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Has the BEPS project already made its mark, or will it run out of steam?

6th Feb 2015
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By Terry Hayes, Senior Tax Analyst, Thomson Reuters

The issue of multinationals and the tax they pay, and where they pay it, is generating plenty of heat at the moment, especially in light of proposals set out by U.S. President Barack Obama in the 2016 budget  he presented on Monday. His plan is to force US multinationals to pay a 14% one-off levy on their profits  held offshore followed by a 19% tax on future profits . It is estimated that there is more than $2 trillion (£1.3 trillion) of profits held offshore and this move could boost US GDP by 1.5% with major corporates such as Apple and Microsoft facing bills that could run into billions of dollars.

The OECD/G20 Base Erosion and Profit Shifting (BEPS) project is being touted as a solution to the problem of multinational profit shifting, but is that the case? While there is broad agreement about BEPS, many experienced tax practitioners have their doubts, and the US is known not to be a fan of BEPS.

Nonetheless, it might not be too big a stretch to suggest that the BEPS project has already achieved a significant result in raising awareness of the issues involved and causing governments to seriously consider how to deal with the problem. The US announcement stands testament to this. Indeed, even before the recent public discussion and debate, at the International Fiscal Association (IFA) Congress in Mumbai last October, Mr Peter Blessing from KPMG suggested that BEPS had, in his view, already achieved a major part of its aim ie influencing behaviour, getting people to seriously address the issues and be prepared to accept change.

It has been argued that tax systems around the world have not kept pace with the digital age and with the internationalisation of the business world. That is indisputable. Traditional concepts of source, residency, permanent establishment, etc and the operation of double tax agreements have struggled to cope.

However, calls (in the media and elsewhere) to simply tax MNEs where they make their profits, drastically oversimplify the situation. In a recent blog post, Claire Kennedy, Partner at Canadian law firm Bennett Jones, said an OECD official had acknowledged that the international corporate tax planning targeted by BEPS constituted legal arrangements and transactions and not illegal tax evasion. That is important.

The BEPS project may not be a silver bullet (it faces some major challenges), but it is a serious concerted attempt on a global basis to address the underlying issues involved. One of those challenges is getting multiple countries to agree on a common approach. It has to be a co-ordinated global approach. Query, therefore, whether the recent move by the UK to levy a "diverted profits tax" (dubbed a so-called "Google tax") that will apply at a rate of 25% to a company's profits that have been diverted from the UK through complex arrangements poses a risk to the BEPS project? So too the proposed US action (although Congress appears most unlikely to pass it).

Apparently the UK did not want to wait until the OECD BEPS project had run its full course, especially given the need for all countries to agree on a common approach and the difficulties (and time) that may involve.

Reaction to the UK move has been swift. While acknowledging that international tax rules are in urgent need of updating, the Confederation of British Industry said the decision for the UK to "go it alone, outside the OECD process, will be a concern for global businesses, and moving the goalposts on offsetting losses risks creating a worrying precedent". It has most recently called for changes to the proposed diverted profits tax to ensure it does not capture genuine commercial transactions.

So there are some real challenges ahead, although it is acknowledged that there is much of the BEPS agenda that can be implemented.

Not plain sailing

Business has long had concerns about a number of issues with BEPS, not the least of which is compliance costs. Other major concerns include the allocation of taxing rights between source and residence countries, and the vexed issue of value creation - value may be created in multiple locations in the value chain of a business. The challenges in obtaining agreement between many countries on the implementation of BEPS should not be underestimated and the rules have the potential to impact smaller corporations that may have cross-border dealings, not just MNEs.

As I said at the outset, BEPS is complicated. Pressure on governments to do something about the perceived problem is increasing, but carry the risk of tax policy being made "on the run". Developments over the next year will be worth watching.

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