BEPS challenges: An initiative for fair taxation leads to tax disadvantages for industrialized countries

International tax issues have never been before in focus of political discussions as they are today. Globalization, increasing economic activities and cross-border business structures lead to the fact that international tax planning became more important in recent years. Differences in national tax systems, gaps in international tax rules and the lack of coordination between countries’ tax administrations supposedly gave multinational enterprises opportunities for Base Erosion and Profit Shifting (BEPS).

The initial start of the BEPS project was in summer 2012 and in February 2013 OECD published the first draft of a BEPS report. On 5 October 2015 the OECD released the final reports of the action plan on BEPS (endorsed by the G20 leaders on 15 November 2015). The action plan comprises 15 items to stop international tax planning techniques of multinational enterprises (MNEs) aiming at tax base reduction in high-taxed environments and profit shifting in low-taxed environments. The participation of developing countries is one important part of the project.

The BEPS project aims to develop of commonly-agreed international tax standards and strengthened monitoring. The BEPS action plan gives a comprehensive package of concrete recommendations for domestic tax rules and treaty measures for changes in national legislations (to be implemented by the countries’ governments) as well as adjustments in OECD model tax convention and transfer pricing guidelines.

Objectives of BEPS-project

In the light of BEPS debate, however, it should be noted that Germany already provides for substantial regulations and requirements in domestic tax law, especially German Foreign Tax Act (Außensteuergesetz), to close the gaps in existing international tax rules and that they are more stringent than the international standards requested by BEPS project. Relevant BEPS action items from German tax perspective are:

<strong>BEPS action item</strong> <strong>comments</strong>
Neutralizing the effects of <strong>hybrid mismatch arrangements</strong> (action 2) <div class="bdi-content__text"><ul><li>some rules already exists in German tax law </li><li>intended to adopt a new general regulation which provides for the elimination of multiple/single expense deductions in case of hybrid financing or hybrid company structures</li></ul></div>
Designing effective <strong>controlled foreign company (CFC) rules</strong> (action 3) <div class="bdi-content__text"><ul><li>German Foreign Tax Act provides for strict CFC rules</li><li>adjustments to mitigate German tax rules are beneficial e.g. reduction of low-tax rate, updating of activities and credit system</li></ul></div>
Limiting <strong>interest deductions and other financial payments</strong> (action 4) <div class="bdi-content__text"><ul><li>Germany has already Interest Limitation Rules in domestic tax law</li><li>modification: limitation should only apply on intra-group financing</li></ul></div>
Countering <strong>harmful tax practices</strong> (action 5) <div class="bdi-content__text"><ul><li>Germany has no IP/patent-box (no need for action)</li><li>domestic tax law comprises general anti-abuse rules </li><li>EU level: new state aid rules shall prevent harmful cross-border tax practices</li></ul></div>
Preventing the artificial avoidance of <strong>permanent establishment status</strong> (action 7) <div class="bdi-content__text"><ul><li>consideration in double tax treaties</li><li>already implemented in new tax treaty between Germany and Australia </li></ul></div>
Aligning <strong>transfer pricing</strong> outcomes with value creation (action 8-10) <div class="bdi-content__text"><ul><li>adjustments of transfer pricing guidelines executed by OECD (no need for action in Germany)</li></ul></div>
Guidance on transfer pricing documentation and <strong>country-by-country reporting</strong> (action 13) <div class="bdi-content__text"><ul><li>CbC-Reporting shall be obligatory for MNEs with a turnover above EUR 750 million</li><li>implementation is intended in Germany for 2016</li><li>consultations with other countries not completed regarding the exchange of information</li></ul></div>

The BEPS items are discussed controversially, for example the exchange of tax information versus the unwanted publication of confidential data related to CbC-Reporting. Discussions about double taxation arose resulting from new transfer pricing rules and permanent establishment definitions. General uncertainty exists with respect to the political commitment of some countries as to whether, when and to what extent they will implement the OECD recommendations.

As presented above, Germany’s tax system already catches the essential points of the BEPS actions today. Further tightening of the domestic tax law would result in a clear disadvantaged position for Germany, particularly if other countries such as the US will not follow. Therefore, BDI urges for an internationally coordinated approach without any front-running of nations or institutions and therefore is engaged in the process of striking a cooperative balance on this challenging tasks.