PKN Alert: OECD base erosion and profit shifting project – update on transfer pricing issues

The Organisation for Economic Co-operation and Development (OECD), on February 12, 2013, issued its initial report regarding Base Erosion and Profit-Shifting (BEPS). Since its release, there have been several discussions between the OECD working group, representatives from different tax authorities and the business. The BEPS report and the subsequent discussion has created speculation as to where the key area of focus could land. The discussions seem to have distilled the key pressure areas to control of risks and intangibles, use of hybrids, taxation of digital business, transparency agenda, inter-group financial transactions and anti-avoidance measures. The key issues are expected to be addressed by the Comprehensive Action Plan (CAP) which is due to be issued in July. We provide the highlights and our initial comments on the proceedings below.

The OECD’s BEPS project is endorsed by the members of the G2o and seeks to address concerns of reduced tax revenues stemming from tax planning by corporations aimed at eroding the taxable income base through shifting profits to locations where they are subject to a more favourable tax treatment.

In response to the G20 pressure the OECD issued a report targeted at multi-national enterprises in February 2013. In the report the OECD acknowledges that businesses are now operating in a more globally integrated manner than ever and the current international tax rules were developed during a time when cross border transactions were not as prominent. The report recognises that current rules also do not take into account advances in technology such as use of Ecommerce and technological development.

The report seeks to put the G20 concerns into an international commercial and taxation context and to identify the international taxation framework and principles that currently govern the areas of concern. It also aims to establish which of the international taxation principles, including the arm’s length principle, is still fit for purpose and which may need to be reviewed and potentially revised. The report identifies a range of issues and symptoms that led to this erosion of profits citing taxing jurisdictions, transfer pricing, leverage and anti-avoidance as the main areas for potential reform.

The outcome of this project is currently being driven by political pressures which are also largely driven by the media/civil society agenda.