BEPS: what’s next?

The final OECD package to tackle aggressive tax planning was endorsed by the G20 last year. Now is the time for implementation and for an “inclusive framework” for developing countries.

Last November in Antalya, the G20 adopted the final package of measures on Base Erosion and Profit Shifting (BEPS), putting an end to an intensive two-year OECD process around 15 action points to tackle aggressive tax planning practices by international businesses. Tax revenue losses from BEPS practices are at USD 100–240bn annually, or 4–10% of global corporate tax revenues according to (conservative) estimates by the OECD.

On the menu of the final BEPS package, we have:

1 (monumental) revision of the OECD Transfer Pricing Guidelines (Actions n°8–10);
1 revision of the OECD Model Convention on Tax (n°7, on permanent establishment status);
4 new “minimum standards” on harmful tax practices by governments such as patent boxes and opaque rulings (n°5), more restrictive conditions on treaty benefits (n°6), better access to dispute resolution mechanisms (n°14) and an entirely new country-by-country (CbC) reporting framework (n°13).
4 (less ambitious) “common approaches” and “best practices” on the tax treatment of debt (n°2 & 4), controlled foreign companies (n°3) and mandatory disclosures (n°12) respectively;
2 in-depth reports on the digital economy (n°1) and the impact on tax revenues (n°11); and
1 new multilateral instrument (still to be negotiated) to deal with the above treaty-related outcomes (n°2, 6, 7 & 14).

The G20 Summit in Antalya also announced extra funding commitments from OECD donors to support developing countries and their tax administrations, as well as the creation of a “toolbox” to be prepared by the G20 Development Working Group.

The BEPS process has been historic. Never before has there been so much attention and energy spent on reviewing international tax rules. Whether the outcome will effectively deliver on expectations is another matter. For sure, business groups have been unhappy right from the start of the process and never really accepted that the OECD would threaten the “50-years-of-international-consensus-on-tax”. NGOs heavily criticised the final package for being too weak and too self-serving for OECD countries. The outcome may have delivered against the initial mandate of the Action Plan, at least for some action points — but will it actually tackle the fundamental problem of aggressive tax planning? The truth is that we may need more time, for implementation at the very least, before taking a definitive stance.

Meanwhile at the OECD in Paris, it seems that we are back to normal. The “BEPS project” team that was set up within the Secretariat to steer the process has been dismantled, and tax meetings have resumed in what seems to be pre-BEPS format: behind closed doors with the agenda and working documents kept confidential.

As if, it is time to call it: mission accomplished. Or perhaps not, the mission isn’t entirely accomplished. And for various reasons.

For starters, the BEPS package of September 2015 is not quite a final one. For some of the above action points, outstanding issues remain to be dealt with — technicalities and clarifications for most of them, but not for all. For example, the case of “non-CIVs” in dealing with treaty abuse (n°6) is still unresolved. Behind this acronym lies the USD 15tr worth hedge fund and private equity industry — no small feat for sure. In the same vein, the upcoming discussion on the attribution of profits of permanent establishments (n°7) between local and parent jurisdictions may not be an easy one, particularly between the OECD and emerging economies.

Then there is of course implementation. It is not a given that all jurisdictions committed to the BEPS package will implement it in the same way and timely manner. If some governments — or their respective parliaments — become reluctant to implement, or if different interpretations emerge, it could mean serious consequences for the coherence of the international tax system. This is what the entire raison d’être of the BEPS project has been, to prevent exactly that. Ultimately, this was its source of legitimacy in the face of top heavy opposition by business groups. Tensions are in fact already emerging between US and European administrations over the tax treatment of large US multinationals in Europe, including Google, Apple, and McDonald’s.

Even the implementation of the CbC reporting framework may not flow as smoothly as expected, with different directions and different speeds, depending on individual countries and regions. Early January, 31 countries signed on a new Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbC reports between tax administrations. Good news… If we disregard that 8 OECD member states did not show up to the signing ceremony, including Canada, South Korea, Turkey, and the US. Among the non-OECD countries involved in the BEPS process, Argentina, China, Russia, and Saudi Arabia also stayed away. Overall, a third of the 44 BEPS signatories did not sign the MCAA. Not very reassuring. And yet, at the same time, sooner rather than later, the EU may well move towards… public disclosure of CbC reporting — something that would happen over the dead bodies of many at the OECD.

But there is perhaps an even bigger challenge ahead. One that relates to the governance of the entire BEPS process. It so happens that the G20 Communiqué in Antalya came with a little surprise for the OECD. The G20 heads of states quite unexpectedly called “on the OECD to develop an inclusive framework by early 2016 with the involvement of interested non-G20 countries and jurisdictions which commit to implement the BEPS project, including developing economies, on an equal footing”. A call that surely comes in response to the Addis Ababa UN Summit on Financing for Development clash between key OECD countries and the developing world over the direction of the international tax governance system (the OECD vs. a new UN-framed international tax organisation). Meeting next 26–27 February in Shanghai, the G20 Finance Ministers are expected to adopt an OECD proposal for such an inclusive framework.

We don’t know how that proposal looks like. But if terms like inclusive and equal footing (for developing countries) have any meaning, then it is de facto a call by the G20 for a radical change in the way the BEPS process is to be governed.

So far BEPS has been ruled by a traditional OECD committee framework involving 44 countries:

34 member state representatives seated on the OECD Committee on Fiscal Affairs (CFA);
plus the added 10 “associates” (with the same rights and duties as member states), including 8 non-OECD G20 countries (Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia, and South Africa), plus Colombia and Latvia (both currently in the OECD accession process).

Early 2015, a second group of 15 participants and invitees were taken on board: Costa Rica and Lithuania (in the OECD pre-accession process), as well as Bangladesh, Georgia, Jamaica, Kenya, Malaysia, Morocco, Nigeria, Peru, Philippines, Senegal, Tunisia, and Vietnam. That has helped create more space for the developing world in the process, but not much more than that. Invitees were invited, participants participated. But in the end they were not on “equal footing” with the group of 44. Assuming that these 15 developing countries would soon formally commit to the BEPS package, it would bring the total to 59 countries. That’s better than 44, but still removed from the vision proposed by the G20 of an inclusive framework with equal footing for developing countries.

So what’s next? One of two possible scenarios would have to occur. A low-key scenario would see the status quo with some adjustment: a gradual increase of CFA membership to the group of 59, with some add-ons here and there. A high-profile scenario would on the other hand, transfer the BEPS project away from the CFA to an entirely new Global Forum type of organisation, as it already exists in the area of tax evasion with the Global Forum on Tax Transparency. The governance arrangements of Global Forums are more flexible and inclusive than the OECD committee framework, while remaining within the OECD sphere.

This is perhaps the most important choice to be made: status quo with a few extras — but then the G20 call won’t be really heard — or, and alternatively, change gear, and move to a Global Forum type of governance for a truly inclusive implementation of the BEPS project.

Let’s wait and see for the verdict of the G20 Finance Ministers in Shanghai.