International Tax Cooperation: OECD Action Plan on Base Erosion and Profit Shifting

Sullivan & Cromwell LLP - 20 August 2013

The OECD has published an Action Plan on Base Erosion and Profit Shifting. It has been welcomed by the G20.

The Action Plan sets out a series of workstreams to be followed over the next 2½ years. The OECD will propose changes to domestic laws and international treaties:

  • to help governments understand the issues;
  • to close unintended loopholes allowing multinationals to shift profits; and
  • to prevent governments from providing incentives for profit shifting.

Most of the problems addressed in the Action Plan are not new, and it envisages largely incremental changes to the current model of international taxation. In many cases the OECD may look to examples of existing domestic measures or treaty provisions for solutions. The OECD’s current approach suggests at least that these solutions should be practical.

There are likely to be difficulties in reaching consensus or in implementing any consensus reached: for example, the European Union’s treaties may limit what its members can sign up to and jurisdictions (such as the UK) which have sought to entice corporate taxpayers by making their tax regimes more “user-friendly” may well baulk at some of the changes proposed. Some states, however, are likely to take aggressive unilateral action (with strong public support) to deal with the problems as they see them. Lack of consensus and unilateralism carry with them the risk of double taxation, which can only hinder growth at a time of overall economic weakness.

Giving effect to any proposals will take time as treaties will need to be signed or amended, and domestic laws changed. In order to avoid the need for lengthy bilateral negotiations, the OECD has suggested using a multilateral treaty to implement changes on which there is broad consensus. If that level of agreement can be reached on a number of BEPS remedies, a multilateral instrument may well set a new tax standard among OECD and G20 countries. Even if this shortcut succeeds, however, taxpayers will have some scope to react and restructure.

In spite of the potential disagreements, the current political support for the BEPS project in general is significant and unprecedented. As a result, we can expect to see the BEPS workstreams lead to substantial changes over the next several years; and domestic policy-making is likely to reflect the new climate before that.