On 22 August 2018 the Federal Council adopted the message on the BEPS Convention. But what exactly is the BEPS Project?
The «Base Erosion and Profit Shifting» project is a project against the reduction of the tax base and the shifting of profits. Thus, the aim is to curb the legal - but qualified as aggressive - tax structuring of multi-national corporations and to render international cooperation more efficient. In the following, we have compiled a brief overview of the 15 action points:
Action Point 1 - the tax challenges of a digital economy
Action Point 1 focuses on how the digital economy can amplify the BEPS risks and seeks to identify ways to address these tax difficulties caused by the digitisation of the economy. In the 2015 Final Report, the OECD and G20 countries agreed to first monitor developments and analyse the data that would become available over time. The aim was to have compiled an inventory on this topic by the year 2020. An interim report was already delivered by the OECD in March 2018 and in January 2019 a policy note to the tax challenges of the digitalisation of the economy.
Action point 2 - about hybrid designs
Hybrid design is used in practice by multinational corporations to reduce the overall tax burden by exploiting
qualification conflicts between different national tax legislations. The hybrid element is either a payment, if the payment is qualified differently in different states (hybrid financial instrument), or a legal entity, if the states involved qualify this legal entity differently (hybrid legal form). Action Point 2 aims to prevent these tax mismatches by proposing detailed regulatory proposals and solutions which are to be implemented in the
respective national legislations and DTAs. In July 2017, a further report was published in connection with Action Point 2, which deals with branch mismatches.
Action Point 3 - about the CFC Rules
Many states have already introduced CFC rules into their national legislation before the BEPS Project started. Action Point 3 does not intend to introduce CFC rules as a minimum standard, but instead gives states so-called «best practice recommendations» regarding the design of CFC rules, which they can introduce but are not obliged to do so. The aim is to strengthen the CFC rules internationally. States are introducing additional taxation primarily to prevent corporations from transferring their income to subsidiaries in low-tax countries.
Action Point 4 - about interest and other financial payments
Corporations may deduct the interest payments attributable to a loan from their tax base. Therefore, many corporations try to make excessive deductions for interest expenses by means of intra-group financing or excessive external financing in order to optimise their taxes. In Action Point 4, a common approach was developed on how to limit the tax deductibility of interest payments in a coordinated manner, for instance
depending on the amount of the corporation's income or on the amount of existing fixed assets. However, the OECD recognises that the special circumstances of banks and insurance companies must be taken into account and has therefore drawn up further recommendations in this regard in an updated report dated December 2016.
Action Point 5 - against harmful tax practices and for more transparency and substance (minimum standard)
A few years ago, it was still common practice for states to use special tax regulations and rulings to «attract» large multinational corporations to settle in their own countries. So did Switzerland, for example with its special regimes for holding, domicile and principal companies, which are now to be abolished as part of the Steuervorlage 17. The OECD considers such tax practices and unbridled tax competition to be harmful, as they allow taxpayers undesirable structuring possibilities and ultimately reduce tax revenue in all countries. Action Point 5 therefore introduces an international minimum standard which is essentially based on two points: First, the application of the so-called «nexus approach» to certain preferential regimes, such as patent boxes. This requires a substantial business activity of the company and decisive revenue-generating activities that are necessary to generate the income covered by the special tax regime in order to benefit from the preferential regime. Secondly, the introduction of a binding, spontaneous exchange of information on advance tax assessments (so-called rulings). The states thereby undertake to inform each other in future, without prior request, of tax commitments they make to taxpayers in advance of cross-border transactions. Switzerland has transmitted information on advance tax assessments to the partner states for the first time in May 2018. In addition, a review process was initiated under Action Point 5, which reviews the various tax regimes of the states and publishes further new reports.
Action Point 6 - about preventing treaty abuse (minimum standard)
Since there is always a risk that several states may tax the same income in the case of cross-border economic activities, states enter into bilateral double taxation agreements (DTAs) with each other in order to divide the taxation rights between them. However, taxpayers repeatedly try to exploit the different provisions in the DTAs and their interaction with the respective national provisions in such a way that they do not have to pay any or less taxes in the respective states. Action Point 6 therefore sets a minimum standard for the prevention of such abuses of treaties, in particular in order to prevent so-called «treaty shopping». The new regulations are to be incorporated into the OECD Model Convention, which forms the basis for many DTAs, and at the same time be automatically inserted into existing DTAs by all interested states through the so-called «Multilateral Instrument» (Action Point 15). A review process was also initiated on Action Point 6 and a report on its results was published in February 2019.
Action Point 7 - against the avoidance of permanent establish-ment status
In general, DTAs stipulate that the profits of a foreign corporation are taxable in a state only if the economic involvement of the foreign corporation in that state has become so concentrated that there is a permanent establishment to which the profits can be attributed. The definition of a permanent establishment is therefore of decisive importance for (non-)taxation. Action Point 7 aims to amend and extend the definition of permanent establishment in Article 5 of the OECD Model Tax Convention in order to combat tax structures which attempt to circumvent the existence of a permanent establishment and thus of the tax connecting factor. In March 2018, a further guideline was published on this issue.
Action points 8 to 10 - about intangible assets, capital & risks and other transfer pricing issues
Multinational corporations are economically active in different countries through legally independent companies. These companies of a multinational corporation exchange goods and services with each other across borders. For each of the goods and services exchanged, a transfer price must be determined in order to ensure appropriate taxation. The special feature of transfer prices is that they are not formed in a market based on supply and demand. The internationally accepted standard for determining appropriate transfer prices is the arm's length principle, which states that corporations must structure their transfer prices as if the underlying transaction of goods or services had been agreed not between companies of the
same corporation but between independent third parties. This is intended to prevent multinational corporations from improperly using transfer prices and arbitrarily shifting the tax substrate between states by establishing conditions that are not comparable to those of foreign companies.
Action Points 8-10 deal precisely with this issue of transfer pricing. They aim to strengthen the arm's length principle, address transfer pricing issues related to intangible assets in particular, which are often very difficult to value, and clarify transfer pricing guidelines regarding the allocation of risks and capital within the
corporation. The final report further includes guidelines on transactions related to cross-border commodity transactions and on intra-group services with low added value. In July 2017, the OECD published revised Transfer Pricing Guidelines and issues further guidelines at regular intervals, e.g. on the Application of the Transactional Profit Split Method or on the Application of the Approach to Hard-to-Value Intangibles.
Action Point 11 - about data analysis and collection regarding the scale and economic impact of the BEPS Project
Action Point 11 provides recommendations for making better use of available tax data, improving analysis in order to better measure tax losses due to profit reduction and profit transfer and to better measure the impact of BEPS countermeasures in future.
On 15 January 2019, based on Action Point 11 the first edition of the corporate tax statistics was published.
Action Point 12 - for the disclosure of aggressive tax planning models
More and more states are obliging taxpayers or their advisors to disclose aggressive or fraudulent tax planning models to the tax authorities. Action Point 12 does not intend to make such disclosure rules a minimum standard, but merely formulates recommendations as to how such disclosure rules can be designed effectively. States are therefore free to decide whether they wish to introduce binding disclosure rules or not. In March 2018, the OECD published model disclosure regulations in line with the Action Point 12, which are intended to prevent the circumvention of the Common Reporting Standard (CRS) of the OECD/G20 states as part of the AIA by avoidance agreements and offshore structures.
Action Point 13 - about transfer pricing documentation and the exchange of country-by-country reports (minimum standard)
In addition to Action Points 8 to 10, Action Point 13 forms the second major pillar regarding transfer pricing issues and proposes a globally uniform three-level structure for transfer pricing documentation: The states have the option of introducing a corporation-wide «Master File» and a country-specific «Local File»; how-ever, the «Country-by-Country Reporting» (CbCR) is a minimum standard and must be implemented by the states.
By means of the CbCR, large multinational corporations must provide information annually and for all tax jurisdictions in which they operate on the amount and worldwide distribution of their income, the taxes paid and the most important economic activities of the group. The Country-by-Country Report must be submitted to the state of the ultimate parent company and is automatically forwarded to the other states concerned via the exchange of information between states, provided that these states have concluded a corresponding international agreement. The OECD constantly updates the list of signatory states to the «Multilateral Competent Authorities Agreement on the Exchange of Country-by-Country Reports» (CbC MCAA). In May 2018, it also published a first collection of examination reports relating to the CbCR. At the end of June 2018, Switzerland sent the first country-specific reports on the 2016 tax period to other countries. The sub-mission of the reports will be become mandatory for Switzerland from the 2018 tax period onwards.
Action Point 14 - about dispute avoidance and dispute re-solution (minimum standard)
Many states agree in their DTAs that a Mutual Agreement Procedure (MAP) can be carried out in order to arrive at a uniform interpretation in the event of disagreement regarding the application of the DTA or to eliminate double taxation in individual cases. These measures within the framework of the BEPS project in particular may initially lead to an increase in double taxation. For this reason, the OECD wants to improve the effectiveness of instruments for dispute avoidance and resolution with Action Point 14, which has been designed as a minimum standard, so that treaty disputes can be settled in good time or avoided beforehand. Furthermore, a large group of states has undertaken to rapidly integrate binding arbitration procedures into their bilateral DTAs so that independent arbitration tribunals can decide on individual cases in which the states involved cannot agree on a solution to the double taxation conflict. An effective monitoring mechanism shall ensure compliance with Action Point 14.
Action Point 15 - about the development of a multilateral instrument for the implementation of the BEPS Action Points
To ensure that the BEPS measures with regard to DTAs can become effective in practice, the existing agreements would have to be amended accordingly (in particular to implement the minimum standards
contained in Action Points 6 and 14). Due to the large number of existing DTAs, however, this process and the bilateral negotiations required for it would be extremely lengthy. For this reason, the OECD set itself the goal in Action Point 15 of drawing up a Multilateral Agreement («Multilateral Instrument») which would supplement the existing DTAs with the BEPS recommendations in accordance with the selection decisions made by the contracting states. The number of states that have signed the Multilateral Agreement is rising steadily and on 1 July 2018 it entered into force with the ratification of Slovenia as the fifth ratifying state.
The BEPS measures were adopted by the heads of government at the G20 summit in Turkey on
16 November 2015. Since then, the OECD has published new reports and guidelines on the implementation of the 15 BEPS Action Points at high intervals and is constantly seeking exchanges with governments, authorities and taxpayers at various meetings and via the Tax Talks. It is a successful project and clearly shows how eager the OECD is to implement the BEPS Action Points. Without a doubt, the BEPS project heralded a new «era» in the tax world. An era of transparency and international exchange that will make tax avoidance and aggressive tax planning virtually impossible in the future.