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A few months ago, we asked our members to submit their most pressing BEPS-related questions for Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration.

His answers are now here!

Please keep in mind that, given his far-reaching responsibilities, Pascal was not able to answer all twenty of Taxlinked’s questions and selected those he believed were the most pertinent.

Happy reading!

Taxlinked (TL): Have countries begun implementing the BEPS measures?

Pascal Saint-Amans (PSA): With agreement on the BEPS package in October 2015, countries have moved quickly into implementation mode. Some of the measures developed may be immediately applicable such as the revised guidance on transfer pricing. Other measures require domestic legal or regulatory changes to take effect. Country-by-Country Reporting (Action 13), as well as the work on Hybrid Mismatches (Action 2), are two areas where we have seen countries act to implement already – and in response, businesses are changing their practices to reflect this new reality. For the tax treaty-related BEPS measures, we have 95 countries participating in the negotiation of a multilateral instrument that will allow them to update their bilateral tax treaties efficiently and quickly.

The implementation of the BEPS measures is going to be monitored through an inclusive framework. That will allow all interested countries and jurisdictions to participate in this next phase of the BEPS Project on an equal footing with OECD and G20 members. The framework’s mandate will include the remaining standard-setting work on certain BEPS Actions, review of implementation of the BEPS minimum standards, and providing implementation support and data gathering on the implementation of the package as a whole.

TL: Will widespread implementation of the BEPS measures make doing business easier?

PSA: What is important to recognise when considering the impact on business is that the BEPS Project has ensured we have managed to achieve a common position on the solutions for addressing BEPS across 44 countries. And we expect to see more countries commit to the BEPS package as they join the new inclusive framework in the next phase. With the pressure on governments to take quick action to address BEPS that was rising since the crisis, the risk was that countries moved unilaterally – fracturing the international tax system.

So what we see with the BEPS outcomes is greater certainty and consistency for business than would otherwise have been the case, and a balancing of compliance burdens with the need for greater transparency. Business has been a critical stakeholder in the development of the measures – providing input throughout the Project to make sure the rules were practical and balanced. We’ve also recognised the need to improve resolution of cases of double-taxation, and not just tackle the issue of double non-taxation. That is why under Action 14, we’ve achieved a minimum standard that will be closely monitored to ensure progress is made to improve the speed and efficiency of the process for resolving cross-border tax disputes.   

TL: How will financial institutions be affected by the BEPS package of measures and under what circumstances?

PSA: Generally speaking, the approaches set out in the reports are intended to apply to all MNEs, regardless of the industry sector. However, in some areas, the BEPS reports recognise that the financial services sector has particular features and some further work may need to be undertaken on rules to ensure that BEPS risks are adequately addressed. For instance, further work will be done in the year ahead to consider how the rules on hybrid mismatches and limits on interest deductibility may need to be adjusted to take into account the specificities of financial services businesses.

TL: Can you explain Automatic Exchange of Information (AEOI) and the Common Reporting Standard (CRS)?

PSA: The Automatic Exchange of Information (AEOI) Standard is the international standard for automatic exchange of financial account information. It consists of two components: a) the Common Reporting Standard, which contains the reporting and due diligence rules to be imposed on financial institutions; and b) the Multilateral Competent Authority Agreement (MCAA) for CRS, which contains the detailed rules on the exchange of information. It sets out the agreed common approach for financial account information to be collected by financial institutions, transmitted to local tax administrations, and then exchanged between governments. 

TL: Are the reporting requirements with respect to financial institutions under the CRS similar to that for the US’s FATCA and the IGAs? For example, is the reporting of the owners of companies limited to passive entities?

PSA: The Common Reporting Standard draws extensively on the intergovernmental agreements (IGA) to implement FATCA and the reporting requirements are generally similar, e.g. in both cases, reporting occurs on an annual basis, the scope of financial institutions to which the obligations apply are similar, and reporting financial institutions should provide information on the controlling person(s) of passive non-financial entities. However, there are some differences that are mainly driven by the multilateral nature of the CRS system and the absence of some US specific aspects. For instance, the CRS is based on residence, unlike FATCA, which refers to citizenship, and under the CRS financial institutions should report information on the controlling person(s) of certain investment entities (e.g. professionally managed trusts or investment vehicles) that are resident or located in jurisdictions that do not participate in automatic exchange under the AEOI standard.

TL: As for the CRS, when do the requirements take effect or are they already in effect? How many countries are currently participating?

PSA: So far, 96 jurisdictions, including almost all identified financial centres, have committed to undertaking the first exchanges under the CRS by 2017 and 2018. While most jurisdictions are making rapid progress to implement the legislative and regulatory framework necessary, there is concern that Panama has recently stepped back from its original commitment, indicating that it will not adhere to all aspects of the CRS. Panama has therefore been removed from the list of committed jurisdictions and the Global Forum will continue to work closely with its members to ensure a global level playing field is maintained – with some jurisdictions not being able to benefit from failing to implement the standard.

TL: With regards to entity accounts and the automatic exchange of information, how will Trusts be affected and is there a requirement to report on details of beneficiaries and settlors?

PSA: The CRS will generally apply to trusts in two circumstances: (i) when a trust is a reporting financial institution, and (ii) when a trust is a non-financial entity that maintains a financial account with a reporting financial institution. In both cases, there is a requirement to report information on the settlor, the trustee, the protector (if any), the beneficiary or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust.

TL: In the BEPS Explanatory Statement, I read that BEPS is more harmful to developing countries than to developed ones. How did you reach this conclusion? Are there any specific and reliable statistics?

PSA: Although measuring the scope of BEPS is challenging, the findings of the work performed since 2013 confirm the potential magnitude of the issue, with estimates indicating that the global corporate income tax (CIT) revenue losses could be between 4% to 10% of global CIT revenues, i.e. USD 100 to 240 billion annually. Estimates of the impact of BEPS on developing countries, as a percentage of tax revenues, are higher than in developed countries given developing countries’ greater reliance on CIT revenues while, in terms of absolute value, the impact is greater on developed countries. The BEPS Package has also made a number of recommendations to ensure we are able to gather more reliable data on the impact of BEPS.

TL: In looking at treaty abuse, why does the report propose different anti-abuse rules?

PSA: The BEPS package includes agreement on a common minimum standard in the treaty abuse area to ensure that treaty shopping is effectively addressed. At the same time, countries have some flexibility in deciding how to meet the minimum standard, through a limitation on benefits (LOB) provision or a general anti-abuse rule based on a “principal purpose test”(PPT), or a combination of the two. This provides flexibility to governments to adopt the approach that fits best with their tax system, but critically ensures that treaty shopping is curtailed in all instances. In addition, the package includes a number of specific anti-abuse rules that will allow countries to address other forms of tax treaty abuse, relating for example to dual residence companies and dividend transfer transactions.

To support countries in the implementation of these measures, the negotiation of a multilateral instrument is underway with 95 countries participating, which will allow them to update their existing bilateral tax treaties with a single instrument.

TL: What is your opinion on countries like the UK introducing diverted profit taxes and other countries looking to introduce similar provisions and how does this fit with BEPS?

PSA: We know that a number of countries have been very eager to take action quickly, and that is why it was important to move quickly with the establishment of the BEPS Project and delivery of the 15 Actions. What is clear is that without coherent, global approaches, problems like those that gave rise to BEPS are likely to arise again – it is the mismatches and gaps between national tax systems, along with the international rules, that have facilitated these types of tax planning arrangements and allow the location of taxation to be separated from the underlying economic activity. To effectively maintain their tax sovereignty in a globalised world, governments can no longer just consider their domestic system if they want their tax policies to be effective.

TL: In relation to hybrids, what happens if countries fail to introduce the measures?

PSA: The work delivered to address hybrid mismatches allows interested countries to protect themselves from their effects but don't require all countries to implement to be effective. Their design also prevents the rules resulting in double taxation if both countries do apply them.

Hybrid mismatches take advantage of differences in the tax treatment of financial instruments and entities to achieve double non-taxation or long-term tax deferral. The measures developed include general and specific recommendations for domestic hybrid mismatch rules and model treaty provisions that will put an end to multiple deductions for a single expense, deductions in one country without corresponding taxation in another, or the generation of multiple foreign tax credits for one amount of foreign tax paid.

TL: What are the information requirements to be submitted uniformly by all countries committed to the BEPS package?

PSA: Three layers of documentation have been agreed under Action 13 of the BEPS Project: a master file, a local file and a Country-by-Country (CbC) reporting template. The CbC reporting template is a new tool that will allow tax administrations to perform high-level transfer pricing risk assessments. This is a minimum standard that will require MNEs to provide annually, and with respect to each jurisdiction in which they do business, aggregate information relating to the global allocation of the MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group, as well as information about which entities do business in a particular jurisdiction and the business activities each entity engages in. The Master file is intended to provide tax administrations with high-level global information regarding multinational enterprises’ (MNEs) global business operations and transfer pricing policies. The Local File requires that more transactional transfer pricing documentation be provided in each country, identifying relevant related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions.