Tax morality and transparency and its political impacts have been one of the market’s hot topics recently. The OECD action plan on BEPS (Base Erosion and Profit Shifting) is one of the most pressing agenda items. It is important to understand the political nature of BEPS in order to assess its implications.
At the request of the G20 Finance Ministers, the OECD launched an Action Plan on Base Erosion and Profit Shifting (BEPS) in July 2013, identifying 15 specific actions (see table below) considered necessary in order to equip governments with the domestic and international instruments to prevent corporations from paying little or no taxes. The ambitious timetable of the action plan calls for completion of certain action points by September 2014, others by September 2015.
BEPS is a political initiative
I recently hosted a KPMG event on BEPS, where the key note was held by my colleague Andrew Hickman. As the European Leader of KPMG’s Global Transfer Pricing Resolution Network and a member of the Business and Industry Advisory Committee to the OECD (BIAC), he has built up much insight on the matter.
He pointed out that it is important to understand that BEPS is a political initiative outsourced to the OECD and that it may be contrary to national objectives and individual countries’ tax sovereignty. What this could mean is illustrated in the example of the British Chancellor of the Exchequer, George Osborne, who said earlier this year that the British government was committed “to creating the most competitive tax regime in the G20 and we are delivering on this ambition”. According to Hickman, this raises the question of whether there is a common understanding about the concepts of competitive taxation and whether these are accepted internationally.
I believe it will be a challenge for the OECD, as a consensus organization, to implement its plan in the face of national rules, policies and objectives, which vary widely. There is no global tax authority and each member country has its own agenda.
BEPS is now
Nevertheless, it is obvious that some elements of the BEPS actions are here to stay, and it is advisable to start analyzing the individual exposure to these action points. I assume that of the items most likely to be implemented, the country-by-country reporting and the disclosure procedures are on top of the agenda. But also without the specific completion of the action points, the authorities are and will be inspired by them. From my clients I hear that BEPS has already influenced their daily work, as BEPS has become a topic not only among group tax functions, but also in the communication to the audit committee and other stakeholders. Even more importantly, it influences the interaction with tax authorities in various countries.
Andrew Hickman suggested that heads of tax ask themselves whether outcomes would be very different to what their current profit allocation looks like if they were to ignore contracts and legal entities and would use a KERT (Key Entrepreneurial Risk Taking) / SPF (Significant People Function) analysis instead, and if so, why?
BEPS is already taking place now and the question remains what the industry’s reaction will be. In my view, BEPS will encourage the further development of current cutting-edge approaches, and their application will be more consistent and widespread. But the increased focus on transparency and the political attention on tax matters are here to stay.