What is the BEPS Plan?
The BEPS plan (short for Base Erosion and Profit Shifting) is a response by the G-20 to aggressive tax practices implemented by certain multinational taxpayers in recent years. The BEPS plan is coordinated by the Organisation for Economic Co-operation and Development (OECD) and aims to establish new guidelines for tax policy and reform international taxation and transfer pricing rules, ensuring that profits are taxed where economic activity occurs and value is generated.
The implementation of the BEPS plan has received unprecedented support, with over a hundred countries directly involved in the technical groups formed to develop the plan, and many others contributing to the final outcome through participation in regional forums. Regional tax organizations such as the African Tax Administration Forum (ATAF), the Centre de Rencontre et d’Études des Dirigeants des Administrations Fiscales (CREDAF), and the Inter-American Center of Tax Administrations (CIAT) have joined international organizations such as the International Monetary Fund (IMF), the World Bank, and the United Nations (UN) to contribute to this effort. Other stakeholders, particularly businesses and civil society, have made valuable contributions, submitting 12,000 pages of comments on the 23 draft discussion papers published and discussed in 11 public consultation meetings. Meanwhile, OECD webcasts on BEPS have recorded over 40,000 views.
The BEPS plan is currently in the implementation stage. Many of its actions, such as Actions 8-10 and 13, have had an almost immediate effect, reforming transfer pricing regimes on a global scale. Other actions, such as Action 1 (taxation of the digital economy), were set to be reviewed until a final position was reached in 2020. Regardless, these changes represent the most significant international tax reforms in the past hundred years.
Actions of the BEPS Plan
The BEPS plan consists of fifteen measures aimed at ensuring substance, coherence, and transparency in taxpayer operations. The measures are as follows:
Action 1: Taxation of the Digital Economy
This action identifies tax challenges arising from new business models in the digital economy and develops options to address inefficiencies in current tax systems through a holistic approach that considers direct and indirect taxation mechanisms.Action 2: Neutralizing the Effects of Hybrid Instruments
This action provides recommendations for designing domestic rules to neutralize the effects of hybrid instruments and entities (e.g., structures that enable double exemption, double deduction, or long-term deferral). These recommendations include amendments to the OECD Model Tax Convention and domestic laws to prevent undue tax treaty benefits, deny deductions for payments that are not taxed in the recipient’s jurisdiction, and resolve conflicts between multiple jurisdictions seeking to apply anti-hybrid rules.Action 3: Strengthening the Rules on Controlled Foreign Companies (CFCs)
This action aims to develop rules that prevent tax planning strategies using controlled foreign companies that erode the tax base in the residence country and/or shift profits to low-tax jurisdictions.Action 4: Limiting Base Erosion via Interest Deductions and Other Financial Payments
This action proposes best practices for designing rules to prevent tax base erosion through excessive interest deductions and other financial payments. It addresses the use of intra-group debt financing and third-party arrangements to artificially reduce taxable income.Action 5: Countering Harmful Tax Practices with Transparency and Substance
This action addresses aggressive tax planning by requiring greater transparency in multinational group operations. It mandates the spontaneous and compulsory exchange of information on preferential tax rulings and establishes substantial economic activity requirements for benefiting from preferential tax regimes.Action 6: Preventing Treaty Abuse
This action proposes recommendations to prevent inappropriate granting of tax treaty benefits and emphasizes that tax treaties should not be used to create double non-taxation.Action 7: Preventing the Artificial Avoidance of Permanent Establishment (PE) Status
This action modifies the definition of Permanent Establishment to prevent artificial avoidance through commissionaire arrangements and specific activity exemptions.Actions 8, 9, 10: Aligning Transfer Pricing Outcomes with Value Creation
- Action 8 – Intangibles: Introduces new rules to ensure intangible assets are taxed where they are generated and valued properly.
- Action 9 – Risk and Capital: Ensures profits are not inappropriately allocated within multinational groups based solely on contractual risk allocation.
- Action 10 – Other High-Risk Transactions: Establishes rules to prevent artificial intercompany transactions that lack economic substance.
Action 11: Developing Data Analysis Methodologies on BEPS and Its Impact
This action establishes methodologies to collect and analyze BEPS-related data, evaluate its economic impact, and ensure the continuous monitoring of BEPS measures.Action 12: Mandatory Disclosure Rules for Aggressive Tax Schemes
This action proposes disclosure requirements for aggressive tax structures, balancing administrative costs with regulatory efficiency.Action 13: Country-by-Country Reporting and Transfer Pricing Documentation
This action introduces a three-tiered documentation approach (Country-by-Country Report, Master File, and Local File) to enhance transparency in multinational group operations and taxation.Action 14: Dispute Resolution Mechanisms
This action aims to eliminate obstacles preventing the resolution of tax treaty disputes through mutual agreement procedures and proposes best practices, including arbitration options.Action 15: Development of a Multilateral Instrument
This action explores tax and international law considerations related to developing a multilateral instrument that allows jurisdictions to implement BEPS measures and modify bilateral tax treaties.
Aggressive Tax Practices Targeted by the BEPS Plan
The OECD has estimated that corporate tax avoidance and profit shifting result in global revenue losses of approximately 4% to 10% of income tax collections, amounting to between $100 billion and $240 billion annually. These losses stem from various factors, including aggressive tax planning by multinational corporations, lack of domestic regulation, insufficient coordination with international rules, limited transparency among tax administrations, tax competition effects, and resource constraints in tax enforcement.
Tax avoidance strategies vary in complexity. Common schemes include:
- Treaty shopping, where a multinational group interposes a holding company to gain tax treaty benefits that would otherwise be unavailable.
- Value chain reorganization, where entities’ economic activities are artificially misaligned with their functions, assets, and risks.
- Hybrid instruments, which create double non-taxation scenarios for financial transactions.
- Intercompany transactions lacking economic substance, such as artificial royalty charges, service fees, or financial transactions used to shift profits.
Given the significance of BEPS-related tax changes, multinational groups must proactively address these reforms to avoid future tax disputes and compliance risks.
This article was prepared for a special issue of IDC magazine regarding the BEPS plan.
[2] OCDE (2015), Nota explicativa, Proyecto OCDE/G20 de Erosión de Bases Imponibles y Traslado de Beneficios, OCDE.
www.oecd.org/ctp/beps-2015-nota-explicativa.pdf
[3] OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing.
