BEPS Tail Shouldn’t Wag Global Investment Dog

I spoke recently on a panel in Tokyo on the future of international tax planning after BEPS (the OECD's & G20's Action Plan to counter Base Erosion & Profit Shifting). The panel also featured a senior official at the OECD and practitioners from the US, Japan, Germany, France, Ireland and the Netherlands.

It was refreshing to hear the OECD official acknowledge that the international corporate tax planning targeted by BEPS constitutes legal arrangements and transactions and not illegal tax evasion. Moreover, she also acknowledged that in the area of treaty-shopping, governments themselves have to take some responsibility for creating treaty shopping and arbitrage opportunities through negotiation of inconsistent treaties, for example with differing withholding tax rates on interest, dividends or royalties or capital gains exemptions that are broader in some treaties than in others. That said, the OECD is clearly determined to counter previously accepted corporate tax planning practices that reduce the effective rates of corporate tax for multinational enterprises.

The OECD released a number of draft instruments and reports on key BEPS Action Items in September, including transfer pricing documentation, hybrid mismatch arrangements, anti-treaty shopping measures and the digital economy. These reports must be finalized and the other Action Items reported upon by the fall of 2015, which means we can expect the next year to be busy. Some consultation drafts on the remaining Action Items, notably on Permanent Establishments and Transfer Pricing Guidelines on Low Value Intra-Group Services, have already been released.

While OECD member governments broadly support the overall goals of BEPS, significant differences appear to exist among them in how these goals should be achieved, particularly in what changes to domestic tax legislation or treaties are warranted and desirable. As a result, there remains considerable uncertainty about how much of the BEPS agenda will be implemented and how. There is a real concern that tax policy made in a...