The OECD has today released a lengthy report in relation to its Base Erosion and Profit Shifting (BEPS) work. Arising from concern by tax authorities that the tax planning activities of corporates is resulting in substantial losses in tax revenues, the report assesses the current position and considers how base erosion and profit shifting could be addressed using a collaborative solution. In the current climate of intense criticism and media scrutiny of corporate tax practices, this is a welcome re-assessment of the common principles by which taxing rights are divided between states, and one that will have widespread implications for the Financial Services sector.
The BEPS project is driven by the concerns of the tax authorities that substantial tax revenue is being lost due to planning by corporates aimed at eroding the taxable base and/or shifting profits to locations where they are subject to a more favourable tax treatment.
At the same time, there is also the more fundamental concern that the common principles by which taxing rights are shared between states have not kept pace with the changing business environment - especially given the nature of globalised business (including the ability to transact business across the internet) and the increased importance of intellectual property as a value driver.
The BEPS project has also received much political attention, including backing from the G20 and various individual governments.
The paper released today is largely a careful diagnosis of the current position. It includes a chapter on empirical evidence relating to the use of BEPS techniques, followed by a chapter on global business models that are used by corporates before moving into a more detailed analysis.
The document then proceeds to consider the key tax principles and opportunities for base erosion and profit shifting.
It notes that the jurisdiction to tax, including permanent establishment (PE) rules, have come under pressure from the development of the digital economy.
It also points out that transfer pricing already considers economically significant activities and responsibilities undertaken, assets used and risks assumed. The different treatment of debt and equity in many states is highlighted and a range of anti-avoidance techniques categorised.