December 14, 2021
What is BEPS?
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used mainly by multinational enterprises to exploit the loopholes in tax rules so as to avoid paying tax. These tax planning strategies artificially shift profits to low or no tax jurisdictions where there is little or no economic activity. The OECD and G20 inclusive framework on BEPS have collaborated on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
What is the OECD?
The Organisation for Economic Co-operation and Development (OECD) is an international organisation of 38 governments that exists in order to further trade and economic progress, as well as find solutions to the various social, economic, and environmental challenges which face the global community.
Born in 1961 out of the reformation of the post-World War II-era ‘Organisation for European Economic Co-operation (OEEC), its initial membership of 20 European nations was expanded by the addition of non-European countries such as Canada, the USA, and Japan.
Today, the general criteria of an OECD member country are to have both a high-income economy and a very high Human Development Index (HDI), as well as to be regarded as a ‘developed country’. Demonstratively, in 2017 the 38 OECD member countries collectively comprised of 42.8% of global GDP.
Their stated goal is “to shape policies that foster prosperity, equality, opportunity and well-being for all.”
OECD has developed 15 actions to help Governments with domestic and international rules and instruments to address tax avoidance and to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. The 15 action points are discussed below:
The two-pillar solution
The OECD and G20 inclusive framework on BEPS have agreed on a two-pillar solution to address the tax challenges arising from the digitalization of the economy. The agreed components in each of these two pillars are detailed below:
OECD Pillar -1
Pillar 1 becomes applicable for multinational companies with global turnover above 20 billion euros ($24 billion) and profit before tax of 10%. Revenue will be sourced to the end market jurisdictions where goods or services are used or consumed. To facilitate the application of this principle detailed source rules will be prescribed. Pillar 1 is designed so as to adhere to the concept of taxation of net income, avoid double taxation and be as simple to administer as possible. When implemented, multinational companies will pay taxes in jurisdictions where they generate revenue. While Pillar 1 is primarily focused on digital companies, it would also apply to consumer-facing businesses in which a company that does not have a physical presence in the jurisdiction sells products directly to consumers.
OECD Pillar -2
Pillar 2 seeks to establish two interlocking rules – (1) an income inclusion rule (IIR) and (2) an undertaxed payment rule (UTPR) which are interwoven to constitute the Global anti-base erosion rules (GloBE) Rules which is the fundamental principle on which Pillar 2 is designed. The IIR imposes top-up tax on a parent entity in respect of the low tax income of a constituent entity. The UTPR denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under IIR. In addition to the above, Pillar 2 also advocates a subject to tax rule (STTR) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below the minimum rate. The GloBE rules are applicable to multinational companies that meet the 750 million euros ($900 million) threshold as determined under BEPS Action 13 (country by country reporting). The minimum tax rate used for IIT and UTPR shall be 15%, whereas the minimum rate for STTR shall be 9%.
How can Kreston Global help?
Kreston Global’s presence in more than 115 countries around the world can help businesses in this era of tougher rules and extensive reporting requirements that can affect SMEs in the multinational supply-chain. Businesses could look at Kreston Global:
- To assist in discussions with tax authorities and handle paperwork.
- To conduct knowledge sharing sessions so as to increase awareness on requirements of the three tier TP documentation structure.
- To perform diagnosis and provide assistance in getting ready for the new compliance obligations.
- Analyse intangibles and determine whether all stakeholders who contribute to development, enhancement, maintenance, protection and exploitation of intangibles are getting their revenue share appropriately.
- Develop processes and procedures to meet TP documentation deadlines so as to ensure that there is an alignment between local and global documentation.
Please contact one of our member firms here, or fill in our enquiry form and someone will be in touch as soon as possible.