Base Erosion And Profit Shifting Project Research Articles

ANALISIS PENERAPAN CONTROLLED FOREIGN COMPANY RULES DALAM MENGATASI BASE EROSION AND PROFIT SHIFTING DI INDONESIA

One cause for the inability to achieve the expected tax revenue target for some last years was the practice of tax avoidance. One form of tax avoidance is the utilization of Controlled Foreign Company (CFC) to defer the recognition of income from overseas over WPDN capital to be taxed in the country. This practice is also faced by many other countries in the world. The issue of the Base Erosion and Profit Shifting (BEPS) has been of concern to developed and developing countries. G20 countries cooperate with OECD to form a BEPS Project to formulate measures to address these BEPS. Indonesia as one of the Associate Members of the Project BEPS has a position that is parallel to the other OECD countries and participates in implementing the BEPS results. BEPS Project has resulted in BEPS Action Plans which one of them is Action 3: Strengthening CFC Rules. Action 3 will provide recommendations to the domestic law related to the design of CFC Rules. Until now, related to Action 3, BEPS Project has issued a Public Discussion Draft Action 3: Strengthening CFC Rules. This draft is divided into seven "building blocks" required for CFC Rules to be effective. The aim of this study is to analyze the effectiveness of CFC Rules in Indonesia, whether it is sufficient to prevent BEPS. After that, we can determine what steps should be taken by Indonesian tax authorities to strengthen the CFC Rules in Indonesia based on seven dimensions of building blocks. The conclusions of this study are (1) CFC Rules in Indonesia as a whole have not been able to overcome BEPS; and (2) When compared with the recommendations of the Discussion Draft Action Plan 3, CFC Rules Indonesia needs to be improved. However, the necessary improvements should be adjusted to match the needs and characteristics of Indonesia.

When Global Tax Reform Meets International Trade Rules: An Inquiry into the Intersection of the GATS and the BEPS Package

A recently published World Trade Organization (WTO) Panel report on Argentina – Measures Relating to Trade in Goods and Services (“Argentina – Financial Services”) has drawn attention to the intersection of rules governing trade and direct taxation of multinational enterprises (MNEs). Nevertheless, such intersection was inevitable since the creation of the General Agreement on Trade in Services (GATS). While measures related to direct taxation are not carved out from the scope of application of the GATS, the drafters have left rooms for WTO Members to take measures to ensure the effective imposition of direct taxes and to conclude agreements among each other to avoid double taxation. However, the depth and breadth of the current global tax reform under the auspices of the Organisation for Economic Co-operation and Development (OECD) and the G20 goes beyond the scenarios envisaged by the GATS negotiators back in the 1990s. As will be explored by this paper, the Argentina – Financial Services case revealed just the tip of the iceberg. Whether the meeting between the global tax reform and the WTO rules will be amicable depends on how countries choose to implement and advance the tax reform project and how the WTO Members intend to accommodate the current trade rules to such reform project. This paper tries to assist this process by providing a systemic analysis of the measures envisaged by the OECD/G20 Base Erosion and Profit Shifting (BEPS) project and how the provisions of the GATS could be relevant. Keeping in mind that the GATS is still a “young” multilateral trade agreement with ambiguities and limited guidance in jurisprudence, recommendations will be proposed concerning the application of the GATS to measures with manifold policy objectives, keeping in mind the asymmetry of the WTO disciplines on goods and services. To put the issue into perspective, this paper will start with an inquiry into the genesis of the current global tax reform project and the origin of its intersection of the GATS and the BEPS Package. Part II will take a detailed look at how the recommendations in the 2015 BEPS Package could potentially cause trade concerns under the GATS, and if the Agreement’s exception clauses are sufficient to excuse the measures taking to implement these recommendations. In doing so, measures related to the BEPS Package are categorized into three groups, namely measures specifically recommended by the BEPS Package; measures designed domestically, but under the guidance developed by the BEPS Package; and measures countries may unilaterally adopt to counteract non-compliance or induce compliance of BEPS Package’s recommendations by other countries. Finally, Part III will spell out recommendations to ensure an amicable meeting between the BEPS Project and the international trade rules.

The G20 as the Global Agenda-Setter and Political Consensus Builder in Global Tax Governance

In 2012, the Group of 20 (G20) mandated the Organisation for Economic Co-operation and Development (OECD) to fundamentally reform international tax standards through the Base Erosion and Profit Shifting (BEPS) project. While much research has already focused on the content of the ensuing changes, the G20’s role in the international tax regime has garnered little attention. This paper investigates the G20’s role as a global policy maker in the international tax regime. Drawing from the theories of neofunctionalism and neoinstitutionalism, we seek to determine through an institutional approach how the G20 functions. Our analysis-framework comprises seven components reflecting the role, competences, interests, and activities of the G20 in the area of global tax governance, and particularly in the context of the BEPS project. We will also highlight the relationship between the G20 and the OECD to this background. We conclude that the G20’s functioning can be best described as the global agenda-setter and political consensus builder on international tax matters.

The Questionable Legitimacy of the OECD/G20 BEPS Project

textabstractThe global financial crisis of 2008 and the following public uproar over offshore tax evasion and corporate aggressive tax planning scandals gave rise to unprecedented international cooperation on tax information exchange and coordination on corporate tax reforms. At the behest of the G20, the OECD developed a comprehensive package of ‘consensus-based’ policy reform measures aimed to curb base erosion and profit shifting (BEPS) by multinationals and to restore fairness and coherence to the international tax sys- tem. The legitimacy of the OECD/G20 BEPS Project, how- ever, has been widely challenged. This paper explores the validity of the legitimacy concerns raised by the various stakeholders regarding the OECD/G20 BEPS Project.

BEPS Action Plan: Global Tax Cooperation

Given the dynamics of economic and financial globalization, national tax authorities often do not have adequate tools to effectively combat tax avoidance practices that exploit gaps in the existing tax rules. To address the global problem of tax base erosion and profit shifting (BEPS), the Organisation for Economic Co-operation and Development (OECD) and the Group of 20 (G20) have consolidated their efforts on an equal footing. Their joint BEPS Action Plan allowed to involve more than 100 countries, both developing and advanced, in designing and implementing rules aimed at aligning the generation of profits and their taxation and increasing the predictability, transparency and flexibility of the international tax environment for business.This article examines the history of the BEPS project, emphasizing the mode of OECD-G20 engagement in global tax governance, describes the key recommendations made by international institutions to tackle BEPS and forecasts further developments in the area. The author pays special attention to the mechanisms designed to stimulate participation by non-OECD and non-G20 members in the BEPS project and the stance of business on the proposed reforms. He concludes that the work on BEPS is far from finished. Different interpretations of standards, risks of strengthening tax competition between countries and potentially excessive tax burdens on businesses should be addressed. In this regard, OECD and G20 should strengthen their efforts to ensure the participation of developing countries and the private sector, which would stimulate other reforms in international taxation to support global growth and development.

Formulary Apportionment: A Revamp in the Post-Base Erosion and Profit Shifting Era?

In this article, the author analyses the advantages and drawbacks of adopting Formulary Apportionment (FA) as the governing mechanism for the commercial and financial relations between associated enterprises of multinational enterprises (MNE) groups. The author considers the origin of FA, which countries are adopting it, and what its future may be in light of the implementation of the base erosion and profit shifting (BEPS) Action Plan. In particular, the author suggests that international organizations should go more in depth on the analysis of the mechanism, from an empirical as well as a theoretical standpoint, as a by-product on the current work on the application of the profit split method carried out by the Organisation for Economic Cooperation and Development (OECD) in light of the BEPS project.

BEPS Action 7: Evaluation of the Agency Permanent Establishment

The article is devoted to one of the most controversial items of the Base Erosion and Profit Shifting (BEPS)-Project – Action 7, particularly the agency Permanent Establishment (PE) of Articles 5(5) and 5(6). Marking the threshold for source-state taxing rights, the PE has been at the centre of an entrenched debate since the concept’s emergence in the nineteenth century. Thus, working on the agency PE the OECD soon found itself caught between a rock and a hard place. With strong national interest for a high threshold on the one side and the increasing need to rebalance taxing rights due to globalization and the emergence of modern business models on the other side. This conflict shaped the consolations process and final output of Action 7. Ultimately, the Final Report settled for much less than the initially pursued globally supported holistic approach. The need for a substantial reform, however, remains and becomes more pressing with the introduction of unilateral measures. Moreover, with the agency PE in the spotlight, attention will inevitably be directed to the attribution of profits, an issue neglected in the BEPS Project. The inadequacies of the current attribution rules are examined in the second part of this article and a proposal is put forward.

Taxation and Pricing of Intangibles

This research paper, by Alan Ross, was commissioned by the Singapore Tax Academy and SMU Centre of Excellence for Taxation. Alan was previously Head of Tax at PwC Singapore and held a number of leadership positions within PwC overseas prior to Singapore. He has over 30 years experience in International Tax and Transfer Pricing including major issues relating to the taxation of intangibles. The paper first addresses the importance of intangibles in terms of their massive contribution to corporate values in recent years. The relative ease of migrating ownership of intangibles from one jurisdiction to another, possibly lower tax jurisdiction, highlights the concern of many tax authorities. These authorities naturally want their fair share of taxes from the profits generated by such important value drivers where these are wholly or partly situated in their respective jurisdictions. This also explains the significant focus on intangibles in the OECD’s Base Erosion and Profit Shifting (BEPS) work. It should however be noted that this paper was issued shortly before the final BEPS papers were issued by the OECD in October 2015. While nothing fundamental should be changed as a result of the final OECD recommendations, the paper has not been updated for those. The paper focuses significantly on the issues raised by the BEPS project including addressing frameworks for analysing intangibles transactions, the importance of contractual terms and their consistency with actual conduct and functions and of course, the need to allocate intangible profits to those locations where the substantive value creating functions are undertaken. In this respect the so-called “DEMPE” functions are addressed (i.e. Development, Enhancement, Maintenance, Protection and Exploitation) and usefully illustrated by the author with practical real life examples detailing how the intangibles process can be mapped out to identify the truly important functions and risks, the range of values that might be attached to those and where they are carried out or in substance reside. Methodologies for pricing various intangibles transactions are explored in some depth including the availability (or lack thereof) of good third party comparables and the usefulness and limitations of publicly available databases in searching for the same. Comparable Profits methods and Profit Split methodologies are also discussed again noting the practical difficulties associated with applying such methods to unique intangibles. The pricing methods are usefully linked by the author to various methods for valuing intangibles as these should clearly be consistent with the pricing of individual intangible transactions and vice versa. The valuations section covers cost based, market based and income-based approaches to valuations, forecasting issues and discounted cash flow models including the use of Capital Asset Pricing Models (CAPM). The paper also explores some of the difficulties in valuing early stage technologies and goes on to address more sophisticated approaches such as the use of Real Options and Game Theory. A practical section linked to detailed country Appendices addresses how various Asian and Western countries presently approach certain intangible transactions including the sale or purchase of intangibles, licensing of intangibles and cost sharing. The section explains some of the barriers and uncertainty of tax treatment that often exists especially in developing nations. The paper concludes with a brief commentary on so-called Patent Box regimes that have been introduced in a number of countries and discusses the proposed moderation to such regimes in the “Nexus” approach put forward by the OECD. A number of PwC participants from Singapore and around the world helped with certain sections of the paper and provided input for the country responses that were summarised and incorporated into the data provided in Appendices 3 and 4. The author extends his sincere thanks to them. Similarly, thanks were also extended to Daryl Tan Junyang, a student at SMU who contributed research to several sections.

Base Erosion and Profit Shifting: The New Framework of International Taxation

Base Erosion and Profit Shifting (BEPS) refers to a set of tax avoidance practices that deny the tax revenues to a nation by eroding the tax base of the nation where economic activities generating the profits are performed and where value is created, by shifting the tax incidence to locations where no or low taxes are payable (tax havens). BEPS can be achieved through the use of transfer pricing tactics, treaty shopping, digital economy maneuverings and other dubious means. The term BEPS has been used in a project headed by the OECD which produced final reports in October 2015 in response to fifteen action points agreed previously (July 2013). The BEPS project is an attempt by the world’s major economies to rewrite the rules on corporate international taxation so as to address the widespread perception that the corporations, especially MNCs, don’t pay their fair share of taxes. It seeks to ensure that MNCs report profits where economic activities are carried out and value is created.

Does a More Transparent International Tax Environment Provide the Same Outcomes as Transfer Pricing Would But in a Less Arbitrary Way?

Effective tax planning involving transfer pricing is made possible due to discrepancies between the tax regimes offered by different countries. The mobility of intangible assets and the significant profits yielded by exploitation of intangibles make tax planning using transfer pricing of intangibles the most controversial and thorny issue in international taxation. The double Irish Dutch sandwich structure is used to illustrate how differences between different tax regimes are exploited, allowing multinationals to minimise their tax bills.International efforts to tackle revenue losses have been led by the OECD, recently culminating in the base erosion and profit shifting (BEPS) project. However, a historical review of the OECD’s work on tackling harmful tax practices reveals the limitations of any of such attempt. Adoption of a tax regime always falls within a state’s sovereignty and cannot be interfered with by any other country or organisation. Despite their participation in the BEPS project, many OECD countries and European Union (EU) member states are adopting preferential tax regimes and lower corporate income taxes to attract investment in relation to intangible development and exploitation. Examination of the OECD’s campaign against harmful tax practices and the latest developments in the area of information exchange illustrate the difficulty of reaching a consensus on a substantial standard, and the diverse national interests in setting their own tax polices. Nevertheless, improving transparency can be regarded as a compromise to tackle harmful tax practices. Measures to improve transparency have been reinforced by the OECD’s Action plan on base erosion and profit shifting (BEPS Action Plan).The existing preferential regimes for research and development and commercialisation of intangibles force multinational enterprises to consider the tax consequences of their global operation. However, these enterprises are facing a more transparent international tax environment and better-equipped tax authorities, which makes arbitrary tax planning of transfer pricing less possible.

The BEPS Project: Disclosure of Aggressive Tax Planning Schemes

Action 12 of the Base Erosion and Profit Shifting (BEPS) Action Plan promises the development of new rules on disclosure of aggressive tax planning arrangements. This article examines the meaning of the phrase, the experience of the UK with Disclosure of Tax Avoidance Schemes, and raises some issues about the Organization for Economic Cooperation and Development (OECD) plans in this area.

Transfer Pricing in BEPS: First Round — Business Interests Win (But, Not in Knock-Out)

Reforming the transfer pricing regime is not merely one of many equal tasks faced by the BEPS initiative; it is its core task. The Organisation for Economic Co-operation and Development (OECD) has responded to the challenge with an ambitious plan to reform the substantive transfer pricing rules so that they could realistically meet the challenges of sophisticated tax planning - particularly of transactions involving intangibles - and to standardize reporting to reduce compliance and enforcement costs for all stakeholders. On September 2014 the OECD has delivered only partially on these promises, progressing very little on the substantive reform front, yet meeting the not less important goal of standardizing transfer pricing reporting. The article takes a critical look at the progress of the BEPS project in the transfer pricing area, and makes recommendations to support the OECD's original intentions as articulated in the initial Base Erosion and Profit Shifting (BEPS) reports.