Can B.E.P.S. Survive Without U.S. Support?

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On May 28, 2015, the O.E.C.D. announced the countries that will participate in a meeting to begin substantive work on drafting a multilateral instrument under B.E.P.S. Action 15. Currently, more than 83 countries have expressed interest in joining the discussion, which will take place on November 5 and 6, 2015. The United States was noticeably absent from the list. However, the O.E.C.D. hopes that support will continue to grow in the intervening months and that the meeting may ultimately include as many as 100 countries.

The U.S. Treasury chose not to participate in negotiating a multilateral instrument under B.E.P.S. Action 15. After a careful review of the agenda for the discussion on the multilateral instrument, the U.S. Teasury felt that participation did not seem like a good use of its scarce resources. This decision was prompted by the question, “What is there for U.S. to gain by participating in the discussions?”

Ten Year Throwback

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Two years ago, a U.S. Senate investigation accused Ireland of granting Apple Inc. special tax treatment. This accusation sparked a seemingly never-ending investigation into the state aid granted by certain European countries to specific multinational companies. More recently, Apple, Starbucks, Fiat, and various other companies exposed in the “Luxembourg Leaks” scandal were accused of having paid substandard taxes as a result of agreements between those companies and the Netherlands, Luxembourg, and Ireland, which constituted illegal state aid.

Now, the European Commission (the “Commission”) is looking into the penalties that should be levied upon the income earned through these agreements. The Commission’s investigations into these advance rulings and advance pricing agreements (“A.P.A.’s”) between E.U. member-states and major U.S. multinationals could lead to tax adjustments dating as far back as ten years.

STATE AID

State aid is defined as “an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities.” This does not include subsidies or tax breaks available to all entities. A measure of state aid constitutes an intervention by a state, or through state resources, that gives specific companies or industry sectors an advantage on a selective basis, thereby distorting competition and affecting trade between E.U. member states.

Transfer Pricing Implications of the B.E.P.S. Action Plan

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Determined to eliminate so-called “double non-taxation,” as well as no or low taxation, associated with practices that are perceived to segregate taxable income from the activities that generate them, the Group of Twenty (“G20”) and the Organisation for Economic Co-operation and Development (“O.E.C.D.”) released their Action Plan on Base Erosion and Profit Shifting (“B.E.P.S. Action Plan”) in 2013. Included in the B.E.P.S. Action Plan are several provisions related to transfer pricing:

• Action 4: Limit base erosion via interest deductions and other financial payments;
• Action 8: Assure that transfer pricing outcomes are in line with value creation – Intangibles;
• Action 9: Assure that transfer pricing outcomes are in line with value creation – Risks and capital;
• Action 10: Assure that transfer pricing outcomes are in line with value creation – Other high-risk transactions; and
• Action 13: Re-examine transfer pricing documentation.

The O.E.C.D. has since delivered a number of reports and recommendations related to these actions, including revisions to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“Transfer Pricing Guidelines”), and it continues to perform additional work on deliverables scheduled for later this year.

Shifting Income and Business Operations

volume 2 no 4   /   Read article

By Stanley C. Ruchelman and Kenneth Lobo

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles.The report discovers that a better tax result is obtained when income is booked in low tax countries. Stanley C. Ruchelman and Kenneth Lobo explain.  See more →

See all articles in this series →