The 15 Action Points BEPS

1. Address the tax challenges of the digital economy

2. Neutralize the effects of hybrid mismatch arrangements

3. Strengthen CFC rules

4. Limit base erosion via interest deductions and other financial payments

5. Counter harmful tax practices more effectively, taking into account transparency and

substance

6. Prevent treaty abuse

7. Prevent the artificial avoidance of Permanent Establishment (PE) status

8. Aligning transfer pricing outcomes with value creation: intangibles

9. Aligning transfer pricing outcomes with value creation: risks and capital

10. Aligning transfer pricing outcomes with value creation: other high-risk transactions

11. Measuring and monitoring BEPS

12. Require taxpayers to disclose their aggressive tax planning arrangements

13. Re-examine transfer pricing documentation

14. Make dispute resolution mechanisms more effective

15. Develop a multilateral instrument

BEPS Action Point 1: Address the tax challenges of the

digital economy
The goal of Action 1 is to identify the challenges the digital economy poses to international
taxation. It also aims to develop options to address these. This applies ot direct taxes like
corporate taxation, but also indirect taxes like Value Added Taxes and Custom Duties.

An example of such a challenge is a company that has significant digital presence in the
economy of another country than from which the company is run. Like selling digital products,
or advertising to the local market. Current tax rules are not very clear on how to tax the profits of
such a company.

Not surprisingly, the final report on Action 1 concluded that the digital economy cannot be seen
as separate from the rest of the economy. However, it also concluded that the digital economy
has no unique BEPS issues. For that reason, some of the challenges identified for the digital
economy have been addressed in other Action points (Action points 3, 7 and 8-10, to be precise).

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BEPS Action Point 2: Neutralise the effects of hybrid

mismatch arrangements
Hybrid mismatch arrangements focus on the differences in the tax treatment of an entity or a
financial instrument under the laws of two or more countries.

An example of a hybrid mismatch arrangement is a hybrid entity. Such an entity is regarded as

“tax transparent” in one country and “non-tax transparent” in another country. The use of such
entity in a corporate structure can offer opportunities to avoid taxation on certain income.

The goal of Action 2 is to neutralize the effects of hybrid mismatches. The final report on Action
2 proposes to include a new provision in the OECD Model Tax Convention. This will ensure that
the benefits of tax treaties are granted in appropriate cases with regard to the income concerned.
It will also ensure that these benefits are not granted when neither country taxes this income.

It is anticipated that the revisions of the OECD Model Tax Convention will be completed and
released somewhere this year (2017).

Implementation of these rules is considered important. The OECD, together with the G20, will
monitor whether countries actually implement them in their tax treaties.

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BEPS Action Point 3: Strengthen CFC rules

Controlled Foreign Company rules (CFC rules) lead to the taxation of income of controlled
foreign subsidiaries in the hands of resident shareholders, if certain conditions are met. For
example, CFC rules can test whether a subsidiary is based in a low-tax jurisdiction and if it earns
passive income.
Application of CFC rules can have the effect that low-taxed income of controlled foreign
subsidiaries is taxed in the residence country of the parent company. An addition effect is that
controlled foreign subsidiaries do not have an incentive to shift profits into a third, low-tax
jurisdiction.

The final report on Action 3 provides recommendations on CFC rules, but also gives member
status flexibility to implement these. Therefore, the impact of these recommendations is still
uncertain. The recommendations could result in the implementation of CFC rules in countries
that don’t have them now. In other cases, it could result in the amendment of existing CFC rules.

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BEPS Action Point 4: Limit base erosion via interest

deductions and other financial payments
The mobility of money makes it possible for multinational groups to achieve favorable results by
shifting debt around. The reason for this is that interest is taxed differently around the world. In
some cases, it is not taxed at all.

The goal of Action 4 is to ensure that net interest deductions are directly linked to the level of
economic activity. The economic activity is determined based on taxable earnings, before
deducting net interest expense, depreciation and amortization (EBITDA).

The final report on Action 4 recommends an approach based on a fixed ratio rule which limits an
entity’s net interest deduction to a percentage of its EBITDA. As a minimum, this rule should
apply to entities in multinational groups. The recommended approach proposes a range of
possible EBITDA ratios between 10% and 30%.

The recommended approach is expected to impact entities with a high level of net interest
expenses in combination with a high net interest/EBITDA ratio.

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Action 5: Counter harmful tax practices more effectively,

taking into account transparency and substance
The goal of Action 5 is to revamp the work on harmful tax practices with a priority on improving
transparency. It will evaluate preferential tax regimes in a BEPS context.

The final report on Action 5 focuses on two priority issues:

 The development of a substantial activity requirement for preferential tax regimes.

Preferential tax regimes are those offering special treatment to non-residents or
enterprises not active in the domestic market.
  The implementation of compulsory spontaneous information exchange on certain rulings,
like advance tax rulings. An advance tax ruling is a written interpretation of tax laws
issued by tax authorities. These rulings provide clarity to tax payers as to how much tax
they have to pay. In the past, the case has been made that countries “compete” for foreign
businesses by offering them favorable advanced tax rulings.

In terms of substantial activity, the report refers to intellectual property regimes. The report
endorses the “nexus approach.” Under this approach, taxpayers may only benefit from an IP
regime to the extent that they incurred costs giving rise to the IP income. In addition, it mentions
that this approach can also be applied to other preferential regimes.

With respect to the exchange of information on rulings, the report confirms that the spontaneous
exchange applies both to future rulings (issued after 1 April 2016) and to past rulings (issued
after 1 January 2010 and in effect as of 1 January 2014). The information must be exchanged
with all countries involved in the transaction covered by the ruling, as well as the residence
country of the immediate parent company and the group’s ultimate parent company.

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BEPS Action Point 6: Prevent treaty abuse

The goal of Action 6 is to prevent the granting of treaty benefits in inappropriate circumstances.
It needs to be made clear that tax treaties are not intended to be used to generate double non-
taxation. In addition, countries should consider this before entering into a tax treaty with another
country.

The final report on Action 6 proposes that countries include in their tax treaties either:

 a (simplified) limitation-on-benefits (LOB) provision in combination with a principal

purposes test (PPT),
 a PPT alone or,
 a LOB provision supplemented by provisions that would deny treaty benefits to conduit
financing arrangements.

The report contains detailed proposals for treaty provisions as well as elaborate explanatory
guidance. At the same time, it is now explicitly recognized that countries will have to tailor these
provisions to cater for their specific situation.

The multilateral instrument (see Action 15) provides tools for implementation of these concepts
in tax treaties (see Action 15).

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BEPS Action Point 7: Prevent the artificial avoidance of
Permanent Establishment status
The goal of Action 7 is to develop changes to the definition of Permanent Establishment (PE) to
prevent the artificial avoidance of PE status. Work on these issues will also address related profit
attribution.

To recap; a permanent establishment is a fixed place of business which generally gives rise to a
tax liability. For example, a company in France hires an office in the UK where activities take
place.

Another example could be a company registered and operating out of the UK of which all the
decisions are made by the manager who permanently lives in France.

The final report on Action 7 proposes to lower the PE threshold in the OECD Model Tax
Convention. This means that a Multinational Enterprise with activities in multiple countries will
establish a PE in those countries. The result is that multinational companies will become liable to
tax in more countries.

Lowering the PE threshold may fuel future discussions between tax payers and tax authorities.
This goes not just for the PE status, but more importantly for the PE profit attribution (and tax
liability). In addition, compliance costs and administrative burdens are likely going to increase.

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Action 8, 9 and 10: Aligning transfer pricing outcomes with

value creation
The effects of BEPS on transfer pricing regulation is profound. We dedicated a special article to
it, called The Effect of BEPS on Transfer Pricing.

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BEPS Action Point 11: Measuring and monitoring BEPS

Based on a number of studies, the OECD concludes that Base Erosion and Profit Shifting is
responsible for significant global corporate income tax (CIT) revenue losses. The goal of Action
11 is to ensure that the effectiveness and economic impact of the actions taken to address BEPS
are effective.

The final report on Action 11 contains recommendations on improved access to and enhanced
analysis of available data to measure BEPS, and on a consistent method of presentation. The
report provides tools to assist countries in evaluating the effects of BEPS. Moreover, it enables
them to measure the impact of efforts to prevent BEPS.
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Action 12: Require taxpayers to disclose their aggressive tax

planning arrangements
The goal of Action 12 is to develop recommendations regarding the design of mandatory
disclosure rules for aggressive tax planning arrangements. In short, it should be clear what tax
payers are doing. If they use aggressive tactics to lower the tax burden, tax authorities have a
means to address this.

The final report on Action 12 sets out options and provides best practice recommendations. It
provides a modular approach that gives countries wishing to introduce a mandatory disclosure
regime the option to choose what best fits their needs.

The report also makes specific recommendations for disclosure rules in relation to international
tax schemes.
Finally, it identifies opportunities to enhance the exchange of information obtained by countries
through such rules.

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BEPS Action Point 13: Re-examine transfer pricing

documentation
The effects of BEPS on transfer pricing regulation is profound. We dedicated a special article to
it, called The Effect of BEPS on Transfer Pricing.

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Action 14: Make dispute resolution mechanisms more

effective
It might happen that two jurisdictions seek to tax the same transactions or activities. Generally,
tax treaties directly resolve most such cases. However, two jurisdictions might disagree on the
interpretation or application of a tax treaty. The mutual agreement procedure (MAP) article of a
tax treaty provides a mechanism to resolve these cross-border tax disputes.

The goal of Action 14 is to address obstacles that prevent countries from solving treaty related
disputes under MAP.

In the final report on Action 14, the OECD recognizes that dispute resolution mechanisms should
be improved. The plan is to develop a minimum standard. The goal of this standard is to ensure
that treaty-related disputes are resolved in a quick, effective and efficient manner. This is needed
badly. We wouldn’t be surprised if we’ll soon see a rise of treaty- related disputes because of all
the changes caused by all these BEPS Action points…

In practice, these new minimum standards require amendments to both the OECD Model Tax
Convention and its Commentary, domestic law and regulations, and administrative procedures.

The Multilateral Instrument (Action 15) as published on 24 November 2016, establishes a

separate mandatory binding arbitration route. For now, countries are free to adopt this procedure.

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BEPS Action Point 15: Develop a multilateral instrument

Most countries have Double Tax Treaties (DTT) in place with other countries. These DTT’s
provide clarity as to where a company has to pay taxes, if activities are spread over two or more
countries.

Although a lot of these treaties are based on the OECD Model Tax Treaty, almost all treaties are
the result of bilateral negotiations. If BEPS is to be implemented correctly, these treaties have to
be renegotiated one by one. This would take ages.

Instead, Action point 15 aims to develop a Multilateral Instrument (MLI). The MLI is expected
to be adopted by 100 countries. This MLI allows countries to swiftly modify their bilateral
treaties to implement BEPS measures.

On 24 November 2016, the OECD issued the agreed text of the MLI which, when adopted,
includes BEPS measures into more than 2,000 existing tax treaties worldwide. These measures
relate to the following BEPS action points:

 Action 2 (Hybrid mismatches)

 Action 6 (Treaty abuse)
 Action 7 (Artificial avoidance of Permanent Establishment (PE) status)
 Action 14 (Improving dispute resolution)

The MLI, gives countries the flexibility to specify which treaties are covered. They can decide
how they meet the minimum standards. If desired, they can opt out of all or part of the provisions
which extend beyond the minimum standard.

This flexible approach means that each bilateral treaty will be changed in a unique way,
depending on how the parties to the bilateral treaty adopt the MLI provisions. Only when both
parties agree to amend their treaties in the same way for that particular article (when there is a
“match”), a treaty article will be amended.

It is anticipated that during summer 2017 many countries will participate in match-making
events. These events are aimed at reaching agreement between countries on which minimum
standards will apply in their DTT relations. If an agreement is reached, this will be binding for
the purposes of the application of the DTT.

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15 Action Points BEPS – Conclusion

The OECD has created an ambitious framework to combat Base Erosion and Profit Shifting.

For this, 15 Action Points BEPS have been created, which were summarized in this article.

The result? Let us give you just one example.

Up until now, in order to correctly establish a tax liability for a MNE operating in two countries
you used to be able to look at the local laws and the applicable tax treaty. After all these rules are
implemented, you also have to look at the MLI, the 86 page “Explanatory Statement To The
Multilateral Convention” and compare the level of implementation of the MLI in the respective
countries.

And in addition to that, there is the forced transparency, tougher rules and more extensive
reporting requirements.

The practical result of all of this will likely be a lot of confusion, discussions with tax authorities
and a lot more paperwork. And of course, a higher tax bill (this is where it’s all about, after all).
And who knows what bells and whistles will be added to these regulations. Especially, after the
first “MLI” has been established. That snowball has started rolling.