BEPS Part 1 - Base erosion and profit shifting - OECD BEPS

Summary

In this video, John Andes, an international tax partner at KPMG in Thailand, discusses the BEPS (Base Erosion and Profit Shifting) initiative. The video covers the changes introduced in BEPS 1.0, which address tax avoidance by multinational enterprises, and the new BEPS 2.0 framework, aimed at taxing digital economies and ensuring minimum tax rates. The video highlights the significant updates to tax reporting and compliance, especially regarding multinational enterprises with global turnover above 20 billion euros. It also touches on the complexities of the rules and the need for further guidance from the OECD on pillar 1 rules, which are still being finalized.

Takeaways

• 😀 BEPS (Base Erosion and Profit Shifting) initiative addresses tax avoidance by multinational enterprises (MNEs).
• 😀 The initiative was triggered by tax evasion and aggressive planning that occurred after the 2008 financial crisis.
• 😀 BEPS 1.0 includes 15 action plans, aimed at ensuring profits are taxed where the economic activities take place.
• 😀 The four minimum standards of BEPS 1.0 focus on countering harmful tax practices, preventing treaty abuse, country-by-country reporting, and dispute resolution improvements.
• 😀 Thailand has already implemented these four BEPS 1.0 minimum standards.
• 😀 BEPS 1.0 did not address the growing issue of digital transactions, which led to the development of BEPS 2.0.
• 😀 BEPS 2.0 introduces two pillars to handle tax challenges arising from the digital economy.
• 😀 Pillar 1 of BEPS 2.0 allocates a portion of profits to market jurisdictions where MNEs operate without a physical presence.
• 😀 Pillar 2 of BEPS 2.0 sets a minimum tax rate of 15% to ensure appropriate taxation of MNE income.
• 😀 The complexity of Pillar 2's rules will require significant increases in tax reporting, making compliance challenging for businesses.
• 😀 Pillar 1 rules, originally set to be finalized by 2022 and implemented in 2023, have not been finalized yet, and further guidance from the OECD is awaited.

Q & A

What is the BEPS initiative?

The BEPS (Base Erosion and Profit Shifting) initiative is a global tax reform effort aimed at addressing tax avoidance strategies used by multinational enterprises. It focuses on ensuring that profits are taxed where economic activities are performed and where value is created.

What is the significance of the 2008 financial crisis in the context of BEPS?

The 2008 financial crisis exposed widespread tax evasion and aggressive tax planning by multinational enterprises exploiting gaps and mismatches between different countries' tax systems. This led to the development of BEPS to tackle these issues and improve global tax systems.

What were the main goals of BEPS 1.0?

BEPS 1.0 aimed to tackle tax avoidance, ensure profits are taxed where economic activities occur, and promote greater tax transparency. It consisted of 15 action plans designed to address these issues.

How many countries are involved in implementing BEPS 1.0?

More than 140 countries are collaborating to implement the four minimum actions of BEPS 1.0.

What are the four minimum standards of BEPS 1.0?

The four minimum standards of BEPS 1.0 are: (1) Action 5 - Countering harmful tax practices, (2) Action 6 - Preventing tax treaty abuse, (3) Action 13 - Country-by-country reporting of related party transactions, and (4) Action 14 - Improving the effectiveness of dispute resolution mechanisms.

What limitation did BEPS 1.0 have?

A limitation of BEPS 1.0 was that it did not comprehensively address digital transactions, which are increasingly common in various sectors.

What is BEPS 2.0 and how does it differ from BEPS 1.0?

BEPS 2.0, developed by the OECD and G20 in 2021, addresses the tax challenges arising from the digital economy. It introduces two pillars: Pillar 1 allocates a portion of profits to market jurisdictions, and Pillar 2 ensures that income is taxed at a minimum rate of 15%. This differs from BEPS 1.0 by focusing on digital services and global tax standards for multinational enterprises.

What does Pillar 1 of BEPS 2.0 focus on?

Pillar 1 of BEPS 2.0 focuses on allocating a portion of profits to market jurisdictions where multinational enterprises have customers, even if they do not have a physical presence in those jurisdictions. It applies to companies with at least 20 billion euros in global turnover and a profit margin of at least 10%.

What are the eligibility requirements for Pillar 1 of BEPS 2.0?

Pillar 1 of BEPS 2.0 applies to multinational enterprises with global turnover of at least 20 billion euros and a profit margin of at least 10%. It applies to most industries, excluding highly digitalized business models, extractives, and regulated financial services.

What is the expected impact of the new BEPS rules on multinational enterprises?

The new BEPS rules are expected to have a significant impact on multinational enterprises, particularly regarding tax reporting requirements. Companies will need to adjust their operations, legal affairs, and financial reporting to comply with the changes, especially with the implementation of complex mechanisms under Pillar 2.