On 29 January 2019, the Organisation for Economic Cooperation and Development (OECD) announced a new programme of work, which we have described as BEPS 2.0, to introduce further reforms to the framework for international taxation.
BEPS 2.0 follows the OECD’s project which set out recommendations in 2015 for countries to adopt in order to counteract Base Erosion and Profit Shifting (BEPS project) by companies operating internationally (MNCs).
The focus of BEPS 2.0 is to proceed on a “without prejudice” basis to create an international consensus on new rules for the framework for international taxation, particularly for businesses with valuable intangible assets. The stated aim is to move beyond the arm’s length principle and the scope of current taxing rights which are limited to businesses with a physical presence in a country.
The new rules, if adopted, would readjust the balance of taxing rights and MNC profit allocation between jurisdictions where MNC assets are owned and the markets where user/consumers are based. BEPS 2.0 proposes to address this reform through two main pillars of work which are interlinked:
This includes consideration of new transfer pricing principles which could recognise greater profit attribution to the value contributed by users. Design of a new tax framework would include new rules for defining a taxable presence for businesses which operate in a market without a physical presence by using a concept of “significant economic presence” or “significant digital presence”. A revised basis for taxing profits from intangibles could well apply a formulary approach using attribution factors that give greater weight to the user or consumer market location once the threshold for triggering sufficient ‘nexus’ in that market has been reached.
Work in this area will look at developing both an income inclusion rule as well as a tax on base eroding payments. If the US tax reform model of international taxation is used as a starting point for exploration of a new income inclusion rule, this could result in the development of a concept of a minimum tax rate applied by the parent country jurisdiction to the profits of subsidiaries above a routine return. This could be combined with an approach that would seek to tax, e.g. deny deductions for, payments to entities in low tax jurisdictions.
Ireland’s corporation tax policy offers businesses based in Ireland a comparatively low corporation tax rate of 12.5% and is based on applying an arm’s length principle to tax profits attributable to economic activity and substance in Ireland.
As new rules under BEPS 2.0 are intended to move beyond the arm’s length principle, depending on the outcome, the comparative attractiveness of Ireland’s corporation tax offering may also depend on two further elements, being the:
Ireland’s policy makers are actively engaging in this debate. Ireland remains a location that offers many attractions beyond its corporation tax rate for business including a well-educated workforce and access to EU markets. A revised international tax framework from BEPS 2.0 could affect MNC choices for the location of business activity. It could also affect the amount of tax and related compliance costs for businesses operating internationally with a knock on impact on the cost of goods and services to consumers.
Announcements on a consultation process for interested stakeholders are expected in the coming weeks. This initiative has an ambitious timetable that seeks to develop by May 2019 an outline of the proposals for technical work - to be presented for the approval of G20 Finance Ministers in June 2019.
An important part of participating in this debate will be ensuring that the voice of business is heard during the OECD’s exploration of the impact that different approaches could have on businesses and consumers. Feedback provided by business stakeholders during consultations held as part of the BEPS project had a significant effect on shaping the final project outcomes in 2015.