Strategizing International Tax Best Practices – by Keith Brockman

BEPS update: Actions 5 & 15

The OECD has updates available with respect to Action 5 (Intangibles), Action 15 (Multilateral instrument) and Action 13 (Country-by-Country reporting – refer to prior post of 6 Feb. 2015).  Links are provided for the OECD’s statement of intent addressing these three actions in particular.

http://www.oecd.org/tax/first-steps-towards-implementation-of-oecd-g20-efforts-against-tax-avoidance-by-multinationals.htm

http://www.oecd.org/ctp/beps-action-5-agreement-on-modified-nexus-approach-for-ip-regimes.pdf

http://www.oecd.org/ctp/beps-action-15-mandate-for-development-of-multilateral-instrument.pdf

Summary – Action 5 (Intangibles):

  • The Modified Nexus Approach is generally accepted.
  • 30% uplift of qualifying expenses re: outsourcing and acquisition costs in addition to significant R&D activities of taxpayer.
  • Existing regimes will be closed by 30 June 2016 to new entrants; legislation to be effected in 2015.
  • Grandfather rules for existing regimes may extend 5 years (i.e. 30 June 2021).
  • Methodology of tracking / tracing R&D expenditures will be developed.
  • Guidance to be issued re: definitions; patents qualify, whereas trademarks do not qualify.

Summary – Action 15 (Multilateral Instrument):

  • The intent to develop a multilateral instrument to implement specific BEPS Actions is still desirable and feasible.
  • The instrument will be designed to implement treaty-related measures of the BEPS Project.
  • Several BEPS Action items that are known to be inclusive are Action 2 (Hybrid entities), Action 6 (Treaty abuse), Action 7 (PE) and Action 14 (Dispute resolution).  Other Action items may be included after final guidance is developed, including a mechanism to exchange information for country-by-country reporting.
  • Each Action item may be optional, or there may be a minimum number of Actions that a country will have to execute.
  • The instrument is not compulsory and is open to all jurisdictions.
  • Development of the instrument will be accomplished by an ad-hoc group that is under the aegis of the OECD and G20.
  • Outputs are expected Sept. 2015, with final development of the instrument concluded by 31 Dec. 2016.

The timing of 31 Dec. 2016 will be critical to monitor, as many countries may decide to develop unilateral legislation prior to this date.  It is hopeful that tax administrations will not try to (informally) implement BEPS guidelines prior to the time that effective legislation is executed.

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