08 March 2016

BEPS and the impact on the consumer sector in Europe

In October 2015, the OECD presented its final package of measures to address “base erosion and profit shifting” (or BEPS) and to bring about the “comprehensive, coherent and co-ordinated reform of the international tax rules”.

The outcome of an ambitious and broad ranging two year plan, the BEPS agenda covered 15 “Action Items”, each designed to provide governments and revenue authorities with tools to close the purported gaps in their tax revenues.  These tools consist of international treaty rules (including common standards to be adopted), model domestic legislation and other guidance – some of which will be implemented immediately (such as revisions to the OECD Transfer Pricing Guidelines).  

Recently the European Commission has published its own ambitious anti-tax avoidance package, the aim of which is to ensure that member states take a co-ordinated stance both on the implementation of the BEPS project and against tax avoidance. Please read our article on this topic, recently published in Tax Journal.

The breadth and complicated nature of the BEPS package means that its effect will vary significantly from business to business. The consumer sector can expect to be affected by, amongst other issues, potential limitations on interest deductibility, changes to the UK patent box regime, changes to double tax treaties to prevent treaty shopping and to the treaty definition of “permanent establishment”, changes to the OECD transfer pricing guidelines and increased reporting requirements.  In the UK a forerunner of part of the BEPS package, the diverted profits tax, is already in force.

The European Commission is also currently reviewing a large number of national tax rulings to assess whether the rulings are compatible with the EU’s state aid rules or whether they allow certain multinationals to inappropriately reduce the amount of tax due. A key focus of the Commission’s recent rulings is that FIAT, Starbucks and more recently certain Belgian based multinationals were in receipt of illegal state aid related to the fact that certain arrangements (including transfer pricing arrangements) did not respect the normal “arms-length principle”. Those found in receipt of illegal state aid have to repay the aid plus interest. In the case of FIAT and Starbucks, this has resulted in recovery orders of between €20-30m each. The cases are under appeal. 

These BEPS changes and state aid rulings will require analysis of current domestic and international structures, a review of tax compliance and reporting systems, and, in some cases, a review of whether there is sufficient “substance" in particular jurisdictions.  

The Consumer Group at KWM understands the significant potential impact these measures represent to our consumer clients and the industry generally and will be keeping our clients up to date with developments. We are monitoring how the UK government and other governments around the world are planning to implement the BEPS package. In tables on our website we summarise how the UK, Germany, France, Italy, Luxembourg, Spain, Australia and China have implemented the BEPS package so far. 

After the UK’s Budget on 16th March we will be reporting on the UK Budget BEPS proposals, for example, in relation to interest deductibility.

In the meantime, if you would like further information on any of the above or to discuss the impact of the BEPS package on your business, please speak to your usual KWM contact or Heather Corben.

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