BEPS 1.0 – FIRST PHASE OF THE OECD/G20 BEPS PROJECT

In the context of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, the 15 final actions were published to equip governments with domestic and international rules and instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.

The OECD/G20 BEPS Project has identified the tax challenges of the digitalization of the economy in the 2015 BEPS Action 1 Report (Action 1).

According to Action 1, the digitalization can not only exacerbate BEPS issues, but also raise a series of broader tax challenges. The recent challenges were acknowledged as going beyond BEPS, which were identified as relating to the question of how taxing rights on income generated from cross border activities in the digital age should be allocated among jurisdictions. Several potential options to address the above concern were discussed in Action 1, but more were ultimately recommended.

In the end of Action 1, OECD has called for continued work with the further report to be produced by 2020.

The evolution of the OECD/G20 BEPS Project, from securing political commitment to take action in 2013 to the finalization of detailed actions to counter BEPS has ended the first phase of the OECD/G20 BEPS Project, which are commonly referred as “BEPS 1.0”.

POST-BEPS 1.0 – MONITORING AND IMPLEMENTATION PHASE

After that the BEPS action plans have been published, the implementation phase are entered into. The establishment of an OECD/G20 Inclusive Framework on BEPS in 2016 is a case study of multilateralism, which is effective in the face of  global tax challenges. All countries and jurisdictions joining the framework will participate in this review process, which allows members to review their own tax systems and to identify and remove elements that pose BEPS risks.

The Inclusive Framework on BEPS  is primarily concerned with reviewing the implementation of the minimum standards (Action 5, Action 6, Action 13 and Action 14) agreed in the BEPS Project and the results of the peer reviews show strong implementation throughout the world.

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BEPS 2.0 – THE PHASE OF ADDRESSING THE TAX CHALLENGES OF DIGITAL ECONOMY

As requested by G20 Finance Ministers at the meeting in Baden-Baden in March 2017, in March 2018, the Inclusive Framework issued the Interim Report 2018 – Tax Challenges Arising from Digitalization with an in-dept analysis of tax challenges, including remaining BEPS risks and the questions of how taxing rights on income generated from cross border activities in the digital age should be allocated among jurisdictions. In addition, the Interim Report 2018 has identified three characteristics frequently observed in certain highly digitalized business models, namely:

  • Scale of mass
  • Heavy reliance on intangible assets
  • Importance of data, user participation and their synergies with intangible assets

However, the conclusions from this analysis were not consented, the Member of the Inclusive Framework committed to continue working together to finalize a report in 2020 aimed at providing a consensus-based long-term solutions.

In line with the analysis included in the Action 1 Report and the Interim Report 2018, the Members of Inclusive Framework has suggested many proposals, which focused on the allocation of taxing rights and other unresolved BEPS issues. The proposals were grouped into the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalization of the Economy (The Programme of Work) and divided into two pillars:

  • Pillar One focuses on the allocation of taxing rights and describes the different technical issues that need to be resolved to undertake a coherent and concurrent revision of the profit allocation and nexus rules
  • Pillar Two focuses on remaining BEPS issues, and describes the work to be undertaken in the development of a global anti-base erosion (GloBE) proposal that would, through changes to domestic law and tax treaties, provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation

WHAT NEXT?

For a solution to be delivered in 2020, the outlines of the architecture will need to be agreed by January 2020. Throughout 2020 the Inclusive Framework, Steering Group and Working Parties will work on agreeing the policy and technical details of a consensus-based, long-term solution to the challenges of the digitalization of the economy and will deliver a final report by the end of 2020.

IMPLICATIONS

The two Pillars of BEPS 2.0 could lead to an important changes in the global tax framework. The final outcome of BEPS 2.0 could dramatically transform the prevail international tax and transfer pricing landscape under which the MNEs operate.

Taxpayers should stay informed closely the developments in BEPS 2.0 as well as assess and evaluate the potential impacts of these concerns for reaching changes.