OECD/G20 Base Erosion and Profit Shifting Project O E C D OECD/G20 Base Erosion and Profit Shifting Countering Harmful Tax Practices More Effectively, / G 2 0 Project Taking into Account Transparency and Substance B a s e E r Countering Harmful Tax Addressing base erosion and profit shifting is a key priority of governments around the globe. In 2013, OECD o s and G20 countries, working together on an equal footing, adopted a 15-point Action Plan to address BEPS. io n This report is an output of Action 5. an Practices More Effectively, d Beyond securing revenues by realigning taxation with economic activities and value creation, the OECD/G20 Pr o BEPS Project aims to create a single set of consensus-based international tax rules to address BEPS, and fit S Taking into Account hence to protect tax bases while offering increased certainty and predictability to taxpayers. A key focus of this h work is to eliminate double non-taxation. However in doing so, new rules should not result in double taxation, iftin unwarranted compliance burdens or restrictions to legitimate cross-border activity. g P Transparency and Substance r o Contents je c Chapter 1. Introduction and background t C Chapter 2. Overview of the OECD’s work on harmful tax practices ou ACTiOn 5: 2015 Final Report n Chapter 3. Framework under the 1998 Report for determining whether a regime is a harmful preferential regime te r in Chapter 4. Revamp of the work on harmful tax practices: Substantial activity requirement g H a Chapter 5. R evamp of the work on harmful tax practices: Framework for improving transparency r m in relation to rulings fu l T Chapter 6. Review of OECD and associate country regimes a x P Chapter 7. Further work of the FHTP r a c Annex A. Example of a transitional measure for tracking and tracing tic e Annex B. Spontaneous exchange on taxpayer-specific rulings under the framework s M o Annex C. Template and instruction sheet for information exchange r e E www.oecd.org/tax/beps.htm ffe c tiv e ly , T a k in g in to A c c o u n t T r a n s p a r e n c y a n d S u b s Consult this publication on line at http://dx.doi.org/10.1787/9789264241190-en. ta n c e This work is published on the OECD iLibrary, which gathers all OECD books, periodicals and statistical databases. Visit www.oecd-ilibrary.org for more information. iSBn 978-92-64-24118-3 9HSTCQE*cebbid+ 23 2015 32 1 P OECD/G20 Base Erosion and Profit Shifting Project Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 ‑ 2015 Final Report This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this publication as: OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264241190-en ISBN 978-92-64-24118-3 (print) ISBN 978-92-64-24119-0 (PDF) Series: OECD/G20 Base Erosion and Profit Shifting Project ISSN 2313-2604 (print) ISSN 2313-2612 (online) Photo credits: Cover © ninog – Fotolia.com Corrigenda to OECD publications may be found on line at: www.oecd.org/about/publishing/corrigenda.htm. © OECD 2015 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgement of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected]. FOREwORD – 3 Foreword International tax issues have never been as high on the political agenda as they are today. The integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules, which were designed more than a century ago. weaknesses in the current rules create opportunities for base erosion and profit shifting (BEPS), requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created. Following the release of the report Addressing Base Erosion and Profit Shifting in February 2013, OECD and G20 countries adopted a 15-point Action Plan to address BEPS in September 2013. The Action Plan identified 15 actions along three key pillars: introducing coherence in the domestic rules that affect cross-border activities, reinforcing substance requirements in the existing international standards, and improving transparency as well as certainty. Since then, all G20 and OECD countries have worked on an equal footing and the European Commission also provided its views throughout the BEPS project. Developing countries have been engaged extensively via a number of different mechanisms, including direct participation in the Committee on Fiscal Affairs. In addition, regional tax organisations such as the African Tax Administration Forum, the Centre de rencontre des administrations fiscales and the Centro Interamericano de Administraciones Tributarias, joined international organisations such as the International Monetary Fund, the world Bank and the United Nations, in contributing to the work. Stakeholders have been consulted at length: in total, the BEPS project received more than 1 400 submissions from industry, advisers, NGOs and academics. Fourteen public consultations were held, streamed live on line, as were webcasts where the OECD Secretariat periodically updated the public and answered questions. After two years of work, the 15 actions have now been completed. All the different outputs, including those delivered in an interim form in 2014, have been consolidated into a comprehensive package. The BEPS package of measures represents the first substantial renovation of the international tax rules in almost a century. Once the new measures become applicable, it is expected that profits will be reported where the economic activities that generate them are carried out and where value is created. BEPS planning strategies that rely on outdated rules or on poorly co-ordinated domestic measures will be rendered ineffective. Implementation therefore becomes key at this stage. The BEPS package is designed to be implemented via changes in domestic law and practices, and via treaty provisions, with negotiations for a multilateral instrument under way and expected to be finalised in 2016. OECD and G20 countries have also agreed to continue to work together to ensure a consistent and co-ordinated implementation of the BEPS recommendations. Globalisation requires that global solutions and a global dialogue be established which go beyond OECD and G20 countries. To further this objective, in 2016 OECD and G20 countries will conceive an inclusive framework for monitoring, with all interested countries participating on an equal footing. COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY, TAKING INTO ACCOUNT TRANSPARENCY AND SUBSTANCE © OECD 2015 4 – FOREwORD A better understanding of how the BEPS recommendations are implemented in practice could reduce misunderstandings and disputes between governments. Greater focus on implementation and tax administration should therefore be mutually beneficial to governments and business. Proposed improvements to data and analysis will help support ongoing evaluation of the quantitative impact of BEPS, as well as evaluating the impact of the countermeasures developed under the BEPS Project. COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY, TAKING INTO ACCOUNT TRANSPARENCY AND SUBSTANCE © OECD 2015 5 TABLE OF CONTENTS – Table of contents Abbreviations and acronyms ................................................................................................................... 7 Executive summary ................................................................................................................................... 9 Chapter 1. Introduction and background ........................................................................................... 11 Chapter 2. Overview of the OECD’s work on harmful tax practices ............................................... 15 Chapter 3. Framework under the 1998 Report for determining whether a regime is a harmful preferential regime 19 Chapter 4. Revamp of the work on harmful tax practices: Substantial activity requirement ....... 23 I. Introduction ............................................................................................................................... 23 II. Substantial activity requirement in the context of IP regimes ................................................... 24 III. Substantial activity requirement in the context of non-IP regimes............................................ 37 Chapter 5. Revamp of the work on harmful tax practices: Framework for improving transparency in relation to rulings 45 I. Introduction ............................................................................................................................... 45 II. Rulings covered by the spontaneous exchange framework ....................................................... 47 III. Jurisdictions receiving the information ..................................................................................... 52 IV. Application of the framework to rulings ................................................................................... 53 V. Information subject to the exchange .......................................................................................... 54 VI. Practical implementation questions ........................................................................................... 54 VII. Reciprocity ................................................................................................................................ 55 VIII. Confidentiality of the information exchanged ........................................................................... 55 IX. Best practices ............................................................................................................................. 56 Chapter 6. Review of OECD and associate country regimes ............................................................. 61 I. Introduction ............................................................................................................................... 61 II. Conclusions on sub-national regimes and when they are in scope ............................................ 61 III. Conclusions reached on regimes reviewed ................................................................................ 62 IV. Regimes relating to disadvantaged areas ................................................................................... 65 V. Downward adjustments ............................................................................................................. 65 Chapter 7. Further work of the FHTP ................................................................................................ 67 I. Ongoing work including monitoring ......................................................................................... 67 II. Development of a strategy to expand participation to third countries ....................................... 68 III. Consideration of revisions or additions to the existing FHTP criteria ...................................... 68 Annex A. Example of a transitional measure for tracking and tracing ......................................... 71 Annex B. Spontaneous exchange on taxpayer-specific rulings under the framework .................. 73 Annex C. Template and instruction sheet for information exchange ............................................. 74 COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY, TAKING INTO ACCOUNT TRANSPARENCY AND SUBSTANCE © OECD 2015 6 – TABLE OF CONTENTS Tables Table 5.1 Summary of the countries with which information should be exchanged ............................ 53 Table 6.1 IP regimes .............................................................................................................................. 63 Table 6.2 Non-IP regimes ..................................................................................................................... 64 Table A.1 Taxpayer Q's expenditures .................................................................................................... 71 COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY, TAKING INTO ACCOUNT TRANSPARENCY AND SUBSTANCE © OECD 2015 7 ABBREVIATIONS AND ACRONYMS – Abbreviations and acronyms AOA Authorised OECD approach APA Advance pricing arrangement ATR Advance tax ruling BEPS Base erosion and profit shifting CAN Consolidated application note CFA Committee on Fiscal Affairs CFC Controlled foreign company CRS Common Reporting Standard (Standard for Automatic Exchange of Financial Account Information) EOI Exchange of information EU European Union FATF Financial Action Task Force FHTP Forum on Harmful Tax Practices IP Intellectual property MAC Convention on Mutual Administrative Assistance in Tax Matters MNE Multinational enterprise OECD Organisation for Economic Co-operation and Development PE Permanent establishment R&D Research and development TIN Taxpayer identification number TP Transfer pricing COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY, TAKING INTO ACCOUNT TRANSPARENCY AND SUBSTANCE © OECD 2015