OECD unveils final standards for international tax reforms

London: With artificial profit shifting causing an estimated USD 240 billion annual loss, Paris-based OECD Monday came out with the final detailed action plan for coherent and transparent international taxation norms for multinationals.

The final set of measures, which has been announced after extensive discussions over the years, also comes at a time when countries, including India, are looking for ways to curb tax evasion and illegal fund flows.

The steps, which are aimed at ensuring a "comprehensive, coherent and co-ordinated reform of the international tax rules", have been prepared by the Organisation for Economic Cooperation and Development (OECD), which sets the global taxation standards.

Unveiling the plan, OECD said revenue losses from Base Erosion and Profit Shifting (BEPS) are "conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10 percent of global corporate income tax (CIT) revenues".

Given developing countries? greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant, it said in a statement.

This package of new standards will be discussed at this week's meeting of G20 Finance Ministers and Central Bank Governors in Peru, which will also be attended by Finance Minister Arun Jaitley. The meet is scheduled for October 8.

The OECD/G20 project on BEPS provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to artificially shift to low or no-tax environments, where little or no economic activity takes place.

OECD Secretary-General Angel Gurria said BEPS is depriving countries of precious resources to jump-start growth and tackle the effect of the global economic crisis.

"BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide.

"The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective," Gurria said in a statement.

The proposed new standards will help countries such as India, which has been making efforts to bring back black money stashed abroad by its citizens.

Undertaken at the request of the G20 leaders, the work to address BEPS is based on the 2013 G20/OECD BEPS Action Plan, which identified 15 steps to put an end to international tax avoidance.

To curb profit shifting, various new minimum standards

such as country-by-country reporting as well as those related to treaty shopping and effective mutual agreements have been suggested.

The BEPS package revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called 'cash box' entities to shelter profits in low or no-tax jurisdictions.

Besides, the key concept of Permanent Establishment has been redefined to prevent arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.

OECD said the package offers governments a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility.

There will also be new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.

"Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016," the statement said.

After discussions at the G20 leaders' annual summit in Turkey in November, work will begin on putting in place an inclusive framework for monitoring BEPS and supporting implementation of these measures.

The 2013 BEPS Action Plan was structured around three fundamental pillars -- introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in existing international standards to ensure alignment of taxation with the location of economic activity and value creation and improving transparency as well as certainty for businesses and governments.

The final outcome of the BEPS project supplements the first reports of September 2014.

Leading consultancy PwC India's Rahul Garg (Leader - Direct Tax) said most BEPS recommendations favour developing country economies, as such India welcomes it.

"But the corporates would need to mature to align to likely changes in tax regime as a result of implementing BEPS recommendations. Particular attention will be required to deal with mandatory reporting requirements, avoidance of Permanent Establishment due to split contracts, certain financing instruments and treaty shopping like arrangements," he said in a statement.

Amit Maheshwari, Partner at Ashok Maheshwary & Associates, said the BEPS project would impact supply chains and global structures, potentially dealing a major blow to the practice of MNCs using low-tax jurisdictions to bring down their effective tax cost. 

Deloitte Haskins & Sells LLP's Partner Neeru Ahuja said

the BEPS initiative of the G20 countries is finally taking shape and the initiative is the first of its kind in the history of taxation in terms of the number of countries supporting it.

In a statement, Switzerland said it supports international efforts to achieve greater transparency and a level-playing field with regard to the taxation of multinationals.

"The project outcome will allow for better coordination of international tax law rules and make it possible to close the gaps multinationals could previously use for aggressive tax planning purposes," it noted.

According to the Swiss government, the third series of corporate tax reforms currently under way in Switzerland already take note of certain BEPS results.

"With regard to the exchange of information on tax rulings, Switzerland will create the necessary legal basis with the approval of the OECD/Council of Europe multilateral administrative assistance convention.

"The legal foundations for implementing country-by-country reports are also being prepared. This reporting will provide a complete overview of multinationals' global allocation of income and taxes paid," it added.

With regard to anti-abuse clauses in double taxation agreements, the Swiss government said it will take into account the OECD's work and decide whether it will make the necessary adjustments multilaterally or bilaterally.