On 5 October 2015, the Organisation for Economic Co-operation and Development (“OECD”) released its final reports on all 15 focus areas in its Action Plan on Base Erosion and Profit Shifting (“BEPS”) consisting of a package of measures for a coordinated international approach to reform the international tax system. The BEPS reports seek to eliminate any dubious tax planning practices and make the whole international tax system more transparent. The changes introduced by the BEPS reports will have a significant effect both on corporate entities operating in multiple jurisdictions and also on those not having any cross-border operations.
The recommendations provided by the OECD fall in several different categories and they include inter alia:
- recommendations on challenging hybrid mismatch arrangements currently allowing an instrument or entity to be treated as debt in one jurisdiction but as income in another;
- recommendations on implementing controlled foreign company rules tackling the use of non-resident affiliate companies in low tax jurisdictions to avoid taxes;
- recommendations on limiting the interest expense deductions;
- recommendations on how to prevent entities from tax treaty shopping;
- recommendations on changing the definition of “permanent establishment” (“PE”) to prevent the artificial avoidance of PE status by entities through the use of commissionaire arrangements or exemptions;
- recommendations on the revision of OECD Transfer Pricing Guidelines and recommendations on Country-by-Country reporting;
- recommendations on mandatory disclosure rules for entities concerning aggressive tax planning arrangements;
- recommendations on more effective dispute resolution mechanisms; and
- recommendations on the development of a multilateral instrument for implementing treaty-based recommendations.
Finland has already recently implemented some of the recommendations included in the final reports, such as rules on deductibility of interest expenses. Despite the fact that the report has been labelled as “final”, much remains open to discussion, such as; which countries will implement these in the first place, which elements will they choose to implement, and which countries will ignore the process entirely.
We assume that Finland will implement most of the recommendations included in these reports. However, the implementation will require changes in the domestic legislation. Therefore, taxpayers should now evaluate the implications of the recommendations contained in the reports for their business models and operating structures. Furthermore, they should closely monitor legislative and administrative developments and changes in the countries they currently operate in and/or plan to carry out investing activities in future.