On 16 September 2014, the Organisation for Economic Co-operation and Development published a number of technical recommendations to create international rules against base erosion and profit shift.
Said recommendations, addressed to a total of 44 countries (members of the OECD, G20 and future members) are part of a joint project between the OECD and the G20. It has been designed to create a unique group of international tax rules to end the artificial shifting of profits among other Tax jurisdictions.
These recommendations and their implementation by the relevant national authorities aim to counteract the effect of aggressive structures and reduce transfer price manipulation in the intangibles area, as well as implementing a country by country tax report template, which shall provide tax authorities with information on turnover, profits, staff and tax paid by the company in each State
Recommendation no. 1: Tax challenges in the digital economy
The first and most far-reaching of these recommendations shall impact the digital economy. Unlike others, this type of economy is based on intangible assets due to its use of massive data – especially personal data – and the difficulty in determining the jurisdiction under which value is created.
The risk of base erosion derived from the same makes it essential to specify the rules to determine transfer pricing.
Recommendation no. 8 and no. 13: Guarantee that the results of transfer pricing match value creation: Intangibles and Re-examining transfer pricing documentation
The OECD believes that urgent measures should be adopted and that the digital sector – although it raises greater challenges in respect of taxable income delocalization – should have the same treatment other sectors have: it should not be more favourable and profit should be declared in the country where the added value is created. That is, transfer pricing results should be in line with value creation in the intangibles area.
Other important recommendations include defining the concept “intangible” as well as adapting the Controlled Foreign Company (CFC) rules to the levy on profits derived from the digital economy.
Recommendation no. 2: Neutralize the effect of hybrid structures
The recommendations are also meant to prevent the effects of hybrid structures that companies use to apply tax regulations which are in conflict with other regulations. The aim is to take advantage of several tax deductions or tax credits simultaneously. To that end, regulations are being developed to design a national legislation that shall prevent any effects arising from said structures, such as double exemption, double deduction (for example, not being able to apply a deduction on a payment in one jurisdiction but being able to apply it in another) or long-term deferrals.
It also foresees the introduction of modifications in the OECD Model Tax Convention on Income and on Capital to ensure that said structures are not used to obtain unjustified advantages in treaties.
Recommendation no. 5: Combating harmful tax practices
The OECD’s recommendations also aim to put an end to harmful tax practices by introducing transparency in preferential regimes as a priority and basic requisites concerning the substance, that is, the existence of an important economic activity to which any of the mentioned regimes apply.
Recommendation no. 6: Prevent abusive use of treaties
The OECD shall also be adopting a measure aimed at preventing the abusive use of treaties to prevent granting benefits in inappropriate circumstances. That is, it aims to avoid the application of treaties in situations which have not been considered (this is known as “treaty shopping”).
In this respect the OECD plans to define the concept “Permanent Establishment” (PE) (which is regulated in article 5 of the OECD Model Tax Convention) to prevent multinational companies from taking advantage of the gaps resulting from not having a definition for PE.
As a reminder, the existence or not of a PE is currently a determining factor in international businesses. This is because the existence or absence of a PE may represent differences in the tax costs of an entity, something that could provoke either the attraction or flight of capitals.
Recommendation no. 15: Develop a multilateral instrument
Finally, the OECD considers that a multilateral agreement would be a way to apply the measures developed in the BEPS and, as a result, it understands that bilateral double tax treaty networks should be modified.
These recommendations were examined by the finance ministers and bank governors of the G20 during a meeting held on the 20th and 21st of September in Cairns, Australia.
40 of the attending countries (among them Spain) agreed to implement these measures in 2017, while the remaining countries could implement them the following year.
According to the agenda prepared by the OECD, the remaining measures (only 7 of the 15 measures in the BEPS report have been approved) should be approved by 2015. Said measures, among other goals, seek to ensure that any transfer pricing results are in line with value creation: risks, capital and other risky transactions, in addition to preventing the fraudulent exclusion of the PE status. These measures are pending approval but once they are published by the OECD we shall analyse them in depth.
To finish, it is important to make a brief reference to the impact that these recommendations shall have on Spanish regulations.
The measures regarding the transfer pricing documentation shall be directly applied by the Spanish authorities, while those aiming to counteract the effects of hybrid structures shall require the modification of Spanish regulations. (The draft bill regarding Corporate Tax already includes two basic hybrid models, in line with the recommendations of the OECD).
Finally, the interpretation of international agreements shall be modified through observations, while any recommendations concerning intangibles shall face more practical difficulties due to being linked to recommendations that shall not be approved until September 2015.