The OECD Base Erosion and Profit Shifting (BEPS) Project became a prominent feature of the international tax landscape following the publication of the first report in February 2013. Since then, various changes to domestic laws and double tax treaties have been implemented in response to the 15 actions identified by the BEPS Project. Notwithstanding the fact that "BEPS 1.0" was arguably the most significant re-write of the international tax rules in a century, a number of problems remain outstanding, particularly in relation to the digital economy and the digitalization of the economy more generally. "BEPS 2.0" describes the continuation of work in this space.
Further announcements in respect of BEPS 2.0 are now expected in October 2020. In anticipation of these developments, it is worthwhile to recap on the BEPS Project to date. This four-part series will look back at how BEPS 2.0 came about, discuss the Pillar One and Pillar Two proposals announced under BEPS 2.0, and consider the responses of various jurisdictions.
How did we get here?
BEPS 1.0 was aimed largely at multinationals engaging in tax planning strategies that exploited gaps and mismatches in tax rules to artificially shift profits to low-, or no-tax, jurisdictions, where there is little or no economic activity or to erode tax bases through deductible payments such as interest or royalties.
BEPS 1.0 identified 15 "actions" and final reports for all 15 actions were delivered by October 5, 2015. The "multilateral instrument" (MLI) for the modification of existing double tax treaties was negotiated in 2016 and signed by a large number of countries in 2017. The MLI brought together solutions identified in relation to Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) and Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status), among others. Various changes to domestic tax regimes were also made in response to certain BEPS Actions. However, no particular solution was recommended in the Action 1 Final Report, which concerned the particular tax challenges arising from digitalization and looked to identify the main difficulties the digital economy poses for the application of existing international tax rules.
The OECD/G20 Inclusive Framework recognized the role of the digital economy and the digitalization of the economy more broadly in being part of the strain on international tax rules. The Inclusive Framework continued to work on the tax challenges arising from the digitalization of the economy, which culminated in the publication of the "Tax Challenges Arising from Digitalisation – Interim Report 2018" in March 2018. This interim report concluded on the need to review the impact of digitalization on nexus and profit allocation rules.
Following a number of further additional interim reports, the Inclusive Framework published a "Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy" (the PoW) on May 31, 2019. The PoW detailed the concepts of "Pillar One" and "Pillar Two." Pillar One focuses on the allocation of taxing rights, and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules. Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to "tax back" where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation. Parts two and three of this series will look at each of these proposals in more detail.
Originally published 15 June 2020
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