Questions on BEPS that have been clarified by the OECD - part 1

Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid.

In September 2015, the G20 Finance Ministers called on the OECD to build an inclusive framework for the implementation of the , with the involvement of interested non-G20 countries and jurisdictions, particularly developing economies, on an equal footing (see G20 Communiqué, para. 11). The G20 Leaders reiterated this request in their November 2015 communique, in which they strongly urged the timely implementation of the project and encouraged all countries and jurisdictions, including developing ones, to participate. The OECD/G20 BEPS package had been developed by OECD and G20 countries working together on an equal footing through the BEPS Project of the OECD’s Committee on Fiscal Affairs (CFA). In 2016, the CFA decided to extend the BEPS Project and establish the OECD/G20 Inclusive Framework on BEPS. The CFA identified an initial group of 123 countries and jurisdictions1 that might be interested in joining OECD and all G20 members2 in the Inclusive Framework on BEPS. All members of the Inclusive Framework participate on an equal footing. Since then, additional countries and jurisdictions have joined the Inclusive Framework and today over 135 countries and jurisdictions are members. ***** [1] This identification process included countries: (i) that had participated in the BEPS Project as either a CFA Participant or CFA Invitee; (ii) that were members of, or observers to, the Ad hoc Group for the Multilateral Instrument; (iii) that were members of, or associated with, regional organisations that indicated support for the BEPS Project; and (iv) that expressed an interest in joining the Inclusive Framework. [2] Non-OECD G20 members were already members of the BEPS Project pursuant to the OECD Council Resolution on Partnerships in OECD Bodies

More than 135 countries and jurisdictions from all regions of the world are members of the Inclusive Framework on BEPS (IF). More than two-thirds are non-OECD/non-G20 countries almost half are developing economies. Non-OECD members participate as Associates, meaning that they have the same rights and obligations as OECD countries in all BEPS-related matters. The founding pillar of the agreed architecture for the IF is the co-operation of countries and jurisdictions on an equal footing in the BEPS Project. Like OECD and all G20 members, all Associate members are required to commit to the comprehensive BEPS package, noting the different status of the various measures (e.g. minimum standard, common approach, guidance) and to its consistent implementation. However, it is recognised that non-G20 developing countries' timing of implementation may differ from that of other jurisdictions. In addition, Associates are required to contribute actively to the project, including through policy dialogue and exchange of information, and to make a contribution towards the costs of the project (€ 20 800 in 2020, subject to an annual adjustment for inflation). Once a country or jurisdiction expresses an interest in joining the IF and the IF has agreed that the country or jurisdiction should be invited to become a BEPS Associate, the OECD Council is requested to agree to invite the country or jurisdiction, in accordance with the OECD rules and procedures International organisations can either participate on an ad hoc basis upon the invitation of OECD’s Committee on Fiscal Affairs (CFA) as Invitees to a specific meeting of the IF, or as Observers to the IF on an ongoing basis. To participate as an Observer, international organisations require an invitation issued by the Council, in accordance with Rule 9 of the OECD’s rules and procedures. Invitees and Observers can take part in the discussions orally and in writing. Although they do not have voting rights, they can influence decisions by bringing the views of their membership to the IF’s attention, especially on issues of relevance for developing countries. The OECD’s partners in the Platform for Collaboration on Tax (PCT), a joint initiative with the IMF,  WBG, and the UN, which aims to strengthen collaboration on domestic resource mobilisation, participate as Observers in the Inclusive Framework.   As of December 2020, regional tax organisations, including ATAF, CIAT, CREDAF, CATA, IOTA, and PITAA are also observers along with regional development banks, including the AfDB, the ADB, the EBRD, and the IADB. The World Customs Organization is also an Observer, and the African Union has recently expressed interest and will be joining as an Observer as well.  

Inclusive Framework members are working on the implementation and updating of the OECD/G20 BEPS package. With respect to implementation, the Inclusive Framework is focusing in particular on the four minimum standards in the areas of harmful tax practices, abuse of tax treaties, Country-by-Country reporting for the activities of Multinational Enterprises, and improving dispute resolution mechanisms. Peer review processes ensure the effective and consistent implementation of the minimum standards in order to achieve a level playing field and protect countries’ tax bases. These existing standards and peer review processes are currently being reviewed to ensure they remain appropriate and fit for purpose. The Inclusive Framework also provides support to developing countries to facilitate understanding and implementation of the BEPS measures. Importantly, the Inclusive Framework is also working on new measures to help ensure the international tax system can meet the challenges of increasing digitalisation of the economy. The proposals under discussion include the possibility of a new taxing right which could allocate a percentage of residual profits of MNEs to the jurisdiction of their users or customers even where, because of digitalisation, the company may not have a traditional taxing presence in that country; and a set of rules to ensure all MNEs pay at least a minimum level of taxes on their profits somewhere in the world.

Since its launch by the OECD, the work on BEPS received strong and consistent support by the G20 and it is a key item on the Finance Ministers’ and Leaders’ agendas. Furthermore, all G20 countries have participated as equal partners in the development of the work. Their continued participation and endorsement at the highest levels of government have been critical to guarantee a level playing field and prevent inconsistent standards.The delivery of the BEPS package is concrete evidence of how OECD and G20 members working together can achieve consensus on important reforms with a worldwide impact. Non-OECD G20 countries are Associates in the BEPS Project and participate on an equal footing in the decision making process, at the level of both the OECD Committee on Fiscal Affairs and of its subsidiary bodies carrying out the technical work. In addition, other countries and stakeholders have engaged in regular and fruitful dialogues throughout this process. 

The BEPS Project is carried out through the Committee on Fiscal Affairs (CFA) in its Inclusive Framework format and its relevant subsidiary bodies.  It is led by a Steering Groupwhere developing countries are well represented. Countries’ technical experts participate at the level of subsidiary bodies, such as Working Parties, Task Forces, Ad Hoc Groups and Fora. These are open to all Inclusive Framework members, and are the primary arenas for technical discussions. Countries' senior officials participate in the decision-making process at the Inclusive Framework plenary level to ensure a political commitment to the outcomes.  The OECD Secretariat helps to guide policy making by supporting the activities of the CFA’s various subsidiary bodies, providing insights and expertise, conducting research and preparing draft documents for discussion and approval, and capacity building support.

A Steering Group leads the Inclusive Framework. As its name suggests, the role of the Steering Group is to steer the Inclusive Framework and provide advice to help inform the Inclusive Framework’s decisions. The Steering Group is comprised of members of the Bureau of the Committee on Fiscal Affairs (i.e. from OECD countries), and members from BEPS Associate countries (i.e. from non-OECD countries). Given the important role of the Steering Group, its composition aims to reflect the diverse membership of the Inclusive Framework in terms of both geographic balance and different sizes and characteristics of members’ economies. As the Inclusive Framework has grown, the Steering Group has also adapted, increasing in size and subject to periodic elections with a view to maintaining its representative function.

The OECD Secretariat is headed by the Secretary-General, and in its totality is made up of over 3,000 employees, including economists, lawyers, scientists, political analysts, sociologists, digital experts, statisticians and communications professionals. The OECD Secretariat within the Centre for Tax Policy and Administration (CTPA), i.e. the directorate working on tax issues, has about 200 employees from more than 40 countries. In 2017, given the growing inclusiveness of the work on BEPS, the OECD Council approved the hiring of nationals from countries that are not OECD members, but that are members of the Inclusive Framework on BEPS, to perform work in relation to the BEPS Project. Through this process, essential country knowledge from a wider arrange of countries has been brought into the BEPS work, facilitating the consideration of the full range of perspectives held by members of the BEPS Project, in particular developing countries. The greater diversity of experience and expertise within the Secretariat has enhanced the analytical quality and policy relevance of the work on BEPS.

Decisions of the OECD/G20 Inclusive Framework are taken by consensus at meetings or through a written approval process. All Inclusive Framework members participate on an equal footing. The Rules of Procedure apply to the work of the Inclusive Framework, meaning that members typically get three weeks to comment on any proposal under written procedure pursuant to Rule 6 of the Rules of Procedure. In rare cases, the Chair may decide, on grounds of urgency, to reduce this period. 

The OECD Secretariat provides extensive capacity building support to help developing countries actively participate in meetings of the OECD/G20 Inclusive Framework and its work on addressing the tax challenges arising from digitalisation. Regional outreach and consultation events are organised, as well as regional dialogues with smaller groups of countries on specific digital challenges and the design of possible solutions. As an example, the VAT digital toolkit for Africa was launched on 1 December 2020, involving 19 countries that expressed interest in implementing reforms on the basis of the OECD VAT Standards. South Africa, as an early African adopter of the OECD guidance for international supplies of services has already collected ZAR 8.4 billion (USD 550 million) since implementation of these reforms in 2014.   In addition, the OECD Secretariat delivers a programme of pre-meetings for developing countries ahead of key Inclusive Framework meetings. These pre-meetings provide participants with a briefing on the principal issues to be discussed at the meeting, and access to technical specialists from the OECD Secretariat who can clarify the proposals and answer questions. They also provide a forum for developing countries to exchange views with peers from around the Inclusive Framework ahead of the formal plenary. The OECD also welcomes and facilitates the convening of sub-groups of developing countries, such as members of ATAF.   Due to the novel nature of the proposals on addressing the tax challenges arising from digitalisation, as well as the accelerated timeframe involved, the OECD Secretariat has also been providing accessible bilateral assistance on the proposals and jurisdiction-specific revenue estimation tools to help countries understand the revenue implications of key decision decisions. Support material, such as multilingual recorded presentations, are made available to developing countries, for instance on the economic analysis and impact assessment of the proposals on addressing the tax challenges arising from digitalisation.

Stakeholders (i.e. business representatives, NGOs, academia, development banks and agencies, and interested regional entities) have been engaged in the BEPS work throughout the project. One of the ways that subsidiary bodies, i.e. the technical working groups of the Inclusive Framework, consult with external stakeholders is through formal public consultation processes. Supported by the OECD Secretariat, subsidiary bodies set out technical papers in the form of discussion drafts and working documents, in relation to various BEPS matters. These documents are published together with a request for written input, and the documents as well as the comments are then discussed at a public consultations meeting.   The OECD Secretariat also co-hosts or takes part in regional meetings to discuss BEPS standard setting and implementation issues. During these meetings, specific sessions are generally made open to external stakeholders from the business community, civil society and academia for them to feed their input into the debate.

The OECD classifies its official documents as: 1) Confidential 2) For Official Use and 3) Unclassified. The “Confidential” marking is reserved for material “the unauthorised disclosure of which would seriously prejudice the interest of the Organisation or any of its Member countries.” This includes documents related to sensitive intergovernmental negotiations.

The OECD has been working with civil society since it was founded. Over the decades, the size, scope and capacity of civil society around the world have increased dramatically and so has the OECD’s engagement. This helps ensure that stakeholders’ views are factored into the OECD’s work.  The OECD’s analyses are stronger when they include the perspectives of civil society organisations. The OECD’s core relationship with civil society is based on co-operation with business and trade unions. TUAC is the Trade Union Advisory Committee to the OECD and is the interface for trade unions with the OECD and its members. It is an international trade union, which has consultative status at the OECD, and brings together over 58 national trade unions in OECD countries and beyond that in total represents some 66 million workers. Business at OECD (formerly BIAC) represents key business associations in OECD member countries and key partners. Business at OECD is an international business network with a global membership representing over 7 million companies of all sizes from a diverse group of industries. Business at OECD has a number of policy groups, one of which is its “Committee on Taxation and Fiscal Policy”, which advocates for predictable, stable and transparent tax frameworks and tax administrative practices across issues for the elimination of double taxation and of other tax barriers to cross-border trade and investment. Both TUAC and Business at OECD contribute to the OECD’s work in all areas, including the development of a consensus-based solution to the tax challenges arising from the digitalisation of the economy. In addition, annual consultations with Business at OECD and TUAC take place within the framework of the Liaison Committee of the OECD Council, which is chaired by the Secretary-General of the OECD and open to all member countries. The OECD Ministerial Council Meeting (MCM) Bureau also consults annually with Business at OECD and TUAC ahead of the MCM, which is reflective of the value the OECD places on constructive input from civil society in the policy-making process.

The digital economy is the result of the widespread and transformative process brought on by Information and Communication Technology (ICT). All sectors, ranging from retail, financial services to education and broadcasting and media have been transformed by ICT technologies. So much so, that the digital economy is increasingly becoming the economy itself. It would therefore be difficult, if not impossible, to ring fence the digital economy from the rest of the economy for tax purposes.

The Action 1 2015 Final Report provides a detailed analysis of the digital economy, its business models, and its key features. While the digital economy does not create unique BEPS issues, some of its features exacerbate existing ones. These ones have been taken into account during the work on the definition of permanent establishment, transfer pricing and CFC rules. It is expected that these measures will successfully address BEPS issues in the digital economy once implemented.

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