This article looks at latest developments in what is known as "base erosion and profit-shifting" and the stance taken by the OECD and major industrialised nations.

The following article is by Chris Hamblin, editor of Offshore Red, a sister publication to this one. Here, he writes about developments surrounding that is called “base erosion and profit-shifting” – the controversial process of firms moving profits around to obtain the lowest-possible tax treatment. This practice has come under fire from policymakers claiming that firms should be taxed on profits made in countries where the substantive economic activity occurs, not in low-tax jurisdictions. Defenders say that in the EU single market, for example, firms that domicile for tax purposes in places such as Luxembourg are acting within the law and that it is up to policymakers to construct smarter rules in the first place. While this issue is a corporate one, the arguments used about why these practices need to be curbed, or addressed, are clearly relevant to the private client side of financial life.

The “Group of 20” (actually 19) industrialised nations met in Istanbul this month and reached an agreement over 'implementation guidance' for transfer pricing documents and country-by-country reports.

As promised in 2014, the Organisation for Economic Co-operation and Development, as part of its “base erosion and profit-shifting” initiative, has developed the 'implementation package' for country-by-country reporting and the transfer-pricing documentation. It has also proposed to develop a multilateral convention to streamline the implementation of tax treaty-related BEPS measures and the G20's finance ministers have endorsed it, although this leaves out the remaining 15 member-states of the OECD, whose views are not known.

In September the OECD published new guidance that related to transfer-pricing documents. The full G20 - both finance ministers in September and leaders in November - endorsed it. This guidance indicates that TP documentation contains a three-pronged approach:
-- A master file containing standardised background information relating to the multi-national enterprise group as a whole;

-- A country-by-country report which contains specific information relating to the global allocation of the multinational enterprise's income relating to the global allocation of income of the MNE, taxes paid and certain indicators (for example, the number of employees) of economic activities per geographic location/within the NME group; and

-- There is also to be a “local file” which is dedicated to the transactions in which the local subsidiaries or permanent establishments are involved – in other words, it is to analyse transfer-pricing compliance for the material transactions of the local taxpayer.

Because of worries that these recommendations would be implemented inconsistently, the OECD published 'implementation guidance' which relates to three issues:

-- The first is on the timing of the preparation and the filing of the country-by-country report. The draft says, first of all, that multi-national groups do not need to worry about preparing the country-by-country “filing” before 1 Jan 2016, because the OECD does not expect multi-national groups to start collecting the information before then;

-- The second question answered is which multi-national enterprise groups are covered by the country-by-country reporting. Here a very important decision was made. Marlies de Ruiter, head of tax treaty, transfer pricing and financial transactions, said: “I think the key to that decision was that all countries recognised that we needed to gain experience to be as efficient and effective as possible and not to try to take too big a bite out of the apple. So we agree that the filing would have to take place for the multi-national groups with a consolidated group revenue of more than €750 million or a near-equivalent amount of that. That would mean that 85 per cent of the multi-national enterprises would be excluded but, nevertheless, 90 per cent of world group revenue would be covered”;

-- The third question that the new guidance answers concerns the conditions that might underpin the use of country-by-country reports. The conditions are confidentiality, consistency and the use of the information. On this last point, the information is to be used for vague risk assessment purposes only.

All this, de Ruiter said, was going to lead to implementation occurring through a government-to-government mechanism for the automatic exchange of country-by-country reports. She promised that that “package” would be developed by April 2015.

“What is also indicated is that the master file and the local file will be filed locally, so it will be filed in the subsidiary country where the activities are taking place, but there is agreement between countries that the annexes, that the templates that we have produced need to be taken into account to make sure that these kind of templates are used in a consistent basis and with confidentiality,” she added.

What is the mechanism destined to look like? The OECD website lists the following.

-- Automatic exchange by the jurisdiction where the ultimate parent company is resident – i.e. there is to be an automatic exchange mechanism and the filing is to take place in the country of the ultimate parent company;

-- Competent authority agreements(s) – the exchange is to take place between so-called 'competent authorities' that would be authorised to do it by existing legal instruments such as TRs, bilateral treaties and the multilateral convention;

-- The use of existing legal instruments for exchange of information as a basis of the competent authority;

-- Secondary mechanisms recognised as legitimate only in a few cases;

-- Monitoring of the results of country-by-country reporting to be taken into account in a review in 2020.

This, then, is the recent guidance and the complete package will be finalised in April.