FINAL BEPS PACKAGE - DELIVERED 19 OCTOBER 2015

Raffaele Russo – Head of the BEPS Project

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Why the BEPS Project?

Need to update the rules for the taxation of multinationals to• Reflect changes in the underlying, digitalised,

economy • Ensure that system ‘is’ and ‘is perceived to

be’ fair• Maintain long-standing consensus-based

framework It is a matter of trust / integrity / economic

efficiency / equality

Addressing Base Erosion and Profit Shifting (Feb 2013)

• Identified main pressure areas leading to opportunities for BEPS

• Noted the need for a holistic and coordinated approach

• Called for an Action Plan to tackle BEPS

From inception to action and delivery

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Action Plan on Base Erosion and Profit Shifting (July 2013)

• Called for 15 actions organised around the following three main pillars: − The coherence of corporate tax at the international level− A realignment of taxation and substance− Transparency, coupled with certainty and predictability

• Targeted work on digital economy, and development of a multilateral instrument to implement the measures developed under the action plan

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The BEPS Project has been …

• 2-year time-bound

Fast-pace

• OECD and G20 countries working together on an equal footing • 14 Developing Countries, ATAF, CREDAF and CIAT participating

directly• Other 60 Developing Countries participating via Regional Networks

in Asia, Africa, Latin America and Eurasia

Inclusive

• 23 Discussion Draft published• 12,000 pages of comments received• 11 public consultations with stakeholders and regular webcasts

Transparent

• Explanatory statement (consensus document as the rest)

• Reinforced international standards on:– Tax treaties: abuse, PE, MAP– Transfer pricing: delineation transaction, risk, intangibles,

commodities, services, profit splits, documentation– Harmful tax practices: nexus plus exchange of rulings

• Common approaches (Hybrids and Interest deductibility) and best practices (CFC and MDR) for domestic law measures

• Analytical reports with recommendations (digital economy and multilateral instrument)

• Data and Economic analysis on BEPS5

What’s in the final BEPS package?

BEPS in a nutshell

Parent Co

IntermediateCo 2

Intermediate Co 1

Ultimate Residence Country(High Tax)

Low Tax IntermediateCountry

High Tax Intermediate

Country

Market or Production Country(High Tax)

Local Activity

• Avoid Taxable Presence or

• Minimise Assets/Risks

Low or noWithholding tax

• Hybrid Mismatch

• Preferential Regime

• Maximise Deductions

Maximise Assets/Risks

• Ineffective/No CFC Rules

• Maximise Deductions

• Minimise Assets/Risks

HQ

Expected impact on BEPS … in a nutshell

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• Hybrid Mismatch

• Preferential Regime

• Maximise Deductions

BEPS in a nutshell

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Parent Co

IntermediateCo 2

Intermediate Co 1

Ultimate Residence Country(High Tax)

Low Tax IntermediateCountry

High Tax Intermediate

Country

Market or Production Country(High Tax)

Local Activity

• Avoid Taxable Presence or

• Minimise Assets/Risks

Low or noWithholding tax

Maximise Assets/Risks

• Address techniques used to avoid the PE status

• New agency PE definition• Preparatory or Auxiliary

Activities• Fragmentation

Align substance with value creation through revised/new guidance for applying the ALP: delineation of actual transaction, risk allocation, intangibles including HTVI, CCA, commodity transactions and services

Limit interest deductibility: Common approach on net interest deductions limited to a percentage (between 10%-30%) of EBITDA plus optional group wide ratio

Address treaty abuse through a minimum standards on treaty shopping (e.g. LOB and/or PPT) and other anti-abuse clauses

Action 7

Action 8-10

Action 4

• Nexus approach uses expenditure on R&D as a Proxy for Activity in IP regimes.

• Compulsory spontaneous exchange of information on rulings

Common approach to introduce coordination tools. Combination of primary and defensive rules. Ordering rule that avoids double taxation while preventing double non-taxation

Action 8-10

Include income creating BEPS concerns in the definition of CFC income, e.g. income from digital sales

• Ineffective/No CFC Rules

• Maximise Deductions

• Minimise Assets/Risks

Action 5

Action 2

Action 8-10

Action 4

Action 3

Action 6

Action 13

Action 12

Expected impact on BEPS … in a nutshell

Action 14TP master fileTP local fileCbC report

Mandatory Disclosure

Market / Production

Country

Avoid Taxable PresenceOR

Minimise Assets/RisksMaximise Deductions

Intermediate Country 1 Ultimate Residence Country

Intermediate Country 1

Local ActivityOr Sub

IntermediateSub 1

IntermediateSub 2

Parent Co

Low or noWitholding tax

Preferential RegimeOR

Hybrid MismatchesOR

Base Eroding Payments

Low or noWithholding tax

Maximise Assets/Risks

Ineffective/No CFC Rules

Minimise Assets/RisksMaximise Deductions

BEPS in a nutshell

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WHAT’S NEXT

In addition to some technical follow-up work, for example:

– Profit split and TP aspects of financial transactions

– Finalise LOB and clarify attribution of profits

Focus turns to: – Supporting and Monitoring

Implementation

What’s next?

ImplementationOther recommendations

1. Hybrid entities

2. LOB and/or PPT

3. Preamble

4. Other treaty anti-abuse measures (e.g. dividend washing, etc.)

5. Permanent Establishment definition

6. Minimum standard on Dispute Resolution (Arbitration)

Changes to MTC

1. Country-by-Country Reporting and TP Documentation

2. Harmful tax practices

3. Hybrid mismatches

4. Interest deductibility

5. CFC rules

6. Mandatory disclosure rules

1. Chapter I: recognising actual transactions; allocations of risk; group synergies, location savings and other local market features; assembled workforce

2. Chapter II : Commodities

3. Chapter V TP documentation and CbC report

4. Chapter VI: Intangibles

5. Chapter VII: Low value-adding services

6. Chapter VIII: Cost contribution arrangements

Maybe immediately applicable depending on the legal and tax

system

Amend bilateral treaties Multilateral instrument to be open for signature in 2016

Changes to domestic laws or practices depending on the

system

Changes to TP Guidelines

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Developing an inclusive framework

We will continue to work on an equal footing as we monitor the implementation of the BEPS project outcomes at the global level […]

and we call on the OECD to prepare a framework by early 2016 with the involvement of interested non-G20 countries and jurisdictions, particularly developing economies, on an equal footing […]

G20 Finance Ministers and Central Bank Governors, 4 - 5 September 2015, Ankara

• A system meant to eliminate double taxation cannot itself generate double non-taxation– Close loopholes to ensure sustainability – Ensure improvements in the resolution of disputes

• New environment will be one of increased transparency – Those who continue to take aggressive position will have a hard life

and be subject to scrutiny– Those who do not deserve certainty and predictability

• The BEPS Project is a won bet– G20 and OECD plus developing countries demonstrated how

governments can work together and achieve tangible results in short timeframes

Concluding remarks (1)

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• A lot has been done– Consensus achieved on key international corporate tax

issues• A lot still needs to be done

– Implementation is key and BEPS work should provide basis to advance your agenda domestically

• Prioritisation probably warranted– TP doc and CBC– Multilateral instrument– HTP– Hybrids and Interest deductibility – CFC and Mandatory disclosure

Concluding remarks (2)

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