The OECD's role in regulating international taxation began with the report " Fight against Base Erosion and Profit Shifting" in February 2013. During the same year, the group of countries known as the G20 agreed to adopt an Action Plan containing 15 key points to address base erosion and profit shifting.
Such Action Plan seeks to fight against harmful domestic rules that affect cross-border activities, reinforce the requirements of current international standards, improve transparency and certainty.
The final version of the Action Plan was published in November 2015, and its main objective is to define the path to be able to tax income where value is created. The 15 chapters of the document address different methods used by companies in their aggressive tax planning in order to reduce tax liability to minimum percentages.
The Action Plan came to update the rules of international taxation after almost a century, created at a time when the world was not as interconnected as it is today.
The scope of BEPS seeks to cover changes in the domestic law of countries, their practices and international tax treaties. Domestic law is reviewed through recommendations, while international treaties are addressed through the Multilateral Instrument. Said Instrument was finalized in 2016 and allows treaties that are not in line with the Action Plan to be modified without resorting to negotiation rounds.
It is important to understand how the OECD articulates its actions in the context of BEPS among its members, as well as to define which instances are involved in the process.
First, the OECD's Inclusive Framework establishes recommendations on implementations in order to reduce misunderstandings and disputes between the governments involved. It brings together in the Committee on Fiscal Affairs all countries and jurisdictions involved in international taxation. Learn more about how the OECD works here.
In the second instance, a Peer Review is provided to members of the Inclusive Framework. The Peer Review is a questionnaire in which each jurisdiction evaluates its domestic laws and the international tax treaties to which it is a party. The outcome is shared in a final document in order to evaluate the progress of the implementation of the BEPS package.
Some of the most relevant advances in the evolution of the BEPS package is that after the first Review, in 2018, there were 116 jurisdictions members of the Inclusive Framework. During this period, the provisions of the Multilateral Mechanism, had not taken effect since most of the agreements signed by members did not comply with the minimum standards.
In the second Review, in 2019, there were already 91 members in the Inclusive Framework, which generated the modification of 60 bilateral agreements.
By 2020, 94 jurisdictions party to the Inclusive Framework, ratified the Multilateral Convention for the Application of Tax Treaty Related Measures to Avoid Base Erosion and Profit Shifting." In this context, the complaint registration rate increased by 500% compared to 2019.
OECD Action 6: Treaty Shopping
The practice of treaty shopping consists of transferring income generated in one country to a person in another country, through an intermediary country in order to obtain a tax advantage generated by the treaties signed by each of the countries in question. This is an essential part of an aggressive tax strategy that seeks to establish businesses exclusively for the tax environment of the host country and to reduce taxes.
There are a number of reasons to prevent treaty shopping:
Some of the previous attempts to address treaty shopping include:
Currently, Action 6 focuses on the implementation of minimum standards. Members are expected to comply with them. These standards are divided into two. The first is to include a statement of non-taxation, and the second is to include a series of methods addressing treaty shopping.
The Multilateral Instrument can modify existing bilateral tax treaties. This is particularly useful since countries can edit treaties to which they are parties without the need to renegotiate them. The second is a series of rules known as the Limitation on Benefits that seeks to discourage people from seeking to benefit from international treaties.
The first progress made in the context of Action 6 was made on May 29, 2017. The document establishes that in order to be in line with the provisions of the treaty, countries should include:
For the 2020 Review, the OECD concluded that:
In the same year, the OECD findings were as follows:
In conclusion, it should be emphasized that the actions of the OECD are of great relevance for fair taxation globally. To achieve this, it is necessary that more jurisdictions are part of the mechanisms presented in this text, as this reduces the number of jurisdictions that could function as destinations oriented to treaty shopping.