The OECD’s BEPS project going forward

Since the release of the final BEPS reports by the OECD in October 2015, many countries started with the implementation of the BEPS recommendations.

In the next coming years, we can expect more developments. A very recent development is the launch of an inclusive BEPS framework by the OECD, which allows interested non-OECD member countries to join the BEPS project as BEPS Associates.

Another recent development is the release of the European Commission’s Anti-Tax Avoidance package, which includes measures to implement the BEPS package within the EU.

Further, we can expect OECD reports in respect of the remaining issues of the BEPS Action Plan during 2016 and 2017. These reports will undoubtedly include recommendations for additional measures to combat base erosion and profit shifting.

It should however be avoided that the introduction of a wide range of anti-BEPS measures will ultimately lead to the erosion of the arm’s length principle, which has always been the base of the OECD’s transfer pricing policy.

The OECD’s inclusive BEPS implementation framework

During the meeting of the G20 Finance Ministers on 26 – 27 February in Shanghai, the OECD presented its new framework that should allow interested countries to join the implementation of BEPS measures.

To this end, interested countries and jurisdictions can participate in the BEPS project as so-called “BEPS Associates”. As a BEPS Associate, a country that is not a member of the OECD will have the possibility to be involved in the further development and implementation of the BEPS project in the same way as OECD and G20 member states.

By introducing the possibility to become a BEPS Associate, the OECD hopes to achieve a global implementation of anti-base erosion and profit shifting rules.

The inclusive BEPS framework will continue to focus on the four BEPS pillars in the areas of harmful tax practices, tax treaty abuse, CbC reporting and cross-border tax dispute resolution.

The OECD also announced that the framework will focus on the work that still has to be done within the BEPS project, with a particular focus on transfer pricing and on tax treaties.

The framework will also play an important role in the implementation of BEPS measures and will in particular provide support to developing countries. To this end, the idea is to develop “practical toolkits” that can help countries to deal with the most important BEPS issues.

The first meeting of the participants in the BEPS inclusive framework will be held in Kyoto on 30 June and 1 July 2016.

Implementation of the BEPS package in the EU

 Another important recent development in respect of the implementation of the BEPS package has taken place within the EU.

On 28 January 2016 the European Commission presented new measures against corporate tax avoidance. The aim of the European Commission is to establish a coordinated approach within the 28 EU member states. The main instrument used by EU is the introduction of an Anti-Tax Avoidance Directive and a revision of the administrative cooperation directive.

The proposed directive contains measures that are intended to implement certain measures proposed by the OECD within the framework of the BEPS project, for example rules in order to neutralise hybrid mismatches, a limitation on interest deduction and CFC rules. The proposed directive however also includes anti-tax avoidance measures that are not included in any of the BEPS reports, such as the introduction of a European general anti-abuse rules, a switch-over clause and an exit tax.

The European Commission further proposes a revision of the Administrative Cooperation Directive. The proposed revision includes the introduction of country-by-country reporting between tax authorities of the various member states on tax-related information on multinational companies.

It is however important to note that the measures proposed by the European Commission have a de minimis character, allowing individual member states to take stricter measures in their domestic tax law if this is deemed appropriate.

Further work in respect of the BEPS package

During the release of the 2015 final BEPS reports, the OECD announced that during 2016 and 2017 reports will be released in respect of the remaining issues of the BEPS Action Plan.

This year and next year, we can therefore expect guidance in respect of these remaining topics, of which the following issues are of particular relevance:

• Determination of profits to be attributed to permanent establishments (expected before the end of 2016);
• Application of the transactional profit split method (expected during 2016 – first half of 2017);
• The transfer pricing aspects of financial transactions (expected during 2016 – first half of 2017).

These reports will undoubtedly include recommendations for additional measures to combat base erosion and profit shifting.

What will be the future of the arm’s length principle?

Although the OECD’s endeavour to combat harmful tax practices and to achieve global coverage for its anti-BEPS measures seem logic, it seems that taxation - and in particular transfer pricing - have increasingly become political issues ever since the BEPS project started.

The risk is that the OECD’s transfer pricing policy will move away from a clear, conceptual approach based on the arm’s length principle towards an approach that aims to prevent as many possibilities for tax planning as possible.

For example, the introduction of measures without the possibility to provide counter evidence based on the arm’s length principle is an indication that the arm’s length principle does not always prevail.

Although one can understand certain measures against harmful tax planning, it should be avoided that these measures lead to the erosion of the arm’s length principle, which has always been the base of the OECD’s transfer pricing policy.