Introduction of BEPS Action.

Introduction :
With the finalization of the Organization for Economic Co-operation and Development (OECD) 15-point Action Plan on Base Erosion and Profit Shifting (BEPS), businesses are still uncertain about what’s next. Companies are wary of how the 15-point actions will be interpreted and implemented across various jurisdictions and how these will impact on them.

The 15-Point Action Plan is as follows:
Action 1 — Address the Tax Challenges of the Digital Economy
Action 2 — Neutralize the Effects of Hybrid Mismatch Arrangements
Action 3 — Strengthen CFC Rules
Action 4 — Limit Base Erosion via Interest Deductions and Other Financial Payments
Action 5 — Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
Action 6 — Prevent Treaty Abuse
Action 7 — Prevent the Artificial Avoidance of PE Status
Actions 8-10 — Assure that Transfer Pricing Outcomes are in Line with Value Creation
Action 11 — Measuring and Monitoring BEPS
Action 12 — Require Taxpayers to Disclose their Aggressive Tax Planning Arrangements
Action 13 — Re-examine Transfer Pricing Documentation
Action 14 — Make Dispute Resolution Mechanisms More Effective
Action 15 — Develop a Multilateral Instrument
While the 15-point Action Plan provides some minimum standard which must be consistently applied, bulk of the action points are mere recommendations and not hard rules. This situation is likely to provide room for variations in local interpretation and application as it is the national legislature and not OECD that enacts laws and treaties.
BEPS Action Plan was developed to eradicate gaps and mismatch in the current international tax rules which allow profits to disappear for tax purposes or to be shifted to no or low-tax location where the business entity has little or no economic activity.
The current flaws in international tax rules created opportunities particularly to multinational entities (MNEs) to exploit legal loopholes and enjoy double non-taxation of income. It also encouraged many companies to choose investment purely for tax reasons rather than economic reasons leading to inefficient allocation of resources. Research undertaken by the OECD since 2013 confirms that BEPS practices resulted in a loss of revenue for the government anywhere from 4%-10% of global corporate income tax revenue (e.g. $100 to $240 billion annually).
In developing countries like the Philippines, the magnitude of the impact of BEPS is particularly stark compared with developed countries. The 15-point Action Plan, therefore, aims not only to close tax loopholes but to create tools that countries can use to shape a fair, effective and efficient system based on the three-core principles — coherence, substance and transparency. This brings us now to the question on whether or not the 15-point Action Plan will result in a tax system that’s fairer, more efficient and more understandable.
The effectiveness of the Action Plan lies in widespread and consistent implementation across various jurisdictions. The challenge now is how much harmonization will be achieved. For example, in the implementation of Action Plan 4 which limits base erosion via interest deductions and other financial payments, the OECD only recommends a restriction on interest deduction over certain percentage of profits which is between 10%-30%. The OECD leaves the exact ratios and implementation for governments to decide. This stance will allow different jurisdictions to interpret what is permissible interest deduction and what is not.
Another case in point is the enhanced transparency and information sharing which was seen by the OECD as crucial bulwark in the drive to eliminate gaps and mismatched in tax rules. Under the Action Plan 13 on Transfer Pricing (TP) Documentation, a three-tiered standardized approach to TP documentation was set out that requires the submission of the master file, local file and country-by-country (CbC) reporting in a prescribed template. Companies are required to disclose high-level information regarding global allocation of income, economic activity, total employment, capital, tangible assets and taxes paid in every jurisdiction.
Given the magnitude of sensitive information required by the heightened transparency, legitimate concerns were raised that these information may likely be used by the tax authorities as part of their aggressive “fishing expedition.” Businesses criticize that tax authorities may misuse the information to reconstruct business and conduct profit imputation adjustments. For example, a local authority may compare the tax paid in one jurisdiction with the head count and simply conclude that the correct share of the overall tax take is missing.
In the Philippines, where the transfer pricing regime is still in nascent stage, the adoption of Action Plan 13 may take longer than anticipated. Domestic legislation providing mechanisms for government-to-government exchange of CbC reporting may raise public apprehension that can impede the implementation of the said action plan. The existing TP Regulations may also have to be revisited to include submission of TP reports with the annual submission of Income Tax return, and to clarify the definition of intangibles and arm’s length conditions for transaction involving intangibles. All these considerations will likely produce varying implementations of the said action plan.
At present, income can be channeled through low tax jurisdictions even if there is little economic substance behind it. But with the 15-point Action Plan in place, profits will be reported where the economic activities that generate them are carried out and where the value is created.
The current international tax will also be aligned to keep pace with the increasing borderless digital economy. And the shift in the tax focus from where the intellectual property is provided (source-based) to where it is consumed (destination-based) will be expected. This will necessarily change the governing rules on permanent establishment which may require rewriting of model commentary and renegotiation of treaties between countries and introduction of the concept of “digital presence”. Also, the shift in liabilities towards where value is created (substance) may likely raise prices in countries where there are already consumption tax (e.g. VAT) which may add to tax disputes between countries.
This shift may even result in the real risk of double taxation if countries can’t agree. With the change in paradigm as described by the OECD in the 15-point action plan, concerns about tax planning no longer being legal have emerged. Taxpayers would like to know from tax authorities what is the acceptable tax planning and what is not. The question is no longer geared towards whether the companies operate within the bounds of law but whether they pay fair tax. What constitutes a fair share now becomes imperative. Thus, without clear guidelines, countries may end up in inter-state disputes as tax authorities vie for the right to tax. Companies may also face considerable uncertainty over how to structure their businesses, which may likely hold up investment and growth.
In the Philippines, the challenge in the digital economy includes determining how digital players like online sellers or retailers, app stores, and Internet advertisers make profits and how these profits should be characterized and be taxed. This will require a clear set of rules and regulations from the Bureau of Internal Revenue. Again, these concerns will delay the implementation of the action plan and may lead to its uneven implementation.
The 15-point Action Plan will definitely reshape the landscape in global international tax. Significant work at the national level will be seen such as changes in legislation and the creation of bilateral treaties and multilateral instruments. Given that there will be variations in the timing of the implementation of the action plan and in the interpretation of how these rules will be applied in each jurisdiction, businesses must be ready to manage these uncertainties that could affect its operations and strategies. The local tax authorities are deserving of credit for actively supporting the BEPS initiative, but must be mindful that clear and consistent rules are necessary to grow businesses and the economy. The tax authorities should ensure that the existing system keeps pace with the increasingly borderless digital economy while real convergence on the BEPS action plan develops.
The success and effectiveness, therefore, of the 15-point action plan still rests on the consistent, timely implementation and widespread adoption of majority, if not, all jurisdictions. Anything less will only create more anomalies, loopholes and uncertainty