Even if you’re not directly involved in the tax affairs of MNCs operating in Ireland, you will no doubt have heard of BEPS. The BEPS project has been in the news now for about a year and has some way to run. Once it is complete, global tax principles are likely to have fundamentally shifted from today’s position. That could have major consequences for Ireland.

The OECD is the organisation behind the BEPS project, with the backing of most of the world’s major economies. In broad terms, the Base Erosion Profit Shifting “BEPS” project focuses on tax planning strategies that exploit gaps and mismatches in tax rules to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real activity but where taxes are low / nil, resulting in little or no overall corporation tax being paid. The BEPS project seeks to eliminate or minimise these practices.

As part of BEPS, the OECD identified actions and set deadlines to implement these actions. It also identified the requisite resources and methodologies to implement the actions. The Action Plan sets out 15 actions to address BEPS in a comprehensive and co-ordinated way, as follows:

1. Address the tax challenges of the digital economy
2. Neutralise the effects of hybrid mismatch arrangements
3. Strengthen CFC rules
4. Limit base erosion via interest deductions and other financial payments
5. Counter harmful tax practices more effectively, taking into account transparency and substance
6. Prevent treaty abuse
7. Prevent artificial avoidance of permanent establishment status
8. Develop rules to prevent BEPS by moving intangibles amount group members
9. Develop rules to prevent BEPS by transferring risk among, or allocating excessive capital to, group members
10. Assure that transfer pricing outcomes are in line with value creation
11. Establish methodologies to collect and analyse data on BEPS and the actions to address it
12. Require taxpayers to disclose their aggressive tax planning arrangements
13. Re-examine transfer pricing documentation
14. Make dispute resolution mechanisms more effective
15. Develop a multilateral instrument to enable countries to adopt the measures and amend tax treaties

Generally BEPS strategies are not illegal but rather they take advantage of current rules that are based on a traditional bricks and mortar economic environment rather than an environment that is increasingly characterised by intangibles. In essence, what the OECD is saying is that existing global tax principles are no longer fit for purpose as they do not take into account the different ways in which companies now do business.

The problems intrinsically linked to BEPS, according to the OECD, include the distortion of competition, inefficient allocation of resources and overall inequity amongst all taxpayers.

Clearly any solutions put forward under the BEPS project need to have broad acceptance to have any meaningful impact. While the OECD’s role makes this a more realistic target, consensus on any new measures will be challenging, particularly given that some of the proposals represent a fundamental change to how companies are taxed.

We’ve already seen some countries take unilateral action and introduce tax measures in respect of areas that are currently being examined under the BEPS work. Clearly this is far from ideal but thankfully, so far, individual actions have been limited. The challenge for the OECD is to work sufficiently fast to ensure that solutions are proposed in a timely manner but to have enough time to gain a consensus amongst the key members.

It is important to note the political momentum behind the BEPS project, with full G8/G20 backing. At the moment, there is significant desire and drive for change. As long as this lasts, it is hard not to imagine a fundamentally different tax landscape within a relatively short space of time, perhaps 5 years. Indeed some measures may be introduced within a shorter timeframe with perhaps only the more contentious matters taking longer to resolve.

Perhaps the most important “take away” from all of the OECD’s work on the BEPS project is the focus on substance. This is a theme running through much of its published papers since last summer. For Ireland, this can offer significant opportunity as many of the large multinationals may be encouraged to move further jobs here if it supports their tax strategy. Clearly tax strategy needs to be aligned with commercial strategy for Ireland to attract these jobs; there are many non-tax factors that are crucial, such as the supply of suitable labour, solid infrastructure etc.

Traditional tax havens may suffer at the expense of low “onshore” countries such as Ireland in the new landscape. We won’t be the only country seeking to benefit from any changes but we are in a strong position given the substance that many MNCs already have here.

Our challenge will be to retain our attractiveness in a tax environment that will likely see the end of structures such as the “Double Irish”. Adapting for change is going to be key for the Department of Finance in the coming years and staying close to the OECD developments is important.

The OECD gave itself a tight timeframe in which to complete its work, with the end of 2015 the deadline for phase one. The work has been split into bite sized pieces, with chunks of it already well underway. Some of the key areas already examined by the OECD are looked at below.

Digital Economy

The OECD issued a draft report in March 2014 in relation to taxing the digital economy and in particular, whether it requires new “fit for purpose” tax rules. An idea has been touted that companies could have a “digital presence” in their key markets and this presence would result in a tax liability in those markets on sales that are made from the selling country.

This report also discusses the value that data generated by customers creates for companies. The attribution of such value may result in the creation of a tax exposure for companies based on where their customers are located.

These two features represent a fundamental shift in how companies have been taxed to date.

There are a significant number of multinational companies operating in Ireland who are liable to Irish corporation tax on their worldwide income. However, if the shift were to take place whereby profits were allocated to jurisdictions where customers are located or where the companies have a digital presence, this would significantly undermine the benefits of Ireland as the quantum of profits liable to Irish tax would be much reduced.

There has been significant reaction to the OECD digital economy proposals, much of it adverse and pointing out that the line appears to have been blurred between direct tax and indirect tax. It has been pointed out to the OECD that while technological advances have enabled companies to offer more products and services, the fundamental business model has not changed. Companies still use assets and labour to create a product/service that it sold to a customer. Taxing rights should focus on where the value is created.

There is a sense that the OECD itself isn’t overly keen on some of the proposals in the Digital Economy report and has openly said that many of the proposals may not be required if other BEPS actions, such as transfer pricing and intangibles, provide solutions.

Intellectual Property

An OECD working group is looking at intellectual property (“IP”) owned by groups. There is a sense that too much value is being attributed to IP with a view to shifting profits from high tax jurisdictions to low tax jurisdictions. By reducing the value of the IP, this ability to shift profits would be reduced.

As noted above, this could result in multinationals migrating IP from havens to “onshore” jurisdictions such as Ireland. Given the OECD’s clear focus on substance, there may be an incentive to house your IP and jobs together. Clearly having a suitable IP tax regime in that sort of environment is crucial.

Impact on Financial Services Sector

The proposals, particularly in Action 6, may have inadvertent negative repercussions for the Irish financial services sector. In particular, the proposals could have a negative impact on treaty access for collective investment vehicles and could actually create double taxation for investors.

The provisions, if implemented as proposed, could remove all treaty access for the majority of Irish funds. The possibility of introducing a general Limitation of Benefits test in all tax treaties has been suggested and this clause could make it extremely difficult for cross-border funds to access treaties. This would result in the imposition of higher foreign withholding taxes on investments which investors would not otherwise have incurred if they had invested directly or had invested in a domestic fund. Thus, this would represent discrimination for cross border funds compared to domestically targeted funds.

Therefore, it will be important to ensure that negotiations surrounding this action are approached in a manner whereby the ability of Irish collective investment funds to access the Irish treaty network be highlighted. It will be important to foster the establishment of cross-border funds and prevent the introduction of double taxation and discriminatory outcomes.

Transfer Pricing Documentation

There was a discussion draft on transfer pricing documentation and country by country reporting released on 30 January 2014. A number of key issues were identified; one such issue is ensuring the compliance cost to business is minimised and materiality should be borne in mind as part of the cost. In addition, the confidentiality of information should be preserved and only shared by tax authorities under treaty exchange provisions.

A concern expressed by many is the additional compliance burden that may face companies if the changes proposed by the OCED are implemented.

Timeline

It is expected that the Action Plan will be largely completed in two years. Whilst some changes such as amendments to the OECD Transfer Pricing Guidelines and Amendments may be directly effective, others will need to be implemented through domestic law, bilateral treaties or multilateral instruments; such changes will possibly require more input and time.

The key issue for the OECD will be getting sufficient consensus to drive the changes. It is clear from Pascal Saint-Amans, OECD Head of Tax Policy, this project is not going to chug slowly along until we all forget about it. In other words, this is not going to follow the CCCTB rate of progress but will be driven by a large co-ordinated group that is results driven and that to date has met its challenging delivery dates, even if this has meant that opportunity for input from taxpayers has been limited.

Conclusion

The BEPS project is going to be with us for a while. On completion, we are likely to be facing a very different global tax landscape, one that offers both risks and opportunity for Ireland.

Key for Ireland is being suitably nimble in the crucial next couple of years and retaining a competitive tax environment within the new parameters. If we can do that the opportunities can trump the risks.

Peter Vale is a Tax Partner with Grant Thornton.

Email: peter.vale@ie.gt.com

Sarah Meredith is a Tax Manager with Grant Thornton

Email: sarah.meredith@ie.gt.com