The world of Revenue Generation is ever-dynamic. The universe of tax is equally changing by the second. To the government, the goose that lays the golden eggs is every earner of income particularly the blue-chip multinationals and nationals; of course, they not only lay golden eggs, but they also lay several golden eggs. But the geese would not lay eggs only for one man to take and vanish into thin air; certainly not.
In the world today, multinationals, make conscious efforts to reduce their golden egg (tax) liabilities in the most legal ways possible. In a similar vein, the government makes conscious efforts to reduce the possibility of companies not paying enough taxes. The consequence of this: a totally non-fictional legal conflict. This conflict has transcended into the international atmosphere; it is absolutely real. It is not an issue to be treated with levity anymore. Nations of the world in collaboration with representatives from the private sector and academia all sit to passionately discuss this conflict with a view to creating a viable and beneficial balance in world economies. Creating the balance inevitably occasioned the issue of BEPS, which means BASE EROSION AND PROFIT SHIFTING, among other relevant issues.
Briefly tracing the historical flow of BEPS becomes very crucial at this juncture. The largest conglomeration of countries of the world is the United Nations (UN). The UN is well organized and has several organs and agencies including the one particularly dedicated to tax matters, the ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD). From the OECD, the BEPS phenomenon was created. What is this BEPS?
We need not journey too long in history. As recently as 2013, the G-20 of the UN sat and directed the OECD to come up with Action Plans aimed at ensuring that companies, especially multinationals, pay their fair share of taxes. In details, what the G-20 really wanted to curb was the raging and excruciating issue of stateless income.
According to Edward D. Kleinbard, a professor at the University of Southern California, Gould School of Law, “Stateless Income” is income that is derived for tax purposes by a multinational group from business activities in a country other than the domicile of the group’s ultimate parent company but that is subject to tax only in a jurisdiction that is neither the source of the production factors through which it was derived nor the domicile of the group’s parent company.
For a better mental vision, let us take this illustration. Please, do not zoom off the rails. Follow smoothly:
Verity City Plc. is a multinational parent company headquartered in Lagos, Nigeria (30% CIT). Other companies in the group are Verity Inc. in Canada (5% CIT+ 50% tax credit for automobile importation and sale) and Verity Rococo in Singapore (15% CIT). Verity is an automobile manufacturing entity. Realizing that the location of its parent company has the highest tax rate, it relocates its manufacturing plant and substantial intellectual property rights (IPRs) to Singapore and puts a warehouse in Nigeria and Canada for the storage of finished Verity cars. Verity Group sells cars the most in Canada, then more in Singapore and very few in Nigeria.
From the above fact scenario, the majority of Verity income and tax benefits would certainly come from Singapore. Nigeria, where the parent company is based, gets the least of the income base.
This is a very simplistic approach to understanding BEPS. It gives an idea as to how it looks like, but not exactly how it is. According to the OECD, BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations (tax havens) where there is little or no economic activity. Notably, some of the schemes deployed by these multinational companies are illegal. However, not all of them are illegal.
On the disadvantages of a lackadaisical attitude to any government or revenue service to BEPS, it can occasion injustice and heavy unfairness on domestic enterprises as multinationals gain undue advantage on their sophisticated abilities to avoid tax liabilities. In addition, BEPS may prompt domestic rebellion or resistance to tax compliance and enforcement.
Today, the OECD is renowned for its OECD/G20 Inclusive Framework on BEPS which brings together 116 members and tax jurisdictions, representing over 95% of global GDP, to collaborate on the implementation of the BEPS Package. Does this not already give you a hint? Taxation is a global urgency already.
What is the BEPS Package?
The BEPS Package is a derivative of the OECD/G20 BEPS Project. The Project is set up as an international framework to combat tax avoidance by Multinational Enterprises (MNEs) using BEPS tools. This project was led by the OECD Committee on Fiscal Affairs and within two (2) years (2013), a report was released. Within the next two years, a 15-point Action Plan was developed through widespread consultations with relevant municipal, regional and international stakeholders as well as contributions of members.
The Action Plan was followed by the Inclusive Framework in 2016 which is all aimed at closing loopholes in tax codes or laws and in country-by-country inconsistencies, i.e. differences between the tax law provisions of distinct but commercially related countries.
Flowing from deep policy and enforcement considerations, it was realized that for an effective international tax framework to hold sway, developing countries must be involved in their numbers and “letters” (laws). To gain membership therefore, non-OECD/G20 countries must commit to the BEPS Package. The BEPS Package is a plan to “equip government with domestic and international instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.
The BEPS Package consists of 15 Action Plans that provide tax standards in exchange for a membership fee which is discounted for developing countries. The reason for this discounting is apparent, bearing in mind the objective of the BEPS Package which involves countries working on the Inclusive Framework on equal footing.
These Action Plans are carefully highlighted below:
Action 1 Digital Economy
Action 2 Hybrids
Action 3 Controlled Foreign Company (CFC) Rules
Action 4 Interest Deductions
Action 5 Harmful Tax Practices
Action 6 Treaty Abuse
Action 7 Permanent Establishment Status
Action 8-10 Transfer Pricing
Action 11 BEPS Data Analysis
Action 12 Disclosure of Aggressive Tax Planning
Action 13 Transfer Pricing Documentation
Action 14 Dispute Resolution
Action 15 Multilateral Instrument
In subsequent episodes, these Actions Plans will be comprehensively dealt with. Other relevant matters will also be touched. For your questions and inquiries on the understanding of BEPS, you may follow LAW AXIS 360 on its various social media platforms.
OLUKOLADE O. EHINMOSAN, ESQ