In this vlog our team of tax experts answer 3 key questions to simplify BEPS 2.0:
- What is BEPS 2.0?
- How does BEPS 2.0 differ from BEPS 1.0 and what are the key challenges?
- What is the high-level impact for Groups in the Middle East?
What is BEPS 2.0?
The Base Erosion and Profit Shifting project, known as BEPS, started in February 2013.
BEPS seeks to address tax planning strategies that exploit gaps in tax rules to artificially shift profits to low or no-tax locations, where there is little or no economic activity, or to erode tax bases through deductible payments.
Although some of the schemes used are illegal, most are not. This undermines the fairness and integrity of tax systems because multinational businesses can use BEPS to gain a competitive advantage over domestic enterprises. Every year, $240 billion USD are lost due to tax avoidance by multinational companies.
The original BEPS Package provided 15 Actions that equiped governments with the instruments needed to tackle tax avoidance. After BEPS 1.0, the OECD and G20 Inclusive Framework, which most of the GCC countries are members of, continued to work on the tax challenges arising from digitalization, which is referred to as BEPS 2.0.
How does BEPS 2.0 differ from BEPS 1.0 and what are the key challenges?
BEPS 2.0 is a continuation of the work the OECD completed as part of the original BEPS action plan. It consists of two pillars.
In summary, Pillar One focuses on the allocation of taxing rights.
Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that introduce the concept of a global minimum rate of tax.
In October 2020, two blueprints were issued setting out proposals to implement Pillars 1 and 2.
It is now expected that consensus on both pillars will be reached by June of 2021.
Despite these developments, challenges remain, including:
- how the proposals identified in the blueprints can be simplified
- how to deal with countries or blocs implementing the rules unilaterally
What is the high-level impact for Groups in the Middle East?
The BEPS 2.0 proposals will impact every MNE in the Middle East that has consolidated turnover in excess of 750M Euros and undertakes intra-group transactions.
While the impact of the Pillar 1 proposals cannot be ignored, we expect the Pillar 2 proposals, or the introduction of a global minimum tax, to have the biggest impact on Middle East groups given the hybrid model of corporate tax and Zakat in KSA and Kuwait, and the no- or low-tax environment in the UAE and Bahrain.
This is likely to result in significant tax leakage for covered Groups that have a large footprint in these countries.
Covered businesses should consider key impact areas which include:
- Potential group effective tax rate and key intra-group transactions and jurisdictions affected;
- Identification of inefficiencies in the group’s supply chain and operating model; and
- The impact from a data/systems perspective.
Even before a global consensus is reached, it is expected that many countries could incorporate the Pillar Two principles into their domestic tax framework and/or introduce or increase tax rates.
Therefore, it is important to assess the impact and involve stakeholders as soon as practically possible to avoid any unexpected surprises from both a financial and compliance perspective.