VAT CDP Boost
The OECD recently confirmed that the BEPS final reports covering all 15 BEPS actions will be released on 5 October 2015. There has been plenty of media coverage on the issue in relation to certain household names such as Google, Amazon and Starbucks who have been viewed as exploiting international tax rules in order to avoid paying their fair share of tax. But, how much do you know about BEPS and is the project likely to have any indirect tax consequences?
National tax laws have not always kept pace with global business developments including the rise of the digital economy which has left gaps that some Multi Nationals have taken advantage of. Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit these gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity with the result that little or no overall corporation tax is paid. This type of activity undermines the fairness and integrity of tax systems. Under the OECD’S BEPS project the issue is being treated by the international community as a global problem which requires global solutions.
The OECD work is based on a BEPS Action Plan endorsed by the G20 in July 2013, which identified 15 key areas to be addressed by 2015. The final reports are to be delivered to the G20 Finance Ministers next month, together with a plan for follow-up work and a timetable for their implementation.
The 15 Actions being addressed are:
- Action 1: Address the Tax Challenges of the Digital Economy
- Action 2: Neutralise the Effects of Hybrid Mismatch Arrangements
- Action 3: Strengthen CFC Rules
- Action 4: Limit Base Erosion via Interest Deductions and Other Financial Payments
- Action 5: Counter Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance
- Action 6: Prevent Treaty Abuse
- Action 7: Prevent the Artificial Avoidance of PE Status
- Action 8: Assure that Transfer Pricing Outcomes are in Line with Value Creation/Intangibles
- Action 9: Assure that Transfer Pricing Outcomes are in Line with Value Creation/Risks and Capital
- Action 10: Assure that Transfer Pricing Outcomes are in Line with Value Creation/Other High-Risk Transactions
- Action 11: Establish Methodologies to Collect and Analyse Data on BEPS and the Actions to Address It
- Action 12: Require Taxpayers to Disclose their Aggressive Tax Planning Arrangements
- Action 13: Re-examine Transfer Pricing Documentation
- Action 14: Make Dispute Resolution Mechanisms More Effective
- Action 15: Develop a Multilateral Instrument
Particular issues that could have VAT implications include:
- The deliverables are on the whole related to direct tax issues and whilst there is not much specifically mentioned on indirect tax, indirect tax and VAT are likely to become more prominent.
- PE Status – an expansion in the definition of a permanent establishment could result in a requirement for more VAT registrations if there is a knock-on increase in what is considered to be a VAT fixed establishment.
- Digital Economy – the OECD’s March 2014 paper confirms the view that indirect tax measures designed exclusively for the digital economy are likely to prove problematic, primarily because of the difficulties in identifying a specific ‘digital’ sector. The OECD is therefore suggesting that a wholesale move to the destination principle (i.e. based on the customer location) for taxing B2C transactions may be required. The EU implemented new B2C rules from January 2015 for Broadcasting, Telecommunications and E-services (BTE), extending this VAT treatment to all services would be a significant move.
- Country by Country Reporting – the introduction of this under Action 11 is designed to increase transparency across all taxes and could therefore lead to more transactions being identified for VAT purposes.
- Transfer Pricing – transfer pricing adjustments are not always VAT neutral and any changes in this area could generate additional VAT costs.
- Disclosure of Aggressive Tax Planning Arrangements – this is likely to apply to VAT as well as direct tax arrangements.
Several of the BEPS actions may result in Multi Nationals reviewing and amending their international business models. VAT implications should always be considered as part of the implementation of any changes.
BEPS is a key area to watch out for new developments on as the consequences for the tax world are likely to be far reaching over the coming months and years.