base erosion profit shifting – a new world tax order? · 2014-09-24 · shifting behaviour by...

svensk skattetidning 9.2013

Base Erosion Profit Shifting – A New World Tax Order?by krister andersson

1. introductionSeveral speakers have mistakenly said Base Erosion and Profit Sharing rather than Base Erosion Profit Shifting. Could it be a slip of the tongue or is it simply wrong? In any case, the international framework for allo-cating taxable profits and income across countries is likely to undergo substantial changes in only a couple of years’ time.

According to the OECD Base erosion and profit shifting (BEPS) “refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ’disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid.” The role of gov-ernment incentives and tax competition is also mentioned but seems to attract less focus, at least for the time being. The blame is mainly on busi-nesses and taxpayers. This is in sharp contrast to an earlier project at the OECD on Harmful Tax Competition: An Emerging Global Issue, which was published in 1998.1 In the EU, much focus has also been on harmful, targeted measures in the so called Code of Conduct work. In

1. http://www.oecd.org/tax/transparency/44430243.pdf.

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recent years, organizations and governments have targeted tax practices rather than their own laws and legislative proposals.

The background to the BEPS Action Plan is an initiative at the G20.2 The G20 leaders meeting in Mexico on 18–19 June 2012 explicitly referred to “the need to prevent base erosion and profit shifting” in their final Declaration. This message was reiterated at the G20 finance minis-ters meeting of 5–6 November 2012 and they said that they looked for-ward to a report about progress of the work at their next meeting. On the margins of the G20 meeting in November 2012, the United King-dom’s Chancellor of the Exchequer, George Osborne, and Germany’s Minister of Finance, Wolfgang Schäuble, issued a joint statement, which has since then been joined by France’s Economy and Finance Minister, Pierre Moscovici, calling for co-ordinated action to strengthen interna-tional tax standards and urging their counterparts to back efforts by the OECD to identify possible gaps in tax laws. Such a concern was also voiced by US President Obama in the President’s Framework for Business Tax Reform, which states that “empirical evidence suggests that income-shifting behaviour by multinational corporations is a significant concern that should be addressed through tax reform”.

The OECD became the secretariat to the G20 for BEPS and on July 19, 2013 it issued an Action Plan on Base Erosion and Profit Shifting.3 The report outlined 15 actions to be undertaken. Each action point is analyzed below.

There are a considerable number of question marks regarding both the process and the measures to be undertaken. The OECD has for at least fifty years been the standard setter in the international tax area, building on a structured process and consensus between member coun-tries. Much of the work on the actions to be undertaken will be part of an OECD tax process but decision making is basically at the G20 level. Many countries will not be represented at the table and in the discus-

2. The G20 brings together finance ministers and central bank governors from 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States of America plus the European Union, which is represented by the President of the European Council and by the Head of the European Central Bank. The G20 was formally established in September 1999 when finance ministers and central bank governors of seven major industrial countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) met in Washington, D.C. in the aftermath of the financial crisis of 1997–1998, which revealed the vulnerability of the international financial system in context of economic globalization and showed that key developing coun-tries were insufficiently involved in discussions and decisions concerning global economic issues. The objectives of the G20 refer to: 1. Policy coordination between its members in order to achieve global economic stability, sus-tainable growth; 2. Promoting financial regulations that reduce risks and prevent future financial crises; 3. Mod-ernizing international financial architecture.3. The report is available free of charge at: www.oecd.org/ctp/BEPSActionPlan.pdf.


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sions. However, non-OECD G20 countries were involved in the work and all (Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia and South Africa) participated in the meeting of the Committee on Fis-cal Affairs where the Action Plan was adopted. The continued participa-tion and endorsement of all G20 countries will be critical to guarantee a level playing field and prevent inconsistent standards. Major non-OECD economies that are not OECD Members will participate in the project on an equal footing. Other non-members could be invited to par-ticipate on an ad hoc basis.

In the EU, several countries are not members of the OECD and most countries are not G20 members. The only representation for these coun-tries in the deliberations at G20 level is through the European Commis-sion. Sweden is a member of the OECD and the EU, but has not been represented on the three task forces that resulted in the Action Plan. It is of course very important that Sweden actively takes part in the current and future work since the allocation of taxable profit between countries is bound to be affected. The Action Plan however states that the actions are not directly aimed at changing the existing international standards on the allocation of taxing rights on cross-border income. Several of the actions points calls for greater reliance on where economic activity takes place and the importance of actual sales for taxable profits is emphasized. For a small open economy like the Swedish one, with a substantial trade surplus, even a small movement in the direction of attributing sales an increased importance when assessing where profits should be taxed, would result in substantial revenue losses from the corporate income tax.

Most of the action plans should be addressed within a two year period. It is an unprecedented short period in the area of international agreements. The OECD sees large risks in unilateral actions being taken if the time table is not kept. The risk of unilateral actions should not be underestimated. In a tax bill to the Mexican Congress on 8 September 2013, expenses paid by a Mexican company to a related party in Mexico or outside Mexico are non-tax deductible in case the company receiving the payment is taxed at less than 75% of the Mexican tax rate i.e. with less than 22.5%. The proposal would, if implemented, result in compa-nies active in countries with comprehensive tax systems, far from being anything like a tax haven, encounter substantial international double taxation. The Mexican Congress has since withdrawn this part of the tax reform proposal. It nevertheless, demonstrates the need for multilateral actions.




2. backgroundThe BEPS report refers to the challenges globalisation poses to countries’ corporate income tax regimes and the opportunities it has opened up for multinational corporations (MNEs) as reasons for action. Both devel-oped and developing countries are, according to the OECD, suffering from revenue losses. Public investment is therefore under-funded and purely domestic taxpayers will have to pay too much in taxes and com-petition between businesses is harmed.

There are no reliable estimates of the size of the amounts involved. As a matter of fact, one of the actions points (number 11) calls for the need to establish methodologies to collect and analyse data on BEPS. In the EU, it is sometimes mentioned that the revenue loss in the EU amounts to 1 trillion EUR. The validity of this estimate can certainly be ques-tioned. The origin to the estimate seems to stem from a report for the “Group of the Progressive Alliance of Socialists & Democrats in the European Parliament”. The author is Richard Murphy, founder of Tax Justice Network.4 In the estimation of 1 trillion EUR, it is assumed that tax evasion amounts to 850 bn EUR, i.e. the black economy in the EU amounts to 18.4% of GDP. For a country like Sweden, it is estimated to be 18.8% of GDP. The Swedish Revenue Authority estimates the black economy to be in the range 2.6–6% of GDP.5 The remaining 150 bn EUR is assumed to stem from Tax avoidance. The estimate of 1 trillion EUR is clearly not well founded.

However, it should be recognized that tax shifting does occur and lack of transparency may lead to non-optimal resource allocation and tax-motivated behaviour. It is therefore very welcome that G20 will now develop methodologies of how to measure BEPS and monitor the progress of the amounts involved.

The sharp decline in economic activity and resulting deficits in public accounts and the higher debt levels experienced by most countries in the OECD economies probably play a major role for the timing of this project. Despite the economic crisis starting in 2008, OECD statistics show only a minor decline in corporate tax revenue as a per cent of GDP.

4. http://europeansforfinancialreform.org/en/system/files/3842_en_richard_murphy_eu_tax_gap_en_120229.pdf.5. Tax Statistics Yearbook 2011 published by the Swedish National Tax Authority (Skattestatistisk årsbok (2011 års utgåva), Chapter 10, page 221, referring to Nordic/Northern European esimates in the range of 2.5–6 per cent. http://www.skatteverket.se/BAB1223B-BA1B-4EE3-B541-4C48C8B6A1AC/FinalDownload/DownloadId-3A17ECA7E7A5847A054EF331FF169C8C/BAB1223B-BA1B-4EE3-B541-4C48C8B6A1AC/download/18.5fc8c94513259a4ba1d800065202/15214.pdf.




The trend has instead being rising rather in sharp contrast to the fears of a race to the bottom.

Source: OECD.

Reasons behind the persistence in corporate tax revenues are the contin-ued reduction in statutory corporate tax rates, making more investments economically viable and therefore making the tax base broader and deeper, and the base broadening measures undertaken by governments to protect the revenue base, often in terms of anti-abuse legislations.

Sources: National sources, OECD.

Further reductions of the corporate tax rates are in the pipeline.




Examples of changes in statutory corporate tax rates

Sources: IBFD, Swedish Budget Bill for 2013 (where some 15 additional examples can be found on similar changes in other European countries since 2000).

Governments, however, do not only lower statutory corporate tax rates to protect their tax revenues. They also frequently engage in tax compe-tition enabling certain businesses to use tax incentives. It is somewhat of a paradox that governments enact these incentives at the same time as they instruct, or at least allow, their revenue authority to pursue an increasingly aggressive tax audit and litigation agenda. Some tax author-ities are increasingly testing border line cases to see whether a deduction could be disallowed or an income made taxable within their jurisdiction as well. Other countries have embarked on a more coordinated approach, trying to promote investments in general and cross-border investment in particular, by setting up incentive schemes and tax author-ities allowing companies to benefit also from a business friendly tax administration.

The consistency for purely domestic taxpayers where a deduction for one taxpayer is matched by taxation for another taxpayer receiving the income is not automatically upheld in a cross country setting. In combi-nation with tax incentive schemes and differences in implementation and enforcement between countries, friction between sovereign states may build up. If businesses, in addition try to exploit such differences by “aggressive” tax planning activities, some governments may consider themselves disadvantaged. This may result in tax rules that are harmful to economic activities.

Completed, per cent Planned

United Kingdom 30 to 23 (4 steps up to 2013) 20 (2015)

Finland 29 to 24.5 (2 steps up to 2012) 20 (2014)

Denmark 32 to 25 (3 steps up to 2007) 22 (2016)

Portugal 35.2 to 31.5 (5 steps up to 2012) 19 (2018)

Netherlands 35 to 25 (5 steps up to 2011)

Czech Republic 31 to 19 (6 steps up to 2010)

Germany 38.7 to 29.8 (1 step in 2008)




3. aggressive tax planningThe term “Aggressive tax planning” plays a key role in BEPS discussions. The term is not well defined and countries have very different interpre-tations of what it entails or mean. In an international context, it is some-times linked to whether income is taxed in another country or not. The “subject to tax” concept is however also vague; is it sufficient to be sub-ject to tax even if the rate is low or even zero? The EU Commission has in various documents tried to define aggressive tax planning. A recent example is:

“Aggressive tax planning in general can be described as the practice whereby tax payers exploit loopholes of a single tax system or mismatches in the interaction between two or more tax systems via complex and/or artificial arrangements to reduce their tax liability. In these cases, the tax savings could be considered to be unintended by any of the jurisdictions involved, but the arrangement are gener-ally not illegal. Such tax planning schemes frequently lack transparency and are therefore difficult to detect. Member States may not even be aware of their exist-ence and therefore fail to propose effective remedies. It is therefore plausible that some schemes would not achieve their intended tax benefits if they were subject to effective exchange of information provisions.”6

From this text it is obvious that a number of clarifications are needed. What does words like “practice” and “exploit” mean? What is a mis-match? When is a transaction “complex”? To what extent does the tax liability have to be reduced for it to be aggressive? What is the role of the transparency of the transaction? How does one assess whether the tran-saction is difficult to detect?

Aggressive tax planning is almost always attributed to taxpayer behav-ior but the importance of government behavior must also be recognized. The EU Commission states:

“In summary, aggressive tax planning schemes can be considered to thrive on a lack of transparency, a lack of cooperation between tax authorities and the pres-ence of special tax incentives.”7

The importance of national tax laws and incentive schemes has been clearly demonstrated during the tax debate in 2013. Companies like Apple, Starbucks, Microsoft and others have been scrutinized in public hearings and in media. Have they engaged in aggressive tax planning and would revenue authorities agree on the classification?

6. DOC: Platform/003/2013/EN, PLATFORM FOR TAX GOOD GOVERNANCE, Draft Discussion Paper on the “Tax Havens” Recommendation.7. Op. cit.




When Apple decided to borrow 17 billion USD for dividend pay-ments despite having 144 bn USD in cash, the US tax regime with tax-ation upon repatriation came into focus, as well as the low effective tax rate the company endured for its European activities.8

The tax situation for Apple and other companies resulted in unilateral actions being taken by European countries at the same time as the BEPS agenda continues. On October 15, 2013, the Irish government announced that it would close a legal loophole that enabled Apple to save tax on $44bn of offshore income in the country’s first major step against tax avoidance.9 The Irish finance minister said that he would publish leg-islation to ensure that Irish-registered companies could not remain “stateless” in terms of their tax residency.

“Let me be crystal clear, Ireland wants to be part of the solution to this global tax challenge, not part of the problem,” he told parliament in his budget speech. “I want Ireland to play fair – as we always have done – and I want Ireland to play to win.”

His move came after Dublin was singled out by a US Senate commit-tee this year for acting as a conduit for Apple’s earnings so that it could sidestep large tax payments around the world. The report claimed that Dublin allowed Apple to apply a corporation tax of 2 per cent or less, well short of the usual 12.5 per cent rate.

From an example like Apple, it is clear that BEPS would also have to focus on how governments use tax policy for incentive purposes.

4. source versus residence taxation countries

Another important factor behind the BEPS project is the increasing importance of countries relying on source taxation rather than residence based taxation. The rapid growth of countries like India, China and Bra-zil in the world economy has tilted the balance in the direction of more source based taxation. The OECD countries of today represent only

8. Apple CEO Tim Cook said late Tuesday [April 23, 2013] that the company will double the amount it returns to shareholders through share buybacks and dividends by 2015, but will “access the debt market” to pay for it. If Apple were to try to bring that cash back to the United States, it could be taxed at the top corporate tax rate of 35%. “We are continuing to generate significant cash offshore and repatriating this cash would result in significant tax consequences under current U.S. tax law,” said Apple finance chief Peter Oppenheimer during an analyst call Tuesday. Source: http://buzz.money.cnn.com/2013/04/24/apple-debt-repatriation-taxes.9. Ireland pledges to close Apple tax loophole, By Jamie Smyth in Dublin and Richard Waters in San Francisco, FT Oct 15, 2013.




66% of world GDP and are expected to decline to 49% by 2030.10 The acceptance for the Model Convention and the OECD Transfer Pricing Guidelines are challenged and countries with a strong position advocat-ing source based taxation would like the BEPS project to shift the right to tax in favour of source countries. This would call for a review of the concept of Permanent Establishment (PE), taxation of Intangibles, the importance of the allocation of risk and control as well as the linkage of economic activity to actual sales. All of these areas are listed as action points in the BEPS report (see below).

The importance of sales is however also stressed by some existing OECD members. France has for years challenged the international tax-ation principles for the corporate income tax when it comes to internet sales and the so called digital economy. An earlier revision of taxation of internet sales, resulted only in a clarification of a PE when a server is in place for the actual sales.11 The taxation of profits from the sale of good and services facilitated by the server was not discussed. However, that issue is now on the agenda in the BEPS project. It would potentially involve whether France could claim as taxable in France part of the profit in companies outside its territory but engaged in sales over the internet to French consumers.

The complexity of the transfer pricing rules and the outcome in tax-ation rights is challenged by a number of NGOs. They claim that devel-oping countries loose out due to weak administrations and lack of ability to pursue complicated tax cases. At the same time, they claim that devel-oped countries loose staggering amounts in tax revenue (see above). The impression is given that there is a free lunch – higher taxes on business activities in developing as well as developed countries would be to the benefit of everyone. At the same time OECD and other international organisations have highlighted the negative consequences of higher taxes

10. Measured as real GDP at 2005 PPPs, according to OECD Economic Outlook, Volume 2012, Issue 1, Figure 4.5, page 217.11. “The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrange-ments may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise (see paragraph 4 above), even if the enterprise has been able to determine that its web site should be hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement.” Par. 42.3 in INTERPRETATION AND APPLICATION OF ARTICLE 5 (PERMANENT ESTABLISHMENT) OF THE OECD MODEL TAX CONVENTION, 19 October 2012.




on investments and businesses for growth and job creation. It must therefore implicitly be assumed that the return on the potential tax rev-enues must exceed the negative effects on investments and jobs. In other words, governments must use the extra tax revenues strategically and very efficiently. More effective and equal competition across countries and between different types of businesses is also held out as a carrot for increasing taxes. At the same time, many governments engage in active tax competition to make more investments economically viable and to attract investments. It is therefore sometimes hard to understand the eagerness to increase taxes on the one hand and to lower them on the other hand. Hopefully, the BEPS project will result in greater transpar-ency in the area of tax competition and with a clear definition of what acceptable government behaviour is, as well as acceptable corporate behaviour.

5. general comments on the action plan

The Action Plan on Base Erosion Profit Shifting by the OECD and G20 spins over basically every aspect of international taxation. The global tax system was originally designed to prevent double taxation. The focus now is on double non-taxation. However, it is important to address both these aspects in the BEPS project.

Considering the political pressure behind the BEPS project, it is important to keep in mind and to make sure that any changes to the international tax system is made in a balanced and proportionate way. Governments need to agree on acceptable forms of tax competition and businesses must adhere to rules and principles agreed upon. Failure to come to such an agreement might, as shown above, result in unilateral actions by states, which in turn increases the risk of double taxation. Achieving consensus, beyond the G20 countries, towards uniformly agreed standards is thus critical in order to avoid numerous new cases of international double taxation.

In the BEPS report and other OECD publications a distinction is made between intended and unintended double non-taxation. This dis-tinction is important because it gives meaning to differences between tax efficiency and aggressive tax planning on the side of business and normal tax policy and harmful tax practices on the side of governments. This dis-




tinction therefore needs to be further operationalized to be able to come to effective and proportional measures in tackling BEPS related issues. This also means that there should be consensus that universally accepted unintended results of either tax policy or tax planning should be the piv-otal point of the work on BEPS. Defining these concepts would clearly be very helpful.

The aim of the BEPS project should be to identify parts of the inter-national tax system that do not work well and/or do not work as intended. These issues should be addressed by formulating open norms based on well-established principles, not dealing with issues through ad-hoc anti-abuse measures. In addition, the information that is available to tax authorities could greatly be improved by automatic exchange of information between different tax authorities.

In this way a global level playing field can be promoted and affirmed, designed to enhance global trade and prosperity. The Action Plan should play a vital role in realizing growth and prosperity. Any changes of inter-national rules of how to allocate taxation rights between countries must be proportionate. Allowing any increased importance of sales as an indi-cator of economic activity when attributing the right of corporate prof-its, rather than the existing international taxation principles, must be carefully analysed before any changes are considered.

Since many Member States in the EU are not members of the G20 and/or the OECD, it is important that that the European Commission is active in the work on BEPS to ensure an acceptable outcome for all Member States and Europe as a whole. Any change in international tax rules or principles must be EU law compliant to ensure application also in the EU.

6. specific comments on the action plan

Action points 2–5 deal mainly with coordinating national tax policy, 6–10 deal with issues concerning substance and transfer pricing and 11–14 focus mainly on legal certainty and transparency between governments amongst themselves and/or between business and governments. Action points 1 and 15 fall somewhat outside these clusters, dealing with the digital economy and the possibilities of a multilateral treaty.




6.1 coordinating national tax policy (action points 2–5)

This cluster of action points should be examined in light of earlier OECD work on harmful tax practices, EU initiatives on harmful tax competition and work in the Code of Conduct group. Tax competition in itself is embraced by most governments as beneficial for states. It encourages states to innovate their tax system and prevents inefficiencies and the forming of ’cartels’.

Sound tax competition does not lead to a race to the bottom, but will result in an appropriate level as long as there are oversight bodies such as the OECD to determine the playing field and to safeguard the rules. For that reason, a clear internationally agreed working definition on harmful tax practices would be very useful in addressing BEPS issues and in deter-mining the boundaries for acceptable forms of tax competition.

The Action Plan also states that accomplishing the actions set forth requires an effective and comprehensive process that involves all relevant stakeholders. To this end, the OECD will also involve interested G20 countries that are not OECD members. Also other non-member will be invited. This is a laudable development from a point of view that a global level playing field should be achieved. At the same time, going by G20 statements, it seems that the OECD has deviated somewhat from the path of requiring consensus. This could lead to a situation where coun-tries deal with the issues in their own way, creating more gaps and fric-tions between national tax systems. Consequently, consensus should be required.

Action 2 – Neutralize the Effects of Hybrid Mismatch Arrangements “Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduc-tion, long-term deferral) of hybrid instruments and entities. This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instru-ments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on coǦordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be coǦordi-nated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping.”




There is a need to address hybrid mismatches. It is however important that any initiative in this area is internationally coordinated. In order to achieve a positive impact on hybrid mismatches, countries will have to be willing to share information regarding mismatches and also commit not to implement new legislation that would facilitate mismatches.

Furthermore, one has to acknowledge that there may be cases where double non-taxation is an intentional result of domestic policy initia-tives, introduced to stimulate investment. Consequently, it is of utmost importance that any action to reduce the impact of mismatches is clearly defined.

Action 3 – Strengthen CFC Rules “Develop recommendations regarding the design of controlled foreign corpora-tion rules. This work will be coordinated with other work as necessary.”

A more coordinated approach regarding CFC rules is welcome. More uniformity in this area may increase predictability and thus be beneficial to tax administrations and businesses. However, the taxation of foreign income constitutes an important aspect of the tax policy of every national government to stimulate growth and investments. The taxation principles in this area vary from country to country and consequently, so does the current CFC regimes. Many countries do not have CFC rules. Considering that countries have chosen such different approaches to stimulate economic activity, I believe that it will be very difficult to coor-dinate and reach a common position on a standardized CFC regime.

Some of the highly publicized corporate tax cases, like Apple (see above), may have its origin in the design of the US CFC regime and check the box regime. While the US for decades argued that other coun-tries should introduce or strengthen their CFC rules, they enacted a dif-ferent pro-business regime themselves. A number of countries have since scaled backed their CFC regimes when the negative effects on invest-ments and jobs became obvious.

Action 4 – Limit Base Erosion via Interest Deductions and Other Financial Payments “Develop recommendations regarding best practices in the design of rules to pre-vent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments. The work will evaluate the effectiveness of different types of limitations. In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including




financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements. The work will be co-ordinated with the work on hybrids and CFC rules.”

As a principle, companies should be entitled to finance their business operations as they see fit, with equity or debt, as long as they comply with transfer pricing principles in relation to the level of debt and the interest payable. More coordination in the area of interest deductibility would be welcomed if it reduces the burden of compliance and improves certainty for business. It may be noted that the inherent economic double taxation of equity financed investments implies a distortion in the financing mix of companies. In this respect, shareholder taxation ought to also be included but this is outside the scope of this action point.

A likely outcome of this action point is concluding that best practices is an earnings stripping rule, like the one in Germany, allowing full deductibility of corporate interest payments up to 30 percent of EBITDA (earnings before interest, taxes, depreciation and amortization- a cash flow measure). The reason why EBITDA has been chosen in a number of countries rather than EBIT is the much higher correlation between EBITDA and capital intensity in production compared to EBIT. This could be expressed as stating the obvious that there is higher financing needs in an industry like a steel plant (having extensive capital investments and therefore large depreciations) than in a grocery store. EBITDA would take this into account while EBIT would not.

Disparities between States in nominal tax rates should fall inside the domain of acceptable tax competition. This should therefore be outside the scope of BEPS, or at least not being addressed as an interest deduct-ibility issue, but rather as a question of acceptable tax competition.

Action 5 – Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance “Revamp the work on harmful tax practices with a priority on improving trans-parency, including compulsory spontaneous exchange on rulings related to pref-erential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.”

Since tax is a cost that every MNE tries to control, companies will con-sequently respond to legitimate incentives. It is of utmost importance for businesses to be able to understand the difference between what is per-ceived as a BEPS incentive and what is simply permissible planning to




manage tax as a cost. Certain structures resulting in BEPS appear to be the result of domestic legislation rather than generic/global issues. Con-sequently, consideration needs to be given to differentiate between issues that can be addressed through domestic measures and those that will require international coordination.

Governments have to agree on acceptable forms of tax competition (for instance, is a patent box regime acceptable?) and avoid labeling busi-nesses as aggressive tax planners or tax avoiders when using legislated tax incentives such as accelerated depreciation or patent box regimes. In return businesses must adhere to rules and principles agreed upon by and between countries. Governments need to find a common position on how to define “acceptable tax competition”. Such a definition could be linked to full transparency as far as the rules are concerned and a suffi-cient level of economic activity required.

The question of CSR (Corporate Social Responsibility) is sometimes raised in this context. The notion that companies should pay a “fair amount” rather than what is legally required is really the same question as the treatment of donations or charitable contributions. It is primarily a question for the shareholders and their control of management activi-ties. Most countries have strict rules regarding the use of corporate means for other purposes than increasing the value of the company. Most gov-ernments also have tax rules for such contributions. CSR is also addressed in the MNE Guidelines of the OECD. Here, companies are obliged to follow laws and regulations of the countries they invest in as well as the country in which they operate from.

6.2 substance and transfer pricing (action points 6–10)

It is important to maintain a principle-based approach rather than resort to a series of ad hoc measures. The Action Plan confirms that the at arm’s length principle must be maintained. Additional measures to combat unintended double non-taxation should remain within the arm’s length standards. Where it is clear that a transaction is upheld by proper analysis of functions carried, risks taken and assets used and reasonable substance is present, it should be clear that there is no situation of artificially seg-regating taxable income from the activities that generate it.

Action 6 – Prevent Treaty Abuse “Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circum-




stances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considera-tions that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be coordinated with the work on hybrids.”

The first sentence in this action point raises some concern. Is the inten-tion to introduce domestic anti-abuse rules that would override tax trea-ties? If so, I would be strongly against it since it would effectively under-mine the predictability and certainty of a tax treaty. When making an investment, a taxpayer should be able to rely on the text of a tax treaty. Although I understand the need for rules to counter treaty abuse, such rules should come in the form of treaty provision and not in the form of domestic legislation. A number of provisions to counter treaty abuse can already be found in the Commentary on Article 1 of the OECD Model Tax Convention. The work in this area should therefore be concentrated on designing effective treaty provisions to counter treaty abuse.

Action 7 – Prevent the Artificial Avoidance of PE Status “Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.”

Obviously, artificial business arrangements should be targeted. How-ever, considering the discussions in relation to the latest review of the commentary to Article 5 on the definition of permanent establishment, one may feel somewhat concerned that this could turn into yet another clash between source and resident taxation. The case of a limited risk dis-tributor may serve as a good example. Assume that a company selling products over the internet establishes a warehouse to speed up delivery in country X. Should this warehouse render a PE?




Source: BIAC

The potential risk of conflicting views and numerous new PEs is obvi-ous. This would result in numerous double taxation cases. One could question the need for changes in this respect. Article 5 and Model Con-vention commentary provides relative clarity on principles of PE status and these principles, developed over many years, have allowed the crea-tion of commercial agreements with third parties and within the enter-prise that take into account liability for PE status where that arises. Fur-thermore, many aspects of the global supply chain and customer/dealer relationships are predicated on a mutual understanding of PE status and changes would be costly not only for businesses but also for govern-ments. Any change to the model treaty or the model treaty guidance should therefore be targeted at specific abuses and not involve substantial change to long established principles.

Action 8 – Intangibles “Develop rules to prevent profit shifting BEPS by moving intangibles among group members. This will involve: (i) adopting a broad and clearly delineated definition of intangibles; (ii) ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation; (iii) developing transfer pricing rules or special rules measures for transfers of hard-to-value intangibles; and (iv) updating the guidance on cost contribution arrangements.”




In order to avoid inconsistent interpretation and application, finding a clear and well accepted definition of the term intangible is of utmost importance. Anything else is likely to result in numerous dispute and double taxation. In my view, a definition of intangible assets that are to be recognized for TP-purposes ought to include three typical character-istics: ownership, control, and transferability. Although business attributes or notions such as goodwill, on-going concern value, synergies, location savings, workforce in place etc. may affect the valuation of a transaction and consequently affect the transfer price of an intangible asset, such attributes or notions are not themselves assets which can be owned, con-trolled or transferred. Consequently, they should not be included in the definition.

It is equally important to distinguish between allocation of ownership and the compensation for functions performed which may (or may not) contribute to the development and enhancement of the IP. The com-pensation for functions performed will naturally vary depending on the facts and circumstances in each case but nothing should prevent a highly qualified service provider performing important functions related to the development and/or enhancement of the IP from being entitled to a sig-nificant service fee, without acquiring any right or share in the potential IP resulting from his services. At arm’s length, it is indeed reasonable to assume that a highly qualified service provider performing high value adding R&D or marketing functions should receive a higher compensa-tion than a service provider only providing routine R&D or marketing activities. However, this does not mean that either of the service provid-ers at arm’s length is entitled to a share in the IP as such. This distinction is important in order not to dilute the IP ownership concept for transfer pricing purposes into something completely unpredictable. It is crucial to avoid a situation where it will in most cases be possible to argue for some sort of joint or shared ownership based on notions of how “impor-tant” various functions are considered to be.

Action 9 – Risks and Capital “Develop rules to prevent BEPS by transferring risks among, or allocating exces-sive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value crea-tion. This work will be co-ordinated with the work on interest expense deduc-tions and other financial payments.”




I strongly believe that for normal transactions the arm’s length principle works. It should not be modified or diluted to deal with abusive behav-ior. The principles laid out in Chapter IX of the Transfer Pricing Guide-lines on risk allocation and capital are valid and reasonable. Abusive behavior should be countered with targeted measures. To allocate increasing taxation rights to outsourced R&D despite limited risk and control at the outsourced facility must be questioned. If deductions for a substantial part of the investment have been made in a country like Sweden, it would not be justified to allocate taxation of the return of the investment to another country. Certainly, the pricing for services ren-dered should be at arm’s length but an adequate return for the strategic risk and control should also be granted.

Action 10 – Other High-Risk Transactions “Develop rules to prevent profit shifting BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterised; (ii) clarify the appli-cation of transfer pricing methods, in particular profit splits, in the context of global value chains; and (iii) provide protection against common types of base eroding payments, such as management fees and head office expenses.”

I believe that the arm’s length principle works and it does not require that comparables between unrelated parties exist for every transaction. In situations where there are no comparables, transactions can still be priced by the use of transfer pricing methods.

In order to make business decisions, legal certainty is required. A transaction should, in accordance with the Transfer Pricing Guidelines, only be recharacterised in exceptional cases. Increasing use of recharac-terisation would create uncertainty for business and lead to double taxa-tion.

It also needs to be acknowledged that there are transactions taking place within a group that one would rarely find between independent parties. This does not mean that these transactions cannot be priced in accordance with the arm’s length principle. It does however mean that these transactions will be more difficult to analyze. Paragraph 1.69 of the TPG states “…The fact that independent enterprises do not structure their transactions in a particular fashion might be reason to examine the economic logic of the structure more closely, but it would not be deter-minative….”. Consequently, tax administrations are advised to show great caution in dealing with such transactions and to respect the trans-actions actually undertaken to the extent possible. Transactions should




not be disregarded or substituted with other transactions simply because it is difficult to find comparable transactions between independent par-ties.

If there is an overlap of the range of acceptable prices for the seller and for the buyer and if the price falls within this range, the price should be accepted by the tax authorities. The tax authorities should not ask for the median or a specific point in the range. When looking at the realistically available options for a company, a company should not be compelled to elect the most favorable one since it should take into account its belong-ing to a group and therefore the interest of other members. As indicated in paragraph 9.60 of the TPG, as long as the choice is clearly not less attractive than another one it should be accepted.

6.3 legal certainty and transparency (action points 11–14)

In relation to these action points, it is disconcerting to find that there is no reliable data available on the magnitude of BEPS, nor is there an agreed upon methodology to gather and analyse such data. One wonders which measures should be undertaken if the problem at hand is not iden-tified. Furthermore, can effective and proportionate measures be expected if there is little or no real insight into the scope of the problem?

In addition, the proposed timing concerning the action points raises some question since the results on data collection and developing meth-odologies (action point 11) are not foreseen until September 2015. Despite this, it is stated that actions should be delivered by September 2014 in the area of hybrid mismatch arrangements (action point 2), treaty abuse (action point 6), transfer pricing aspects of intangibles (action point 8), transfer pricing documentation requirements (action point 13), identifying the problems of the digital economy (action point 1) and part of the work on harmful tax practices (action point 5 – finalise review on member countries regimes).

Establishing methodologies to collect and analyse data should have far more priority than what is currently the case. As stated in the Action Plan: timely, targeted and comprehensive information is essential. Deci-sions need to be taken on the basis of the right policy considerations. Despite all political pressure, proper due diligence need to be performed to be able to come to effective and proportional measures. As is the case with all action points, international coordination is of utmost impor-tance.




Action 11 – Establish Methodologies to Collect and Analyze Data on BEPS and the Actions to Address It “Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing method-ologies based on both aggregate (e.g. FDI and balance of payments data) and micro-level data (e.g. from financial statements and tax returns), taking into con-sideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses.”

The OECD’s February report on BEBS concluded that there basically was no reliable data available on the scale and impact of BEPS.

The importance of reliable data has been addressed above. A lot of rel-evant information is clearly already available for tax authorities by way of audits – as stated in the Action Plan – but also through yearly submitted tax returns. Additionally, co-operative compliance programmes could provide more up-to-date information without resorting to new disclo-sure initiatives and related administrative burdens. It is important to make sure that any new types of data to assess BEPS, and actions to address it, does not lead to significantly greater administrative burden on businesses or on tax administrations.

Action 12 – Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements “Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. One focus will be international tax schemes, where the work will explore using a wide definition of ‘tax benefit’ in order to capture such transactions. The work will be coordinated with the work on co-operative compliance. It will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations.”

This focus in this action point – as well as the previous one – is mainly about solving a perceived information deficit on the side of the tax authorities. If the claim is correct that in most countries the tax author-ities have little capability to develop the ’big picture’ of the value chain, there could be a warranted need for a targeted approach to improve this.

However, in order to ascertain the need for this approach it should first be established that the lack of capability in fact lies with the absence




of information, insufficient means to access that information etc. In addition, it should be established that the information could not be made available to the relevant tax authorities through (automatic) inter-national exchange of information.

Only in other cases would it be valid to resolve the absence of infor-mation, on for instance, the value chain by an internationally agreed and coordinated request to the taxpayer to disclose the relevant information.

Mandatory disclosure rules on aggressive tax planning arrangements seem irrelevant when there is no consensus on what should be considered an aggressive tax planning arrangement (see above). Also, disclosure rules should be redundant if the automatic information exchange between tax authorities is properly arranged as indicated above.

Action 13 – Re-examine Transfer Pricing Documentation “Develop rules regarding transfer pricing documentation to enhance transpar-ency for tax administration, taking into consideration the compliance costs for business. The rules to be developed may include a requirement that MNE’s pro-vide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.”

Businesses spend a lot of time and incur a lot of costs to define and doc-ument their Transfer Pricing (TPD). Despite this, the documentation often seems to serve little practical purpose. With tougher tax adminis-trations and environments changing ever more rapidly, it is hard to define rules that last more than 3 years and to document them with the details requested by tax administrations.

The current focus of TPD is local and not well suited to an increas-ingly global economy. It is important to identify what information would be most useful to tax authorities. The information requested in the action plan seems a bit rudimentary in order to provide useful indi-cators for risk assessment purposes. It may be more relevant to focus on information in relation to particular risk associated with certain activi-ties. Consequently, the OECD work on TPD should be streamlined with the one on Transfer Pricing Risk Assessment (TPRA). Information required by tax authorities for Transfer Pricing Risk Assessment pur-poses will vary from business to business. Businesses themselves are prob-ably best placed to determine how this information can be usefully pre-sented in relation to their activities. It is in the interest of businesses to present the information in a manner that tax authorities can understand, as this is more likely to lead to a “low risk” assessment.

The words in action point 13 “provide all relevant governments with needed information on their global allocation of the income, economic




activity and taxes paid among countries according to a common tem-plate” deserves some additional comments. No doubt, there are linkages to the discussions regarding country by country reporting (CBCR). There have been several initiatives in this area and the standard for any reporting requirement deviates considerably. A US standard is taking form and several initiatives are under consideration in Europe.

Currently there are three EU regulatory frameworks introducing country by country reporting: the capital requirements directive (part of the CRD IV package12), the accounting directive and the transparency directive.13 However these EU regulatory frameworks do not apply to the same companies. While CRD IV covers credit institutions and investment firms, the accounting and transparency directives apply to large listed and non-listed companies active in the extractive industry and the logging (primarily forest) industry.

In April 2013, the Commission put forward additional new legisla-tion on non-financial reporting (’’Disclosure of non-financial and diver-sity information by certain large companies and groups Directive’’) in order to increase the transparency of EU companies and improve their performance on environmental and social matters.14

There is no requirement on CBCR in the Commission’s proposal which is currently being discussed by the European Parliament and Member States. However, in May 2013, the European Council called for rapid progress on this proposal in order to amend legislation concerning the disclosure of non-financial and diversity information by large com-panies and groups to ensure that they provide country-by-country reporting (European Council Conclusions, 22 May 2013).

12. In March 2013 the EU institutions reached agreement on the fourth Capital Requirements package (CRD IV) consisting of the Capital Requirements Directive (CRD) and Regulation (CRR). In this context, EU institutions agreed to introduce CBCR requirements for institutions regulated under the Capital Requirements Directive. This was the first piece of EU legislation to introduce CBCR. The CRD IV legislation was published in the Official Journal on 27 June 2013.13. The new Accounting Directive repealing Accounting Directives (78/660/EEC and 83/349/EEC) introduces a new obligation for listed and large non-listed large extractive and logging companies to report all material pay-ments to governments broken down by country and by project, when these payments have been attributed to a specific project. The Accounting Directive regulates the information provided in the financial statements of all limited liability companies registered in the European Economic Area (EEA). 14. Under the new legislative proposal on Disclosure of non-financial and diversity information by certain large com-panies and groups (so called non-financial reporting), the Commission seeks to increase the transparency and per-formance of businesses in all sectors on environmental and social matters, in order to contribute to long-term eco-nomic growth and employment. The proposed Directive will amend the Accounting Directives (Fourth and Sev-enth Accounting Directives on Annual and Consolidated Accounts). It establishes certain minimum requirements for European companies to meet in order to enhance consistency and comparability of non-financial information disclosed within the EU. The European Parliament and the Council led by the Lithuanian Presidency recently started their discussions on the text.




However, in June 2013, Commissioner for Internal Market and Ser-vices Michel Barnier called for “measures on more transparency on tax for all large companies and groups – the taxes they pay, how much and to whom”. Additionally, he stated that “It should be possible to introduce rules for the publication of the information on a country by country basis, similar to those approved for banks in CRD IV, or in the Commission’s proposal on improving the transparency of certain large companies on non-financial reporting, adopted in April” (Commissioner’s statement, 12 June 2013).

Obviously, CBCR is a political issue that is currently being discussed by the European Parliament and the Member States. The issue is how to extend the scope of the non-financial reporting directive like in the accounting and CRD IV directives.

It remains to be seen whether CBCR reporting should be an account-ing issue or tax information given to tax authorities. One major differ-ence between the two approaches would be the requirement for audited accounts if it is part of the accounts, while tax reporting would not be audited information.

Action point 13 calls for a common template and the purpose here is said to be to assist tax authorities in their risk and audit analysis. Only a very limited number of information items is envisaged for that purpose. The CBCR requirements seem to go much further and businesses are likely to end up with multiple standards within Europe for accounting purposes and tax purposes as well as requirements across the Atlantic.

Action 14 – Make Dispute Resolution Mechanisms More Effective “Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provi-sions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.”

It is of course very welcome that dispute resolution is addressed in the action plan. This topic is of great importance for businesses. It is also important for governments since the elimination of international double taxation increases investments, jobs and therefore tax revenues. Further-more, legal certainty is of utmost importance for any business investment and the availability of effective dispute resolution mechanisms form an inextricable part of this.

The problem of international double taxation, also within the Single market, has been illustrated by DG TAXUD. They conducted a public consultation in 2010 with the title ’Double taxation conventions and the internal market: factual cases of double taxation’.15 Later, the Commis-

15. http://ec.europa.eu/taxation_customs/common/consultations/tax/2010_04_doubletax_en.htm.




sion adopted a Communication in 2011 “Double Taxation in the Single Market” COM (2011) 712 where it concluded on the need to take actions against international double taxation. Since then, DG TAXUD has continued its work to analyse the problem and evaluate the tax policy options that could better help to solve them. In December 2012, a Fis-calis Seminar dedicated one of its modules to international double taxa-tion. As part of the seminar a questionnaire was circulated to the Mem-ber States (MS) on their practice in eliminating double taxation and on their experience in mutual agreement procedures (MAPs) to solve con-flicts in the interpretation of double taxation treaties (DTCs). In addi-tion, Working Party IV of the Commission held meetings with Member States’ delegates and with stakeholders to discuss this issue in April 2013.

Considering the scope of the BEPS project, with new claims of taxing rights, it is likely to exert additional strain on the disputes resolution mechanisms. Still, relatively few tax treaties include an arbitration clause and the number of MAP cases keeps increasing. Consequently, the OECD and the EU should be encouraged to work on improvements to the efficiency of MAP and the promotion of mandatory arbitration pro-visions in tax treaties.

6.4 digital economy and multilateral treaties (action points 1 and 15)

Action 1 – Address the Tax Challenges of the Digital Economy “Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another coun-try without being liable to taxation due to the lack of nexus under current inter-national rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the char-acterisation of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector.”

To widen the scope of the PE concept to include the digital economy could result in a completely new system for allocating international tax-ation rights across countries. Considering the complexity of this topic and the speed with which business models evolve around the digital economy, a specific set of rules for the digital business does not seem achievable. This is an area where a more in-depth policy debate on the




merits of direct/indirect tax solutions is needed. The EU’s work on this topic for VAT and competition purposes should be explored.

The Action Plan states that actions are not directly aimed at changing the existing international standards on the allocation of taxing rights on cross-border income. However, several of the actions points calls for greater reliance on where economic activity takes place and in Action 1 the importance of actual sales for taxable profits is emphasized. For smaller open economies, attributing sales an increased importance when assessing where profits should be taxed, would result in substantial reve-nue losses from the corporate income tax. This is simply not acceptable, in particular since smaller countries are not members of the G20 and therefore have little or no influence on new rules but would encounter the largest tax revenue losses.

There are reasons to believe that also a large country like the USA would oppose such a new world order of taxation rights. A working group has been formed to look into this subject. It is co-chaired by France and the USA.

Action 15 – Develop a Multilateral Instrument “Analyze the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to imple-ment measures developed in the course of the work on BEPS and amend bilat-eral tax treaties. On the basis of this analysis, interested Parties will develop a multilateral instrument designed to provide an innovative approach to interna-tional tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution.”

A multilateral instrument could be an effective way to implement BEPS actions in the current extensive body of bilateral treaties. It would be beneficial to increase international tax coordination and improve the effectiveness of the current framework in this area. This action point has a later deadline that other action points. It should be completed by the end of 2015 while most of the other action points should be resolved during 2014.

7. the way forwardAn intensive work agenda is now embarked upon. It is stated in the BEPS report that

“The BEPS Project will draw on the expertise of the Committee on Fiscal Affairs (CFA) and of its subsidiary bodies. While the practices of these subsidiary bodies are well-adapted to developing consensus on routine work, they require some




adaptation to deliver results within the expected timelines. There is thus a need to find ways to accomplish the work quickly while seeking consensus. Each sub-sidiary body will need to seek new ways to find consensus as quickly as possible. This may involve, for example, setting up focus groups for the actions for which it is responsible. Each focus group could be composed of a relatively small number of delegates, with one country taking the lead and acting as co-ordina-tor. The focus groups would work actively in between meetings of the relevant subsidiary body, using remote working methods and reducing physical meetings to a minimum, to prepare drafts which would be circulated to and approved by the subsidiary.”

At their June 2013 meeting, the CFA mandated the formation of a new working party on Aggressive Tax Planning (WP 11) to assist the CFA with certain of its responsibilities in relation to the BEPS Action Plan. In particular the CFA mandate called for WP 11 to develop the instruments called for in Action Item 2 – Neutralise the Effects of Hybrid Mismatch Arrangements. WP1 will provide input to WP11. A tentative timetable indicated that Action point 2 to be approved by CFA in June 2014. WP11 will also address action points 3, 4 and 12.

It will come as no surprise that the meeting schedule at the OECD for various working parties and focus groups will be very heavy during 2014. No doubt, there will be major hurdles and problems to resolve and success will not be declared on all action points. However, since it is a political project rather than a tax or economic project, there will be suc-cesses to celebrate.

8. summaryWe experience an unprecedented internationalization. Businesses struc-ture their activities increasingly according to value creation in a truly glo-bal setting and not according to national borders. The international tax framework has not been able to keep up with these changes and therefore an increasing number of international double taxation cases as well as so called double non taxation cases have materialized. Governments have responded by actively competing with lower corporate tax rates to make more investments economically viable within their borders in order to promote growth and jobs. They have also introduced numerous tax incentives which businesses have responded to. The government tax pol-icies have however been dichotomized. They have also instructed or allowed their revenue authorities to pursue increasingly aggressive audit and control strategies to increase tax collections.




Tax planning has become necessary in order to navigate in a very complex international tax structure. Some advisors and companies have engaged in sophisticated transactions and structures which tax authori-ties have brought to their respective governments attention, asking for more restrictive tax rules.

At the same time, a number of large non-OECD economies have grown very rapidly and they challenge the existing international tax rules. Their tax systems have resulted in many cases of international double taxation and a lot of court cases around the globe. Countries advocating taxation according to the source principle have certainly gained territory at the expense of countries advocating taxation based on residence and the OECD books of rule.

After a stalemate, the G20 countries decided that enough was enough and they asked the OECD to act as a secretariat for a study on Base Ero-sion and Profit Shifting (BEPS). The balance of power has clearly shifted. At the same time a number of OECD countries experience large budget deficits and increasing public debts, and they would like to increase their tax revenues as well. Therefore, they all agree to embark on an unprecedented review of international tax rules.

In the middle of all of these efforts are international businesses and small economies. For a country like Sweden, Finland or the Netherlands, with large exports and a small domestic markets, even a small shift in favor of increased source taxation could result in higher taxes for the their multinational enterprises at the same time as corporate tax revenues in those countries would decline. Sweden stands to lose a lot since we run current account surpluses and our export sector is very large. Further-more, Swedish companies have considerable research and development in Sweden as well as headquarters located in the country and several of the action points in the BEPS report point to higher taxation in coun-tries where the companies are active and sell their products.

There is every reason to follow this process very closely. The time table is very ambitious. Most of the reforms should be in place within 24 months. The traditional OECD requirement of consensus is down-played and decisions will be made at the G20 level. Unfortunately, Swe-den is only represented in the G20 by the European Commission, with-out a national seat at the table. We may have a new world tax order once the action points in BEPS are agreed upon.

In such a world, one would hope that it is indeed Profit Sharing rather than Profit Shifting. Profit Sharing would mean that international double taxation is eliminated. Could that explain why the project some-




times is called Base Erosion Profit Sharing rather than Base Erosion Profit Shifting?

Krister Andersson is Head of the Tax Policy Department, Confederation of Swedish Enter-prise. He is also Chairman of the Tax Policy Group of BUSNISSEUROPE and Vice Chair of the Tax Committee of the Business Industry Advisory Committee (BIAC) to the OECD.


base erosion profit shifting – a new world tax order? · 2014-09-24 · shifting behaviour by...

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