For some years the governments of the main developed economies have experienced a loss of tax revenues due to the inability of conventional tax systems to (at least from the viewpoint of the governments concerned) adequately tax the operations of multinational businesses. The decline in the tax base since the beginning of the global economic crisis in 2008 has exacerbated the problem.

In response, in February 2013 the Organisation for Economic Co-operation and Development (OECD) published a report on Base Erosion and Profit Shifting identifying the perceived deficiencies in existing international tax and transfer pricing rules. On 19 July 2013 the OECD published an Action Plan to address these deficiencies. It proposes 15 action points subdivided into transparency and disclosure actions, treaty-related actions, and permanent establishment and transfer pricing actions. The Action Plan may be downloaded from the OECD website by following this link.

The Action Plan contains a wide range of actions, with target completion date of 31 December 2015 or earlier. Although much of the popular attention on this issue has focused on businesses operating in the digital economy such as Amazon and Google, most of the proposed initiatives will also affect companies operating in the conventional economy. They include a strengthening of the CFC rules and initiatives to limit the erosion of the tax base by use of interest deductions and other financial payments, to counter harmful tax practices more effectively, taking into account transparency and substance, and to prevent treaty abuse.

There is a very strong focus on substance throughout the Action Plan, not just directly, but also in the context of issues such as hybrid instruments, avoidance of permanent establishment status and ownership of intellectual property.   We will monitor and report progress of the Action Plan and we recommend that clients that are potentially affected by any changes should consider carrying out a risk assessment of their existing and planned structures, taking into account the increased emphasis on substance and transparency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.