1. BASE EROSION AND PROFIT SHIFTING

2. Overlap of tax sovereignties may lead to double taxation Core work of the OECD is to remove barriers to cross-border trade and investment through designing international standards to eliminate double taxation Many rules work well but some may have also resulted in double non-taxation Post-crisis priorities: governments need resources and to ensure the fairness of the tax system Prevention of double taxation important but recognition that the issue of double non-taxation due to base erosion and profit shifting – BEPS should also be tackled 2 Preventing double taxation: have we been too successful?

3. What is BEPS? Number of structures take advantage of asymmetries in domestic and international tax rules Artificial separation of allocation of taxable profits from the jurisdiction where these profits arise / the place of economic activity Context Many of the principles of international taxation developed in the 1920s – amendments to business models, e.g. globalisation of value chains, increasing importance of intangibles, “digital economy“ What is BEPS? 3

4. Why is BEPS a problem? Distorts competition o Businesses that operate cross-border may profit from BEPS opportunities which gives them competitive advantages compared to enterprises that operate mostly at the domestic level Distorts investment decisions o …towards activities that have lower pre-tax rates of return but higher after tax rates of return – this may lead to an inefficient allocation of resources Is an issue of fairness o If other taxpayers think that MNE’s can legally avoid paying income tax, it will undermine voluntary compliance by all taxpayers 4

5. Increased attention of mainstream media on corporate tax affairs Spreading perception that MNEs dodge taxes all around the world and in particular in developing countries Debate on BEPS issues has reached a high political level – G20 Leaders in Los Cabos, 19 June 2012 – G20 Finance Ministers in Mexico City, 5 November 2012 Increased Attention on BEPS 5

6. 6

7. 7 BEPS report to the G20 Addressing Base Erosion and Profit Shifting 12 Feb 2013 Discussed at G20 Finance Ministers on 15-16 Feb 2013 Call for an Action Plan … by July 2013!

8. Key Tax Principles and Opportunities for BEPS In practice any structure aimed at BEPS incorporate a number of co- ordinated strategies, which often can be broken down into four elements – minimisation of taxation in a foreign operating or source country either by shifting gross profits via trading structures or reducing net profit by maximising deductions at the level of the payer – low or no withholding tax at source – low or no taxation at the level of the recipient (via low-tax jurisdictions, preferential regimes, hybrid mismatch arrangements) with entitlement to substantial non-routine profits via intra-group arrangements – no current taxation of the low taxed profits at level of ultimate parent. Further, effective cash repatriation strategies and “permanent” foreign reinvestment of low taxed cash The Report identifies a number of pressure areas e.g. hybrids, preferential regimes, anti-avoidance rules, etc.

9. Key pressure areas Hybrid Mismatch Arrangements Related party debt- financing Digital economy Availability of preferential regimes Availability of preferential regimes Anti-avoidance measures Transfer pricing 9

10. Calls for 15 actions organised around three main pillars: – The coherence of corporate tax at the international level. – A realignment of taxation and substance – Transparency, coupled with certainty and predictability Also calls for targeted work in the area of the digital economy, which presents a number of specific features, and for the development of a multilateral instrument to implement the measures developed under the action plan. The BEPS Action Plan 10

11. The BEPS Action Plan: 15 Actions 1. Digital Economy COHERENCE 2. Hybrid Mismatches 3. CFC Rules 4. Interest Deductions 5. HTP 15. Multilateral Instrument SUBSTANCE 6. Treaty Abuse 7. PE Status 8. TP Intangibles 9. TP Risk & Capital 10. TP High Risk Transactions TRANSPARENCY 11. BEPS Data 12. Disclosures 13. TP Doc & CbC Reporting 14. Dispute Resolution Presented to G20 Finance Ministers on 19 July 2013, and at G20 Leaders' Summit in September 2013 11

12. III. OECD/G20 BEPS PROJECT 12

13. OECD/G20 BEPS Project Work is carried out by the Committee on Fiscal Affairs (CFA) via its subsidiary bodies All eight non-OECD G20 countries (Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia and South Africa) and OECD Accession countries (Colombia and Latvia) are Associates in the BEPS Project Associates in a Project participate on an equal footing with OECD countries, including participation in its bureau in the Committee overseeing the project in the discussions and in the decision-making process 13

14. Forms of the BEPS outputs OECD/G20 BEPS Action Plan provides for – Recommendations – Reports – Changes to the MTC and Commentary – Changes to the Transfer Pricing Guidelines – Multilateral Instrument Outputs are being developed with Associates Outputs will be approved by the CFA and presented to the G20 14

15. An ambitious timeline 15 Digital Economy Report Hybrid mismatches TP documentation and CBC Addressing TP aspects of Intangibles Preventing Treaty Abuse Review of HTP Regimes Multilateral Instrument Feasibility Report Mandatory Disclosure Rules Report on Data and Economic Analyses Dispute Resolution Interest Deductibility CFC Rules Strategy on expansion of FHTP Addressing TP aspects of risks and capital Addressing TP aspects of Intangibles (phase 2) Addressing avoidance of PE status Addressing TP aspects of other high risk transactions Multilateral Instrument Revision of HTP Criteria Addressing TP interest deductions September 2014September 2015December 2015

16. G20 Finance Ministers Meeting, 18-19 July 2013, Moscow: “Ensuring that all taxpayers pay their fair share of taxes is a high priority in the context of fiscal sustainability, promoting growth, and the needs of developing countries to build capacity for financing development.” G20 Leaders Meeting, 5-6 September 2013, St. Petersburg: “We fully endorse the ambitious and comprehensive Action Plan [..]. We welcome the establishment of the G20/OECD BEPS project and we encourage all interested countries to participate. Profits should be taxed where economic activities deriving the profits are performed and where value is created. (…) Developing countries should be able to reap the benefits of a more transparent international tax system, and to enhance their revenue capacity, as mobilizing domestic resources is critical to financing development.” Australian Presidency: also reflected in the G20 DWG mandate An inclusive process 16

17. Developing countries’ input G20 DWG Report – identifying issues and possible solutions Mechanisms for consultation – Task Force on Tax and Development – OECD Global Relations Program – Global Fora on Tax Treaties, on Transfer Pricing and on VAT – The United Nations UN participates in the tax work of the OECD UN Subcommittee on Base Erosion and Profit Shifting Issues for Developing Countries (October 2013) 17

18. Global Forum on Tax Treaties – September 2013 Task Force on Tax and Development – October 2013 4 high-level dialogue events – February/March 2014: – 20-21/02/2014: Asia / KTC (Korea/Seoul) – 27-28/02/2014: Latin America / CIAT (Colombia/Bogota) – 18-19/03/2014: Africa / ATAF (South Africa/Johannesburg) – 25/03/2014: Francophone countries / CREDAF (France/Paris) Global Forum on Transfer Pricing – 26-27 March 2014 Task Force on Tax & Development special meeting on BEPS and Developing Countries – 28 March 2014 Global Forum on VAT – 17-18 April 2014 Engaging with developing countries 18

19. And not just talk… Helping implementation through developing capacity: Tax and Development Programme: – Transfer Pricing programme with World Bank, EU and others – Tax incentive reviews – Tax Inspectors Without Borders Global Relations Programme of international dialogue: – 75 events per year in 20 locations – 1800 officials and 100+ countries

20. Consultation with non-governmental stakeholders is also key – Business and Industry Advisory Committee (BIAC) – Trade Union Advisory Committee (TUAC) – Non-governmental organisations, think tanks, and academia Mechanisms – Requests for input published on the OECD website – Discussion drafts published for comments – Public consultations organised to discuss the comments received on the discussion drafts – Regular updates regarding progress of the work provided via Webcast sessions Stakeholders’ input 20

21. BIAC Dialogue on the BEPS Action Plan – October 2013 Joint ITUC-TUAC meeting on Corporate Tax Planning – November 2013 Public consultations on Transfer Pricing matters – November 2013 Request for input on Digital Economy – November 2013 New webpage with Event Calendar – December 2013 – http://www.oecd.org/ctp/calendar-planned-stakeholders-input-2013-2014.pdf http://www.oecd.org/ctp/calendar-planned-stakeholders-input-2013-2014.pdf First Webcast session "Update on 2014 Deliverables“– January 2014 – http://www.oecd.org/tax/beps-webcasts.htm http://www.oecd.org/tax/beps-webcasts.htm Request for input on TP Documentation – January 2014 Publication of Discussion Drafts – February/March 2014 Public Consultations – April/May 2014 Consultation with stakeholders 21

22. Recent public consultations Treaty abuse: 14-15 April Digital Economy: 23 April Hybrids: 15 May Country by Country Reporting: 19 May Documents will be published approx. 3 weeks earlier Stay tuned! http://www.oecd.org/ctp/calendar-planned-stakeholders-input-2013-2014.pdf 22

23. Publication of Discussion Drafts: –TP Aspects of Intangibles (Action 8): July 2013 –Country by Country Reporting (Action 12): 30 Jan 2014 –Tax Treaty Abuse (Action 6): 17 March 2014 –Hybrid Mismatch Arrangements (Action 2): 19 March 2014 –Tax Challenges of the Digital Economy (Action 1): 24 March 2014 Other 2014 Deliverables –The Multilateral Instrument feasibility study (Action 15) –Harmful Tax Practices (Action 5, phase 1) 2014 Deliverables on track 23

24. Model treaty provisions and recommendations regarding domestic rules to prevent the granting of treaty benefits in inappropriate circumstances circumventing limitations of treaty or domestic law. A combined LOB and main purpose test Clarify that tax treaties are not intended to be used to generate double non- taxation. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. Tax Treaty Abuse (Action 6) 24

25. Specific rules aimed at circumventing treaty limitations – aimed at treaty shopping (inclusion of derivative benefits clause in LOB)? Main purpose rule test? –Guidance already in Art 1 Prevent abuse targeted at circumventing domestic tax law using treaties – relationship between treaties and domestic rules Treaty abuse - issues 25

26. Unify and streamline country documentation rules to assist compliance Require global master file to provide a big picture of global TP outcomes for risk assessment (not auditing) purposes, and local file for particulars Mandate from G8 and G20 is to undertake these items for the benefit of tax administrations particularly in developing countries. Key issues for business: proportionality – what needs to be included and confidentiality – how to ensure maintained – should these be provided to tax administrations directly or under article 26 of treaties? TP Documentation and Country by Country Reporting (Action 13) 26

27. Changes during discussions - Local file now includes transactional analysis (not master file); as well as reporting activity on a country basis – employees, assets etc and financial data but not by entity; finally includes list of entities and PEs in country with activity codes. Guidance for companies on preparing information needed. Confidentiality – how to ensure maintained – should these be provided to tax administrations directly or under article 26 of treaties. Issue still under discussion. Country by Country Reporting: emerging views 27

28. Members: Chile, Mexico CFA Associates to the BEPS Project: Argentina, Brazil, Colombia, CFA Participants: Costa Rica Developing Countries: BEPS Consultation: Bogota, 27-28 Feb. 2014, plus  Task Force on Tax and Development  OECD Global Relations Programme  Advisory Group for Co-operation with Partners  Global Fora on Tax Treaties, on Transfer Pricing, and on VAT  G20 Development Working Group in cooperation with IMF and other IOs  UN – OECD co-operation on BEPS 28 Globalising BEPS and the region

29. Key priorities: Interest deductibility, other base eroding payments, treaty abuse, and transfer pricing actions Other issues outside BEPS: tax incentives, capacity building and awareness raising. Issues for developing countries 29

30. Next BEPS steps Discussion drafts and consultations: Check our website for announcements and sign up for alerts http://www.oecd.org/tax/beps.htmhttp://www.oecd.org/tax/beps.htm Second Regional consultations. Probably 10 Oct. in Santiago de Compostela – Spain (back to back with CIAT Technical Conf.) Work on implementation though the OECD Global Relations Programme. http://www.oecd.org/tax/tax-global/ http://www.oecd.org/tax/tax-global/ 30

31. QUESTIONS? Further information: http://www.oecd.org/ctp/beps.htm Questions and further information 31 Register to receive free e-mail alerts on the latest tax news from the OECD Centre for Tax Policy and Administration  www.oecd.org/oecddirectwww.oecd.org/oecddirect