Image by Moyan Brenn CC via Flickr

The First Inclusive Framework Meeting on Base Erosion and Profit Shifting (BEPS) was held in Kyoto, Japan on 30 June -1 July 2016. I attended as part of a government delegation from Papua New Guinea (PNG). PNG has been engaged in the BEPS process coordinated by the Organization for Economic Cooperation and Development (OECD) since 2014. This is the first time for PNG to attend an Inclusive Framework Meeting. Related materials on the BEPS Project Action Plan can be sourced from this link.

The BEPS project is a joint initiative developed by the OECD member states and the G20 countries. An Action Plan was issued in 2013 and reports about the Action was released in 2015. BEPs is all about multinational corporate tax avoidance or planning and these are some of the examples Google, Apple and Starbucks.

In the G20 Leaders Communique from Antalya Turkey, the OECD was given a mandate to develop an Inclusive Framework to include other interested countries on an equal footing. This was confirmed in the G20 meeting in Shanghai in February 2016. Two of the BEPS Actions were Actions 1 and 11. Action 1 focuses on Tax Challenges of the Digital Economy. In Action 1, it is envisaged that digital economy poses challenges for international taxation and concerns about companies having a significant digital presence in a country without being liable to tax in that country. There are a number of ways to address Action 1. This can be done through identifying the main tax challenges associated with the digital economy and develop options for both direct and indirect taxation. On one hand, Action 11 focuses on Measuring and Monitoring BEPS. The Action Plan in relation to this includes; the magnitude or scale of BEPS that was not known and lack of data and the difficulty associated with measuring BEPS.

What was the experience in the Inclusive Framework Meeting?

At the Inclusive Framework delegates of 21 countries shared experiences and challenges facing the BEPS project when listening to different officials and the OECD-G20 member countries. At the Inclusive Meeting a total 81 countries were officially recognized as BEPS Members and from this, 36 countries have committed to the project. Also at the Inclusive Framework Meeting eight countries were selected to become the Members of the Steering Group for the BEPS Implementation. These countries include, Brazil, China, Georgia, India, Nigeria, Senegal, Singapore and South Africa.

From the Asia Pacific Region, 11 countries have attended including Australia, Bangladesh, Brunei Darussalam, China, Hong Kong, Indonesia, New Zealand, Japan, Singapore, Hong Kong and PNG.

The atmosphere in which the meeting was held was very positive because of the Japanese hospitality in the city of Kyoto. I noticed that bowing of heads when walking past is embedded in the Japanese culture and this shows how respectful the Japanese people are towards people from other nationalities and among the Japanese people themselves. At the meeting I gained a lot by listening to participants from various countries on the subject of BEPS. For me personally, this was interesting in a sense that understanding the theory on BEPS during my course of study means very little to me if I was not able to understand the practicality of how the BEPS Project works and this meeting has paved way for my own understanding. Participating in the full session over a 3 days period has really helped me to comprehend the issues of profit shifting by Multinational Enterprises (MNEs) who have taken advantage of globalization and the digital economy to progress their interests by reducing the global tax burden. This is especially a challenge in poor jurisdictions that have weak tax administration. Transfer pricing was a concern raised by many developing countries who have attended the inclusive meeting.

At the Inclusive Framework meeting, the new participant countries could sign up to be Associate Members. These countries will have to commit to the comprehensive BEPS Package including its four minimum standards and to its consistent implementation, actively contributing to the Project, including through policy dialogue and exchange of information. The terms and modalities of participation of potential BEPS Associates will be governed by general rules applicable to participation in the Committee on Fiscal Affairs (CFA). Also an annual fee of 20,000 EUR have to be paid effective as of 2017. For countries that have become BEPS Associates effective 2016 will pay only 10,000 EURO.

PNG has already signed up as a BEPS Associate thus will participate in the full range of the work done by BEPS by the CFA and its subsidiaries bodies on equal footing with OECD Members, which includes:

  • being invited to all agenda items of meetings of the CFA and its subsidiaries;
  • participating in the decision making on all outcomes related to the BEPS Project and associating itself with these outcomes unless it states otherwise;
  • its delegates being eligible for election to the Steering Committee Group of the BEPS Project. 

Why  – and how – should new participants join the BEPS project? 

First, new participants must join the Global Forum on Transparency and Exchange of Information. Joining this forum is an important step for jurisdictions that wish to undertake the BEPS project. It is also a first step for countries seeking to sign the Multilateral Convention on Mutual Assistance in Tax Matters.

Joining the BEPS framework will allow the new participants to work together to tackle tax avoidance, improve consistency and soundness of international tax rules and to ensure there is a more transparent tax environment. This includes the development of standards relating to the remaining BEPS issues and implementation of the agreed minimum standards. The OECD will aim to facilitate the BEPS implementation process by providing guidance and supporting development of tool kits and supporting developing countries.

Second, joining the BEPS Project will support Fairness of the Tax System. The work on the BEPS Project and its Action Plan aims to restore the trust of ordinary people in the fairness of the tax systems, to level the playing field among businesses, and to provide Governments with more efficient tools to ensure the effectiveness of their sovereign tax policies. It was also imperative to move quickly to try to limit the risks of countries taking uncoordinated unilateral measures which might weaken key international tax principles which form a stable framework for cross border investments. 

Third, Locating Taxable Profits. Using the BEPS package is regarded as means of better aligning where the taxable profits are actually located including the economic activities and value creation and improve information availability to tax authorities so that effective tax laws can be applied. Hence, double taxation can be minimized. Improving dispute resolution as well as establishing mechanisms to support and monitor the implementation of the measures are also key part of the BEPS reforms. 

Fourth, Introducing Anti-Hybrid Rules is a specific goal of the BEPS Project. These are small number of unilateral measures that countries can take to address profit shifting risks. This measure is although quite uncontroversial but is effective at combatting ‘double non-taxation’ between countries.

The Challenges for New Participants in BEPS Project

There are a number of challenges that participating countries must take into consideration that were highlighted at the Inclusive Framework meeting.

First, Capacity Building within each country to implement the four minimum standards such as Preventing Harmful Tax Practices (tax incentives); Country- By-Country Reporting; Dispute Resolution; and Digital Economy poses an enormous challenges for countries such as PNG. Prioritizing work on the BEPS Project as well as carrying out the normal work of Internal Revenue Commission (IRC) and Treasury requires more officials.

Second, Funding. Many countries who have signed up as BEPS associate are constrained with financial resources to ensure participating in the BEPS inclusive Meetings and Working Party Meetings are essential. Many have expressed their dissatisfaction at the recent inclusive meeting indicating that OECD should be providing the resources needed.

Domestically, the important work to be carried out is for the Government of each jurisdiction to provide resources for officials working in the revenue authorities. The revenue authorities played pivotal roles in revenue collection and fully resourcing them is a key step in in ensuring the BEPS Project materializes. 

Third, Weak Domestic Laws. Many jurisdictions have domestic legislation which is too weak to execute the work on the BEPS Action Plan. Domestic Laws such as imposing mandatory requirements for tax payers to file certain information annually which is in the administration section of the Income Tax Act section 10 or 11 have to be amended to fit in the work of the BEPS project to generate the likely outcomes that the BEPS project aims to achieve. This requires policy development, law drafting and passing of new laws by the country’s legislature. 

Fourth, Political Will. Driving the BEPS Action Plan requires the support of the Government of the day from respective jurisdictions. It is a mammoth task for civil servants to convince their political leaders on the importance of the BEPS Project and its potential contribution in terms of tax revenue to the Government. This is a challenge that needs to be carefully assessed in each country.

The successes of the BEPS Project is in the end, solely the responsibility of individual countries in the OECD, G20 and those countries that have now joined the Associate Members in the Inclusive Framework.m

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