The BEPS project has arrived at an interesting juncture. On October 5, the OECD released the final reports for its Base Erosion and Profit Shifting (BEPS) project, a collective effort by OECD and G20 member countries to mitigate harmful taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. practices. The BEPS project consists of policy reform guidelines divided into 15 action plan areas, including transfer pricing, tax treaty abuse, permanent establishments, and patent boxA patent box—also referred to as intellectual property (IP) regime—taxes business income earned from IP at a rate below the statutory corporate income tax rate, aiming to encourage local research and development. Many patent boxes around the world have undergone substantial reforms due to profit shifting concerns. regimes. But now that the OECD has finished its work and countries are left with generalized policy frameworks, what happens next?
It is now up to individual countries to implement the approved BEPS policies. Many countries have already implemented or have begun to consider parts of the BEPS policies. For example, France finalized limitations on interest expense deductions in 2014 and the Australian Parliament has recently introduced the Multinational Anti-Avoidance Bill aimed at tying business income to economic activity.
Within the U.S., the process of implementing BEPS policies involves two main considerations. The U.S. Treasury must draft rules that are not only consistent with the BEPS action plans but also do not overreach the Treasury’s executive authority. On the first point, the Treasury and IRS have been drafting rules and plan to release them by the end of the year. One area of particularly close examination is country-by-country reporting (CbC), where corporations are required to report their distribution of income and corporate structure across multiple tax jurisdictions. Robert Stack, the U.S. Treasury Deputy Assistant Secretary of International Affairs, has emphasized in a recent Deloitte webcast that the rules will conform closely to the guidelines so that businesses can plan for the future.
With regard to the Treasury’s need to stay within its legal authority, Stack noted during the webcast:
…as the U.S. delegate to the OECD, I was sensitive to not committing the U.S. to any minimum standards where we would have needed Congressional approval…it seemed to be prudent to recognize that there are things where we need to come back to Congress and not present to the world that the United States had agreed to a minimum standard when the executive [branch] doesn’t have the authority to do it.
However, it is uncertain that Treasury has the authority to unilaterally implement BEPS. In a joint letter to Treasury Secretary Jack Lew, Chairman Orrin Hatch and Chairman Paul Ryan have expressed their concerns with Treasury’s authority to implement BEPS policies and urged the Treasury to coordinate with Congress on these issues.
Beyond the United States, the BEPS action plans will face challenges in coordination between countries. Even though BEPS was coordinated through the OECD, the OECD itself does not have any authority to enforce the action plans. It remains to be seen how countries can effectively monitor each other’s progress and whether the OECD will take a more systematic role in this respect.
The BEPS project has been ambitious in the breadth of its goals. But upon the release of the final reports, much work still remains to be done by countries, both individually and collectively, if it is to succeed in achieving those goals.
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