BEPS at a Minimum

By Ted Howard

An uncertain trade and economic environment could force countries to think more deeply about their BEPS obligations. 

While the US machinates over tax reform, another major tax reform project keeps plowingalong. That is the OECD’s Base Erosion and Profit Shifting (BEPS) project, whichincludes a 15-point action plan that it’s still working through.

About 100 countries have signed on to the BEPS proposals so far but some may be lesseager than others to implement. And they acually have that right. That’s because the BEPSaction plan has no legal authority—the OECD calls the 15 items “soft law legal instruments”intended to serve as a basis for “interested jurisdictions” to adopt and implement.That means local legislation is required to pass any tax rules, which could lead some jurisdictionsto weaken their legislation. So even though the OECD says it has “expectations”that countries who join the effort will adopt the spirit of the proposals, how they adoptcould ultimately lead to a race to the bottom.

“Such jurisdictions generally have to implement BEPS…but will try to limit theirchanges to an absolute minimum,” suggests Dr. Beat Baumgartner, an attorney and taxexpert at the law firm Loyens & Loeff Switzerland LLC. “The general trend [is] to reducecorporate tax rates instead of targeted regimes or measures. However, many jurisdictionsin Europe currently think about incentives for intra-group financing (e.g., notional interestdeduction on equity capital).”

A good example of this is Switzerland, Dr. Baumgartner says, which was expected toabolish tax regimes that resulted in low effective tax rates in the past. “Now we expect that corporate income tax rates will be reduced if tax regimes are abolished. Notionalinterest deduction for intra-group financing is also still being discussed bylawmakers.”

ASIA WARILY WEIGHS PROPOSALS

Countries in Asia are also in the midst of a balancing act of making sure theircorporate tax revenues are all they can be and, at the same time, staying competitive.But trade or threats to healthy trade, both locally and globally, could push someAsian countries to slow or dilute their BEPS adoption.

For instance, Hong Kong already sees taxes as a weapon in its fight to stayrelevant. Recently the famous special administrative region of China’s chief executive-elect Carrie Lam said she would do all she could to keep Hong Kong competitive.”My new tax philosophy is not exactly ‘the more, the merrier,’ ” she said in her firstpublic speech in her new role. “Sometimes collecting less is highly desirable,” notingthat “unfortunately we have lost a few regional company headquarters to anotherplace” due to taxes. Therefore, “there is no place for complacency.” Hong Kong haspreviously said it was committed to “implementing the BEPS package consistently.

“There is currently a general climate of uncertainty where Governments are tryingto balance the tension between creating an environment that attracts investmentwhilst at the same time protecting their tax bases and raising needed tax revenues,which could also be contributing to a sense of unpredictability in regional taxregimes,” said Alan Tsoi, Deputy Regional Managing Director and Tax & Legal Leader,Deloitte Asia Pacific, in comments related to Deloitte’s 2017 Asia Tax ComplexitySurvey. “This has created competition for tax revenue amongst many countriesworldwide, reigniting a general trend to lower corporate income tax rates.”

Corporations are becoming more conservative in their tax planning, according tothe Deloitte survey. “In light of the uncertain tax landscape, companies are less likelyto pursue aggressive tax strategies than in the past,” Deloitte said.According to thesurvey, “three-quarters of respondents indicated they would not enter into a taxplanning strategy if perceived by some to be aggressive.” This is versus 40% ofrespondents expressing the same sentiment in 2014, the last time the firm conductedthe survey. This could be the result of “the social responsibility” companies feelas taxpayers. This after public scrutiny has led to controversy over who pays what—witness Amazon and Apple in Europe. “The enormous potential for detrimentalreputational risk has prompted company executives and boards of directors toacknowledge the need to consider such risk when determining the company’s taxstrategy,” Deloitte said.

 This attitude recently emerged at a NeuGroup peer group meeting held in Asia.One member of the NeuGroup’s Asia CFO Peer Group noted that, “where the value iscreated [is] where the profits should remain, [and] thus where the tax should be paid.”This is a far cry from the old method of transferring the fruits of that value to lowertax locations.

 Nonetheless, companies will still move to where it’s most efficient tax-wise.According to Loyens & Loeff’s Dr. Baumgartner, this is happening with non-EUmember states like Switzerland, which implement international minimum standardsonly “and do not adopt burdensome rules such as CFC (Controlled ForeignCompanies in the UK). We therefore already see relocations in order to avoid futurecosts of tax compliance.”