13 October 2015

Launch Of 2015 BEPS Reports

On 5 October 2015, the OECD presented the final package of measures relating to the BEPS project comprising 15 “Actions” in all. These measures were discussed by G20 Finance Ministers at their meeting on 8 October 2015, in Lima, Peru, and subsequently by G20 Leaders during their annual summit on 15-16 November in Antalya, Turkey. In China, the State Administration of Taxation published the Chinese version of the 2015 BEPS Reports.

The global King & Wood Mallesons tax team has prepared a short summary of the 2015 Final Reports for each of the 15 Actions below. Additionally, the OECD has also prepared executive summaries (available here).

BEPS cooperation will extend to 2020

The OECD and G20 countries will extend their cooperation on BEPS until 2020 to complete pending work and ensure an efficient targeted monitoring of the agreed measures. The next focus will shift to designing and putting in place an inclusive framework for monitoring BEPS and supporting implementation of the measures.

The three pillars

The package of BEPS measures consists of 15 Actions, which are mostly articulated around three main pillars: coherence of international tax rules, reinforcement of economic substance and increase of transparency and certainty. Additionally, Actions 1 and 15 are set outside this framework: Action 1 seeks to counteract the challenges posed by the digital economy to current taxation principles and Action 15 seeks to develop a multilateral instrument that countries may adopt to amend their existing bilateral treaties to implement any relevant BEPS reforms that achieve consensus.

Summary of BEPS final recommendations

The table below summarizes the main recommendations arising from the release of the final 2015 BEPS features of these measures.

How to react?

Multinational enterprises should be aware that some Actions will be implemented very soon. The implementation timeline relating to BEPS depends on the Actions and on the countries considered:

1. Some of the measures will require implementation by national lawmakers. These include the outputs of the work on hybrid mismatches, CFC rules, interest deductibility, mandatory disclosure rules, the rules on preferential IP regimes and Country-by-Country Reporting (CBCR).

Faced with these new rules, some countries and tax authorities have been proactive and already enacted unilateral measures.

2. Some other measures will require changes to bilateral treaties, which may be achieved via the multilateral instrument under Action 15 that is expected to be open for signature by the end of 2016.

3. A number of measures may directly and immediately be applied by the local tax authorities, such as the revised guidance on transfer pricing (Actions 8-10).

Multinational enterprises should review their situation with respect to these new measures in all the countries where they do business and be ready to adapt their arrangements and structures in line with any recommendations that are actually adopted in those countries.

BEPS in China

On September 17, 2015 SAT released the revision draft of Implementation Measures of Special Tax Adjustment (“Circular 2”) for the purpose of soliciting public comments, which reflects the recommendations in 2015 BEPS Report in many aspects by taking into account China features. Especially, the revision draft of Circular 2 introduces a three-layer transfer pricing documentation requirement (i.e. master file, local file and special file that is applied to certain types of transactions) supplemented by a country-by-country reporting requirement and strengthens the transfer pricing administration on share transfer, intangible property and intra-group service transactions. Needless to say, BEPS actions have had and will have significant impact on China tax rule formulation and therefore companies that are doing business in or with China should be fully aware of the relevant developments. It is expected that the revision of Circular 2 would be finalized by the end of 2015 and enter into force as of January 1, 2016.

It will take time for businesses to process and evaluate the full impact of the BEPS project. King & Wood Mallesons’ global network of tax advisers is ready to assist you in navigating the BEPS challenges ahead.

Coherence of international tax rules




Action 2: Neutralizing the effect of hybrid mismatch arrangements

Click here for the OECD's final report on Action 2.

The 2015 Report on Action 2 updates and replaces the 2014 Report. It includes detailed commentary, guidance and examples on the implementation and operation of the recommended hybrid mismatch rules, including the transitional rules. 

The 2015 Report also includes further guidance and comments on (i) the treatment of stock lending and repos; (ii) how to treat a payment that is included under a CFC regime, (iii) the operation of the imported mismatch rule; and (iv) the treatment of hybrid regulatory capital under the hybrid financial instrument rule. 

The additional guidance and examples contained in the 2015 Report are welcome in that they clarify how the complex rules may apply. The examples also illustrate the OECD’s broad view of what constitutes a hybrid mismatch arrangement. 

The implementation of the recommended rules will require the modification of national laws and/or bilateral treaties.

Action 3: Designing effective controlled foreign company rules

Click here for the OECD's final report on Action 3.

The 2015 Report on Action 3 sets out best practices (and not minimum standards) in the form of six building blocks for the design of effective CFC rules: (i) definition of a CFC, (ii) CFC exemptions and threshold requirements, (iii) definition of income, (iv) computation of income, (v) attribution of income and (vi) prevention and elimination of double taxation. 

Given each country prioritizes its CFC policy objectives differently, the six broad building blocks are likely to be the height of consensus at this stage. Any implementation of the new rules (whether in line with the building blocks or not) will require the modification of national laws. 

Action 4: Limiting base erosion involving interest deductions and other financial payments

Click here for the OECD's final report on Action 4.

The Report recommends two main approaches to limiting deductions: (i) a “fixed ratio rule” which allows an entity to deduct net interest expense up to a benchmark net interest/EBITDA ratio within a corridor of 10%-30% and (ii) an optional “group ratio rule” that allows interest deduction up to the net interest/EBITDA ratio of worldwide group. 

The Report further allows countries to apply a different group ratio rule to the worldwide group ratio (e.g. an “equity escape” rule, which compares an entity’s level of equity and assets to those held by its group), or not adopt a group ratio rule at all. It also protects the fixed ratio rule and the group ratio rule from planning and includes additional optional elements, including: (i) a de minimis threshold for entities with low levels of net interest expense, (ii) carry forward/back provisions and (iii) an exclusion for third party interest used to fund certain public-benefit assets. 

The OECD will continue work during 2016 on various parts of its Report on Action 4, including on the worldwide group ratio rule and how Action 4 should apply to businesses in the banking and insurance sectors. 

The implementation of the new rules will require the modification of national laws.

Action 5: Countering harmful tax practices more effectively, taking into account transparency and substance

Click here for the OECD's final report on Action 5.

The 2015 Report on Action 5 updates the 2014 Report and includes: (i) recommendations on an agreed approach on defining what constitutes substantial activities for all preferential regimes, whether IP regimes or non-IP regimes; (ii) a completed review of 43 preferential regimes in OECD and G20 countries and (iii) an agreed framework for the exchange of rulings in five clearly defined risk categories pursuant to agreed deadlines and in an agreed format. 

The five risk categories are: (i) rulings related to preferential regimes; (ii) cross-border unilateral APAs or transfer pricing rulings; (iii) rulings giving downward adjustments to profits; (iv) permanent establishment rulings and (v) conduit rulings. There would also be scope for countries to add risk categories as required.

Countries that have a legal framework to start exchanging information covered by the 2015 Report have until the end of 2016 to exchange information on past rulings. They will also need to commence exchanging information under this framework on all future rulings from 1 April 2016.

The implementation of these recommendations will require the modification of national laws.

Reinforcement of economic substance




Action 6: Preventing the granting of treaty benefits in inappropriate circumstances 

Click here for the OECD's final report on Action 6.

The 2015 Report on Action 6 recommends that countries include in their tax treaties an express statement that their common intention is to eliminate double taxation without creating opportunities for treaty shopping. 

The Report then recommends that countries adopt, in their bilateral treaties, either a general treaty anti-abuse rule based on the principal purposes of the transaction (the PPT rule), a limitation on benefits rule (the LOB rule) supplemented by a mechanism that would deal with conduit arrangements not already dealt with in tax treaties, or both.

The OECD acknowledges that each of the PPT and LOB rules has their own strengths and weaknesses and that they may not align neatly with an individual country’s treaty policy. 

OECD countries have therefore committed to a “minimum standard” consisting of the express statement and one or both of the PPT and LOB rules.

Adoption of this minimum standard will require the modification of bilateral treaties. 

Action 7: Preventing the artificial avoidance of permanent establishment status 

Click here for the OECD's final report on Action 7.

The Report on Action 7 contains agreed amendments to the OECD definition of “permanent establishment”. These changes address techniques used to inappropriately avoid the existence of a permanent establishment (for example through the replacement of distributors with commissionaire arrangements).

Follow-up work on attribution of profits issues related to Action 7 will be carried out in order to provide guidance before the end of 2016.

The implementation of the recommended rules will require the modification of bilateral treaties.

Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation 

Click here for the OECD's final report on Actions 8-10.

The Report on Actions 8-10 includes new guidance on how to allocate transfer price risk, transfer price intangibles, hard-to-value intangibles (HTVI), commodities, low value-adding intra-group services and cost contribution arrangements. 

Some further work is still outstanding: (i) further revised guidance on the transactional profit split method, financial transactions and the consolidation of other parts of the existing OECD Transfer Pricing Guidelines with the new guidance; (ii) implementation HTVI and low value adding services and (iii) work mandated by the G20 Development Working Group on TP toolkits for low income countries. 

The overall aim of Actions 8-10 is to align transfer pricing outcomes with value creation of a multinational enterprise.  Businesses will need to review existing structures if tax authorities adopt the recommendations in the Report. 

Actions 8-10 do not require legal implementation before starting to be used by tax authorities. In addition, many recommendations are likely to form part of amendments to the current OECD Transfer Pricing Guidelines.

Increase of transparency and certainty




Action 11: Measuring and monitoring BEPS

Click here for the OECD's final report on Action 11.

The 2015 Report on Action 11 recommends that the OECD works with governments to report and analyse more corporate tax statistics (such as statistical analyses based upon Country-by-Country Reporting) and to present them in an internationally consistent way.

The Report concludes that the fiscal effects of BEPS are significant with between USD 100 to 240 billion of global corporate income tax lost annually. 

The Report’s recommendations would also result in an increased flow of information between revenue authorities, though it recognises the need for taxpayer information to remain confidential.

Action 12: Mandatory disclosure rules

Click here for the OECD's final report on Action 12.

The 2015 Report on Action 12 provides a series of options that enables countries to design a regime that fits their needs to obtain early information on aggressive or abusive planning schemes and their users. 

The recommendations in this Report do not represent a minimum standard and countries are not obliged to introduce these regimes. 

Action 13: Transfer pricing documentation and Country-by-Country Report

Click here for the OECD's final report on Action 13.

The 2015 Report on Action 13 includes revised guidelines on transfer pricing documentation and Country-by-Country Reporting (CBCR). In particular, the Report proposes a three tiered documentation structure: (i) a master file containing high-level information regarding global business operations; (ii) a local file specific to each country disclosing details of material related party transactions and (iii) a CBCR. 

The report requires the master and local files to be delivered by multinational businesses to local tax authorities, whilst the CBCR is to be filed in the ultimate parent’s jurisdiction and shared via exchange of information protocols. 

The OECD recommends that the CBCR commences for fiscal year beginning on or after 1st January 2016 for global groups with revenues equal to or exceeding EUR 750 million. Subject to appropriate information exchange protocols between jurisdictions being in place, first filings are expected to be made in 2017 and transmitted across jurisdictions soon after.

Action 13 has arguably advanced the most out of the 15 action items in the BEPS Action Plan. This is reflected in the level of implementation detail concerning the CBCR and that CBCR implementation projects already exist in several countries including the United Kingdom, Spain, Australia and the Netherlands. In France, the CBCR will be included in the 2015 amending finance bill pursuant to the press release dated 6 October 2015 from the Minister of Finance and Public Accounts. 

The implementation of these recommendations will require the modification of national laws and/or bilateral treaties. 

Action 14: Making dispute resolution mechanisms more effective 

Click here for the OECD's final report on Action 14.

The Report on Action 14 notes that countries have agreed on a minimum standard and a number of best practices in relation to dispute resolution. 

A group of 20 States, including Australia, France, Germany, Italy, Luxembourg, Spain, the United Kingdom and the United States, have also committed to provide for mandatory binding arbitration in their bilateral tax treaties.

It is expected that work under Action 14 will be implemented under Action 15.

Horizontal Actions




Action 1: Addressing the tax challenges of the digital economy

Click here for the OECD's final report on Action 1.


The 2015 Report on Action 1 refers to work done on other Actions that address the tax challenges of the digital economy, including on permanent establishments (Action 7), transfer pricing (Actions 8-10) and the controlled foreign company proposals (Action 3).

The 2015 Report recognizes the importance of VAT/GST collection on cross-border digital transactions and has recommended further action to be taken on this issue in line with international VAT/GST guidelines. However, responses to other broader tax challenges identified by the OECD working group (being: (i) a nexus to a significant economic presence; (ii) a withholding tax regime or (iii) an equalisation levy) have not been recommended. The OECD has left open these options for future adoption by individual countries.

Affected businesses should continue to monitor reform in this space. The OECD will continue to work on Action 1 on the basis of a detailed mandate to be developed during 2016. 

Apart from VAT/GST implications, the OECD recommendations leave open possible unilateral action by countries in the three key areas that have not been recommended.  Such unilateral action could undermine the global approach to BEPS and, in our view, should be considered on a multilateral approach only.

Action 15: Developing a multilateral instrument to modify bilateral treaties 

Click here for the OECD's final report on Action 15.


The goal of the multilateral instrument is to streamline the implementation of the measures developed to address BEPS by modifying, globally, bilateral tax treaties. Around 90 jurisdictions are participating. 

The multilateral instrument should be open for signature by the end of 2016 by any interested jurisdiction. 

The first procedural meeting of interested countries was held in May 2015. An inaugural meeting to discuss the substantive work will commence on 5 November 2015. Consultations are expected.

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