OECD Releases First BEPS Recommendations To G20 In Accordance With Action Plan

As a part of the OECD/G20 project to combat base erosion and profit shifting ("BEPS"), the OECD released the first set of reports and recommendations on September 16, 2014. These reports address seven of the actions described in the 15-point action plan to address BEPS published in July 2013 (the "Action Plan") and consist of the following items:

Recommendations for domestic rules to neutralize hybrid mismatch arrangements and recommended changes to the OECD Model Tax Convention to deal with transparent entities (Action 2, the "Hybrids Report"); Proposed changes to the OECD Model Tax Convention for preventing tax treaty abuse (Action 6, the "Treaty Abuse Report"); Revisions to the OECD Transfer Pricing Guidelines to align transfer pricing outcomes with value creation in the area of intangibles (Action 8, the "Intangibles Report"); Revised standards for transfer pricing documentation and a template for country-by-country reporting of income, earnings, taxes paid, and certain measures of economic activity (Action 13, the "Documentation Report"); A report on the issues raised by the digital economy (Action 1, the "Digital Economy Report"); A report on harmful tax practices, outlining the progress of the review of preferential regimes, etc. (Action 5, the "Harmful Tax Practices Report"); and A report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties (Action 15, the "Multilateral Instrument Report"). These deliverables include specific proposed changes to domestic laws, tax treaties, and transfer pricing guidelines that, if adopted, could significantly affect both the taxation and compliance burdens of multinational enterprises ("MNEs"). After the discussions by G20 finance ministers in September 2014, these reports will be presented to G20 leaders in November 2014, and the OECD continues work on the remaining actions by 2015 in accordance with the Action Plan. As the 2014 deliverables are closely connected to the 2015 deliverables and there is still disagreement on some of the issues, the recommendations made in the 2014 reports will remain in draft form until then. However, it is expected that some countries may begin implementing some of the proposals before finalized versions have been released, and the United Kingdom has already announced its intention to implement country-by-country reporting along the lines of the suggestions in the Documentation Report. Some key points of the new reports are summarized below.

Hybrid Mismatch Arrangements (Action 2). The Hybrids Report, which differs little from the prior draft released in March 2014, provides a set of recommended changes to domestic law designed to prevent hybrid mismatch arrangements (as described below) even in situations where it is unclear which country has lost revenue. The report also provides proposed changes to the OECD Model Tax Convention regarding dual resident entities (a case-by-case approach) and fiscally transparent entities (rules in line with the OECD Partnership Report in 1999). Finally, the report raises additional issues, including intragroup hybrid regulatory capital and on-market stock lending transactions, which need to be further explored.

The report includes specific recommendations on improvements to domestic law, including denying participation exemptions for deductible payments and a set of hybrid mismatch rules. Although the report encourages all countries to adopt the recommended changes to domestic law, the hybrid mismatch rules are designed with both a primary rule and a secondary defensive...

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