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BEPS recommendation could significantly affect cross-border trade

Author(s): Amanda Heale, Patrick Marley

Dec 9, 2015

In November 2015, Prime Minister Trudeau and the other G20 Leaders endorsed the OECD’s package of measures released as part of the base erosion and profit shifting (BEPS) project. The BEPS project, an ambitious plan undertaken jointly by the OECD and G20 to overhaul the global international tax system, culminated this year in hundreds of pages of recommendations that, if adopted, could have a significant impact on cross-border trade and the competitiveness of Canadian businesses.

The OECD’s final report on the OECD/G20 BEPS project (the Final Report) was released in 2015. The Final Report represents the culmination of the OECD’s multi-year project aimed at improving the coherence, substance and transparency of the international tax system. The project was initiated at the request of the G20, in response to growing public concern about BEPS. BEPS generally refers to tax-planning strategies that exploit differences in domestic and international tax rules to shift profits to low tax jurisdictions. The BEPS project has received unprecedented attention from governments and the private sector.

The Final Report outlines the OECD’s recommendations and the participant countries’ consensus for addressing BEPS. It was approved by the G20 Finance Ministers on October 8, 2015 at their meeting in Lima, Peru, and endorsed by the G20 Leaders on November 16, 2015 at their meeting in Antalya, Turkey.

The Final Report represents the consensus views of 44 countries that make up about 90% of the global economy. As a result, if the recommendations in the reports are adopted into tax treaties and domestic law, they could have a significant impact on cross-border trade and investment around the world. The Final Report includes recommendations on the digital economy, the use of hybrids, designing controlled foreign corporation rules, limiting interest deductibility, limiting the use of patent boxes and certain other harmful tax practices; preventing abusive treaty shopping, preventing artificial avoidance of “permanent establishment” status, aligning transfer pricing outcomes with value creation, measuring and monitoring BEPS, mandatory disclosure rules, transfer pricing documentation and country-by-country reporting, making dispute resolution mechanisms more effective, and developing a multilateral instrument to modify bilateral tax treaties.

At the time of writing it is not yet known whether, and the extent to which, the new federal government may seek to adopt the various BEPS recommendations.

The consensus nature of the Final Report results, in many cases, in ambiguous recommendations. Combined with broad access to financial data, such rules will undoubtedly result in many countries seeking to raise additional corporate tax revenues, and may lead to an escalation in international tax disputes and compliance costs in Canada and around the world. By avoiding discussion of difficult issues (such as the allocation of taxing revenue between source and residence countries), the consensus in the Final Report may mask significant differences in views between countries as to who will collect more tax revenue as a result of the proposals.

In Canada’s case, we hope that the new government will remain mindful of the need to ensure that tax treaty provisions and domestic rules protect the competitiveness of Canadian businesses and encourage investment in Canada.

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