Africa Budget Taxation

“Mythbusting” BEPS (Base Erosion and Profit Shifting)

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Uncovering the facts and fictions surrounding the practice of BEPS

“BEPS the myths and facts”

On 5 October 2015, the Organisation for Economic Cooperation and Development (OECD) released the final reports under the base erosion and profit shifting (BEPS) project. The global tax reset is well underway and given the heightened global media, government and public interest there’s been intense scrutiny that has surrounding the issue of BEPS in the age of the globalised entity. We’ve unpacked some the myths and facts to help address some of the speculation and misconceptions surrounding BEPS and its implications.

MYTH: Developing countries have been kept out of the BEPS Project

FACT: Developing Country participation in the BEPS Project has been extensive. More than a dozen developing countries, representing a cross-section of regions and income levels, participate directly in the CFA meetings on BEPS, offering specific insight into the needs of developing countries. The United Nations, the International Monetary Fund and the World Bank Group, as well as the African Tax Administration Forum (ATAF) and the Inter-American Centre of Tax Administrations (CIAT) also participate. A series of regional meetings have been organised in Africa, Asia, Latin America and the Caucasus, to gather input from more than 40 developing countries that could not participate directly, in addition to Global Forum meetings organised in March and September of each year. Developing countries were asked to actively provide their perspective on the challenges they are facing, which resulted in the two-part report for the G20 Development Working Group. All the challenges identified by developing countries themselves are either being addressed through the BEPS Project directly, or through the parallel development of toolkits on items outside of the BEPS Project.

MYTH: The BEPS Project will have no real impact

FACT: While tax policy is always the sovereign right of individual countries, governments have realised the need to address BEPS issues collectively and in a coordinated manner. Proposed changes to the Transfer Pricing Guidelines will be immediately applicable. Changes to the Model Tax Convention will be implemented via a multi-lateral instrument, to be negotiated in the coming year. Preferential tax regimes and decisions on whether they are harmful tax practices have been reached in a clear and agreed peer review process. Recommendations on best practices for domestic law measures are expected to be implemented in national legislation, according to the applicable constitutional requirements. The intense interest from stakeholders demonstrates the potential reach of the BEPS Project, not only on tax practices, but business practices as a whole.

MYTH: Revisions to international tax rules are being written solely by the OECD

FACT: The OECD/G20 Base Erosion and Profit Shifting Project involves input from more than 80 countries, including the 34 members of the OECD, all G20 members, and more than 40 developing countries. They are working on solutions to a challenge facing all countries – closing the gaps in the international tax rules that allow multinational corporations to legally but artificially shift profits to low or no-tax jurisdictions. The BEPS project will lead to changes in the OECD Model Convention and the Transfer Pricing Guidelines, as well as recommendations for improvements to domestic legislation.

MYTH: The BEPS Project is “much ado about nothing” as there is no need to change international tax rules

FACT: More than 100 empirical studies have been published and not a single one suggests that BEPS is not an issue. Using available data, the OECD conservatively calculates that governments are losing up to ¼ of a trillion dollars of tax revenues annually due to these practices. Data reporting requirements approved in the BEPS Project will shed further light on the extent of the problem.

MYTH: BEPS will create unmanageable reporting burdens for multinationals

FACT: The BEPS Project is standardising a number of reporting requirements so as to reduce compliance costs for businesses that operate across borders. For instance widespread adoption of internationally agreed standards for transfer pricing documentation and country-by-country reporting will provide a simplified and consistent approach, avoiding the duplication that would otherwise result from each country creating its own reporting standards.

MYTH: BEPS rules will result in trade barriers

FACT: The BEPS Project aims to close loopholes that allow some companies to artificially shift income to locations where little or no economic activity takes place. Addressing BEPS collectively strengthens the current consensus-based framework for the taxation of cross-border activities. A system meant to eliminate double taxation cannot itself generate double non-taxation without running the risk of unravelling and being replaced by a patchwork of uncoordinated unilateral measures.

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