The joint project of the OECD and the G20 against base erosion and profit shifting by multinational companies ("Base Erosion and Profit Shifting - BEPS") and its results in 2015 represent a milestone in international tax policy. Never before has there been such close agreement on international taxation standards.
Summary and overview of the results
The project was prompted by a growing perception that multinational companies are exploiting existing tax mismatches to minimise their tax burden. This leads not only to tax losses but also to significant distortions of competition. This is because purely national companies - generally small and medium-sized enterprises - do not have these tax structuring options. This also jeopardises the principle of fair taxation. The OECD and the G20 countries have agreed that these problems can only be solved in a sustainable manner through internationally coordinated measures. The finance ministers and central bank governors of the Group of Twenty (G20) therefore asked the Organisation for Economic Co-operation and Development (OECD), as the international standard-setter in the field of taxation, to develop proposals for solutions.
The results are not just declarations of intent, but concrete recommendations that can be implemented. The recommendations cover various aspects of international taxation. The overall guiding principle of the proposals is that taxation should take place where the entrepreneurial activity and the resulting value creation take place.
The reduction of harmful tax competition between countries should be particularly emphasised. International criteria for assessing harmful tax competition have been in place since 1997. However, they have never been updated since then. In particular, clear limits have now been set for so-called patent box regimes, so that preferential taxation may only be applied in the case of corresponding economic activities of the same taxpayer.
Existing principles of international tax law have been revised in order to limit undesirable scope for manoeuvre. On the one hand, this applies to double taxation treaties, which, in addition to their original purpose of avoiding double taxation through the allocation and waiver of tax rights, are now being specified, in particular with a view to avoiding double non-taxation. On the other hand, it concerns the applicable transfer pricing principles (taxation of intra-group services). In addition, for the first time, international principles have been agreed for certain tax instruments, e.g. for limiting profit shifting through interest payments (the so-called interest barrier), for rules against hybrid structures and for add-back taxation.
Another important outcome of the BEPS project is the improvement of transparency between tax administrations. To this end, a mandatory spontaneous exchange of information on so-called tax rulings has been introduced. In the area of transfer pricing, country-by-country reporting also gives tax authorities an overview of certain key figures within the group (profit, taxes, economic activities).
The action points in detail
- Action point 1: Challenges arising from Digitalisation
- Action point 2: Neutralising the effects of hybrid mismatch arrangements
- Action point 3: Controlled Foreign Company
- Action point 4: Limitation on interest deductions
- Action point 5: Harmful tax practices
- Action point 6: Ürevention of tay treaty abuse
- Action point 7: Permanent establishment status
- Action points 8 to 10: Updating the transfer pricing guidelines
- Action point 11: BEPS data analysis
- Action point 12: Mandatory disclosure rules
- Action item 13: Transfer pricing documentation and country-by-country reporting
- Action point 14: Mutual agreement procedure
- Action point 15: Multilateral instrument
Further details on the action points with higher transfer pricing relevance
Action points 8 to 10: Updating the transfer pricing guidelines
Multinational enterprises (MNEs) are economically active in a large number of countries through legally independent enterprises or permanent establishments. In these cases, services are also supplied across borders between the individual members of the multinational enterprise. In order to properly tax these cross-border business relationships, an appropriate transfer price must be determined. The internationally recognised standard for determining appropriate transfer prices is the arm's length principle, which requires that the conditions (in particular prices) that would have been agreed for comparable transactions between unrelated third parties are applied to transactions between associated enterprises (and used as the basis for taxation). The aim is to prevent multinationals from arbitrarily shifting taxable income between countries by setting arm's length conditions, in particular by setting transfer prices that are too high or too low.
As part of the work on the BEPS project, the recommendations on the arm's length principle have been strengthened to limit the abuse of transfer pricing and to ensure that the taxation of company profits is consistent with the economic activity of the companies and the resulting business value creation. One focus of the work has been on the concretisation of the OECD transfer pricing guidelines for transactions involving intangible assets, where it is often particularly difficult to determine the arm's length transfer price. In addition, the OECD Transfer Pricing Guidelines were clarified with regard to the allocation of risks and capital within a group and the determination of transfer prices for transactions that are not or only rarely between independent third parties. From a German perspective, it is important that uniform international standards exist and that the application of the OECD Transfer Pricing Guidelines leads to consistent solutions. Only an appropriate allocation of profits according to internationally harmonised standards guarantees international competitive neutrality and uniformity of taxation. At the same time, double taxation can be avoided.
The appropriate taxation of multinational enterprises, in particular in the area of transfer pricing in cross-border transactions between associated enterprises, can only be ensured if the tax authorities have the necessary information at their disposal.
Action item 13: Transfer pricing documentation and country-by-country reporting
Standardised transfer pricing documentation requirements for MNEs have been agreed in BEPS Action 13 to provide tax authorities with the necessary information and to allow MNEs to comply with their documentation obligations in a consistent manner.
The standardised transfer pricing documentation requirements have three objectives: Multinational enterprises should be able to demonstrate the arm's length nature of their transfer pricing structure. To provide tax administrations with the information necessary for transfer pricing risk management and audit. To this end, a three-step approach has been developed, consisting of an overview of the MNE's business activities and transfer pricing policy (master file), country-specific documentation of the taxpayer's specific transactions with associated enterprises (local file) and the so-called country-by-country report (CbCR). The purpose of the CbCR is to provide all participating tax administrations with an overview of the global distribution of income and taxes, as well as certain indicators of the geographical distribution of economic activity across countries. The CbCR is shared with the tax administrations of other countries through the automatic exchange of information, provided that these countries have concluded a corresponding agreement under international law. Germany exchanges information on country-by-country reports with 78 countries. The exchange of information between the Member States of the European Union is based on Directive (EU) 2016/881 of 25 May 2016 (DAC 4) amending the EU Mutual Assistance Directive (2011/16/EU). In addition, measures are currently being discussed at European Union level to make the relevant information available to the public.
Source: Federal Ministry of Finance
