OECD released two draft reports addressing the need to neutralize the effect of hybrid mismatch arrangements. The first of these provided recommendations for changes to domestic laws. The second addressed amendments to the model treaty. Comments on the draft were released on May 7, and a public consultation was held on May 15.

The discussion draft identified three different kinds of hybrid mismatches:

  • hybrid financial instruments/transfers, which include instruments with both equity- and debtlike features in two different jurisdictions, and repos;
  • hybrid entity payments; and
  • reverse hybrids, which are imported mismatches.

Hybrid mismatches are caused by domestic law differences. Because it is possible to get a deduction in one jurisdiction without paying taxes anywhere else, the discussion draft proposes a complex system of domestic laws and treaty changes that would essentially require one jurisdiction to look at the tax results in another to see what technical rule should apply to a given structure.

The hybrid mismatch action item faces implementation problems similar to those that led to the mismatch issue in the first place. A coordinated system must be adopted by everyone, but persuading numerous sovereign states to follow the same rules is difficult. Early adopters of new rules will be penalized unless and until all countries can be forced to opt in at the same time.

Although it may create a lot of work for tax advisers, the OECD may recommend rules similar to the hopelessly complex U.S. dual consolidated loss rules.

The discussion draft is silent on the U.S. check-the-box rules, and so fails to identify one of the biggest drivers of hybrid mismatch planning.

Treaty Abuse

On March 14 the OECD released a draft report, "Preventing the Granting of Treaty Benefits in Inappropriate Circumstances," that received 543 pages of comments. The public consultation was April 14 and 15.

The draft proposes incorporating a limitation on benefits provision into the OECD model convention. It recommends a main purpose test be included in treaties, which would deny treaty benefits if "it is reasonable to conclude" that obtaining those benefits was one of the main purposes of an arrangement. The test is broad and could affect many routine transactions.

The United States strongly opposes the adoption of the main purpose test and has said it will reserve on this report if it is included. The final report may achieve consensus by allowing countries to choose among different options.


The revised transfer pricing guidelines on intangibles were released on July 30, 2013. Approximately 70 commentators submitted comments, which were published on October 22, 2013. A public consultation was held on November 12 and 13, 2013.

While there was some consensus on the need to revise the transfer pricing guidelines before BEPS, the earlier work has now been overtaken by many of the forces driving the project, such as the weight to be given to an assumption of risk. The most contentious fact pattern involves a Bermuda subsidiary acting as a funding entity for the development of intangibles, and what type of return should be allocated to the zero-taxed funding company.

Because of the political stakes attached to the guideline recommendations, and the fact that some of the thorniest fact patterns remain unresolved, the most controversial aspects of this item likely will not be finalized by the June deadline.

Transfer Pricing Documentation

The draft report "Transfer Pricing Documentation and CbC Reporting" was released on January 30, 2014. Over 1,100 pages of comments from more than 150 commenters were received. The public consultation was held on May 19.

Like the intangibles guidelines, discussion on this action item started before the BEPS project. The discussion draft proposes transfer pricing documentation guidelines, including a master file, local files, and a country-by-country reporting template.

The scope of information requested was controversial among business groups, and the OECD has already announced that it will scale back the first draft.

Questions remain about how taxpayers will make the documentation available to local tax authorities. The United States and taxpayers have raised confidentiality concerns. Rather than attempting to resolve them within the current time frame, the OECD has indicated that recommendations on implementation will probably be pushed to December.

The scope of information requested by the discussion draft template suggests that countries will use the data to move to a formulary apportionment model and away from the arm's-length standard.

The guidelines to be recommended this year will undoubtedly include new requirements for multinationals, although it is unclear whether this additional information will be provided in a way that is useful to tax administrations. The new guidelines are likely to significantly increase the risk of double taxation.

Harmful Tax Practices

The BEPS action plan mandates a revamp of the work on harmful tax practices with a priority of improving transparency, including compulsory exchange on rulings for preferential regimes. The action item will include rules requiring substantial activity for any preferential regime. It is supposed to take a holistic approach to evaluating tax regimes in the BEPS context and engage with non-OECD members.

The OECD has said it will not release anything on this action item to the public before the September G-20 meeting.

Multilateral Instrument

The OECD has a mandate to analyze the tax and public international law issues related to the development of a multilateral instrument with the potential to replace bilateral tax treaties. On the basis of this initial analysis, development may proceed on a multilateral instrument, designed to help implement BEPS action items.

The OECD will not release anything related to this item before September. If the report is approved, work on the development of a multilateral tax instrument could begin in 2015.

What's Next?

Following votes by the Committee on Fiscal Affairs and the G-20, the OECD must incorporate the recommendations into its model convention and guidelines. Individual countries will have to decide the extent to which they wish to incorporate the recommendations into local law.

Although the OECD has a history of countries implementing its recommendations, implementation of the BEPS recommendations has not yet been discussed.

Implementation in the United States will turn on whether any legislative action is needed. Congress is not likely to act on any BEPS items, but other OECD member countries (and nonmembers) may unilaterally adopt measures even without U.S. action.

If non-OECD countries are unhappy with the final recommendations, they are likely to implement different rules, leading to an even more complex international system.

The Next Wave

The OECD has another set of timelines for 2015. The deliverables for September 2015 are as follows:
  • action item 13: recommendations on domestic CFC rules;
  • action item 4: recommendations to prevent base erosion through interest deductions;
  • action item 5: a strategy to expand participation of non-OECD members to more effectively counter harmful tax practices;
  • action item 7: treaty measures to prevent artificial avoidance of PE status;
  • action items 9 and 10: changes to transfer pricing rules on risks and capital, and other high-risk transactions;
  • action item 11: recommendations regarding BEPS data and analysis;
  • action item 12: recommendations on aggressive tax planning disclosure; and
  • action item 14: improvements to dispute resolution mechanisms in treaties.

Three more deliverables are due in December 2015 on action items 4, 5, and 15.

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