Yesterday was a landmark day in the tax world. It was a day that will inevitably have far-reaching implications for multinational companies and all businesses involved in the digital economy: the OECD published its final recommendations from its Base Erosion and Profit Shifting project (BEPS) which introduced, in its own words, “the most fundamental changes to international tax rules in almost a century”.
As a reminder, the project is targeted at updating the international tax rules, to take into account the new digital and online world we operate in, but it is also aimed at clamping down on the types of tax avoidance strategies which have long been adopted by some large multinational enterprises. An ambitious project, so how far has it actually gone in its recommendations?
The answer is that it has gone much further than many observers expected, but inevitably not far enough to satisfy those outraged at the structures adopted by some household name corporate groups. So for instance, the report is impressive in reaching consensus on widening the concept of permanent establishment, introducing anti-avoidance rules into tax treaties and updating transfer pricing rules and requirements. These changes and others will have a profound impact on the way many conduct their cross-border trades. It has not, however, managed to agree to the more radical proposals – such as introducing a new digital withholding tax or doing away with the arm’s length principle in the world of transfer pricing.
So as the multinationals and advisers digest the hundreds of pages of the reports, where do we go from here? We can expect to move now into the “implementation” stage as countries move to adopt many of these measures into their own local law and gear up to change many of their individual tax treaties. The big outstanding questions are: which countries will adopt the measures, when will they adopt them and how? Watch this space for further comments on the proposals and for our essential guidance through these important changes as they develop.