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Base Erosion Profit Shifting: A game changer for International Tax

Base Erosion Profit Shifting

Base Erosion Profit Shifting: A game changer for International Tax

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Base Erosion Profit Shifting:

A game changer for International Tax

In a borderless business world, transnational activity has in the last few years experienced unprecedented growth and access to global goods and services in today’s highly digitalised economy, is only a push of a button away. Powerful multinational corporations (MNC’s) doing business across countries and most often across continents, have seized the opportunity presented from the interaction of different national tax rules and systems, to minimize their overall tax burden, when compared to the “fair” share of taxes these MNC’s would be due to pay, if measured by real economic activity on the ground. As a result, nowhere have the effects of the internationalization of business, been more profound than in the field of international taxation.

The new economic realities which the majority of society in countries around the globe harshly and abruptly is currently undergoing as a result of the scarcity of financial resources available, has prompted governments to relentlessly explore all possible ways to recoup lost revenues. As a result, large
multinational entities and corporations have been placed under the tax
microscope at the request of political groups (EU, G8, G20) and local
governments, feeling the wrath of the civil society at large following the
deeply rooted belief that the financial crisis is to a large part, caused by
affluent MNC’s and “too big to fail” Banks.

The Base Erosion Profit Shifting Mandate

As a result, the leaders of the G20 have given a clear mandate to OECD to
develop and deliver an action plan that would alleviate tax “injustice” and
level the playing field for large and small corporations and taxpayers
internationally. The BEPS initiative, as it is widely known, is by far the
largest and most prominent project that has been undertaken to date by the OECD.
The BEPS action plan (first published in June of 2013) aims at modernizing (in some cases re-writing) the universal rules and fundamentals on which the
international tax system came to exist as early as the beginning of the 20th
century. Admittedly, empirical data made public in recent months and years,
reveals that the tax rules that were adopted some decades ago to foster and
develop the global economy of another century, may not have kept pace with
today’s highly mobile and heavily digitalised business environment.

The BEPS action plan therefore considers possible measures that can be
unilaterally but most importantly multilaterally adopted by countries, in an
effort to tackle the perceived shortcomings and apparent abuses in the existing international tax arena, curbing tax avoidance and eliminating tax evasion.

The Action Points

The BEPS action plan comprises of 15 recommendations or key points with the most important ones being the following:

  • Addressing the tax challenges presented by the Digital economy;
  • Neutralizing the effects of Hybrid arrangements;
  • Strengthening Controlled Foreign Company rules;
  • Limiting taxable base erosion by Interest and Royalty deductions;
  • Countering harmful tax practices and promote Substance and Transparency in
  • corporate affairs and governance;
  • Deterring Tax Treaty abuses (commonly known as Treaty shopping);
  • Preventing the artificial avoidance of a Permanent Establishment (P.E);
  • Aligning Transfer Pricing rules with value creation;
  • Requiring taxpayers to disclose aggressive tax planning arrangements to the
  • Tax authorities.

 

A tight deadline adopted

The OECD has under the pressure exerted by the G20, adopted a very optimistic timetable for implementing its action plan. A timeline of September 2014 has been set for addressing the challenges posed by the digital economy, proposing measures to prevent the artificial creation of a P.E, addressing tax avoidance through hybrid arrangements and limiting treaty abuse with the rest of the action points having a timeline to be addressed by December of 2015 at the latest.

KPMG's International Tax

KPMG International, through its in-house BEPS steering committee which brings together leading Tax experts from around the globe, is closely following these developments and constructively contributes through suggestions and
recommendations to the ongoing discussion invitations and public consultations organized by the OECD. KPMG has a long record of actively participating and enriching the consultative processes and dialogue, on global issues that equally affect multinationals and “mom and pop” shops, by sharing globally, knowledge and expertise acquired locally.

Our fully dedicated International Tax team in Cyprus, is an integral part of
this global KPMG network, offering highly specialized and custom made advice on complex Tax issues, drawing from the wealth of experience and knowledge that is available through our global network (at the push of a button!) and making sure that our clients navigate safely through these turbulent and challenging, but full of opportunities times that we live in.

KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International") a Swiss entity. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International Cooperative ("KPMG International") or KPMG member firms.

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