The BEPS (Base Erosion and Profit Shifting) programme is an OECD initiative, endorsed and approved by the G20 group of leading nations, designed to identify ways of providing more standardised global tax rules.
BEPS is an umbrella term used describe tax planning strategies which exploit mismatches and discrepancies between the tax rules of different jurisdictions, allowing companies to minimise their overall corporation tax payable, either by making tax profits disappear, or by shifting them to low tax jurisdictions where there is little or no genuine activity. In general, BEPS strategies are not illegal; they just take advantage of the different tax rules which apply in different tax jurisdictions.
Examples of the practices that the BEPS initiative is attempting to eliminate include the practice of reducing the taxable base (base erosion) and the practice of shifting taxable profits from high to low tax countries (profit shifting). An example of the former is using large interest payments to reduce taxable profits, whilst the latter is exemplified by the transfer of IP (Intellectual Property) and income derived from it from the US (high tax) to Bermuda (low tax). It also covers the highly-publicised cases of multi-nationals like Starbucks, Google, Yahoo and Amazon who operate extensively in countries like the UK whilst paying little corporate tax there, and Apple and its tax arrangements.
BEPs is really an attempt to address one of the challenges of the current global and digital business environent – how to make sure that all companies, including large corporations, pay their fair share of tax.
Following the initial report on BEPS by the OECD in 2013, an action plan was drawn up to tackle “weaknesses” in existing taxation principles, which was endorsed by the G20 Finance Ministers and which spawned further initiatives at the UN and EU level. These initiatives have resulted in a number of new policies which have been created at both the national and international level to prevent Base Erosion and Profit Shifting.
The extensive Action Plan on BEPS published by the OECD identified 15 separate action points which needed addressing. These included:
- Addressing the tax challenges of the digital economy;
- Neutralising the impact of hybrid mismatched tax agreements;
- Strengthening CFC (Controlled Foreign Company) rules;
- Limiting the extent to which interest deductions and other financial payments can reduce base taxation;
- Countering harmful tax practices more effectively, and preventing treaty abuses;
- Changes to transfer pricing arrangements; and
- Requiring taxpayers to disclose aggressive tax planning arrangements.
In terms of Cyprus, the Minister of Finance issued a Decree on 30 December 2016, introducing mandatory country by country reporting requirements for multinational groups with a consolidated annual turnover in excess of €750 million (so-called “MNEs”). This Decree is in line with EU Directives as regards the mandatory automatic exchange of information as regards taxation and the OECD BEPS initiatives.
As a result, MNE Groups which have an ultimate parent that is tax resident in Cyprus are required to file annually a report which includes specific financial data such as income, taxes, and other measures of economic activity on a country by country basis. There can also be a reporting requirement, under certain circumstances, for a Cypriot tax resident entity which is part of an MNE Group.
BEPS can be regarded as one more element in the sea of global tax changes which are being brought to bear to prevent not only tax evasion but aggressive tax evasion as well, with the stated aim of promoting transparency, compliance and coherence. It, therefore, takes its place alongside such initiatives as FATCA, the Common Reporting Standard (CRS), AML, and changes to the EU Parent-Subsidiary Directive.
Such initiatives, will, inevitably, lead to a huge increase in the compliance cost for business, because the extent of information that requires reporting for an international group is so much greater than it used to be. BEPS will have a major change on the international business landscape. Policies adopted and practices followed will need to change and improve, and there needs to be a corresponding alteration, for some, in the corporate mentality. The need for compliance and transparency will now trump the use of planning strategies aimed at exploiting loopholes and treaty provisions so as to reduce the tax burden.
For Cyprus, it will have an impact on the corporate sector because certain existing tax arrangements will no longer be attractive or even valid. There will, as a consequence, be a reduction in the number of legal entities registered in the country, whilst, at the other end of the spectrum, increased compliance costs for international businesses headquartered her.
The BEPS programme will be rolled-out in a number of phases, and there will be transitional arrangements in place to cover a number of the “action points”, before finally becoming enshrined in national and international law. However, it is clear that businesses must now expect a degree of scrutiny, and reporting of their tax position and arrangements which goes way beyond what they have been used to in the past, and they need to adapt accordingly.