Comments on the G20 Development Working Group on the impact of BEPS in Low Income Countries

Par Robert Robillard - 1 août 2014

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Released today, the full report is available here.

It was also added to our BEPS Library.

Based on the « key findings », action #4 (Limit base erosion via interest deductions and other financial payments), action #6 (Prevent treaty abuse), action #7 (Prevent the artificial avoidance of PE status), action #10 (Assure that transfer pricing outcomes are in line with value creation – Other high-risk transactions), action #11 (Establish methodologies to collect and analyse data on BEPS and the actions to address it), and action #13 (Re-examine transfer pricing documentation) have all been given a « high » degree of relevance to developing countries in the report.

Here are the key findings (pp. 3-4):

« This report finds that developing countries often face policy and other conditions that impact on their abilities to address base erosion and profit shifting. In particular:

Some developing countries lack the necessary legislative measures needed to address base erosion and profit shifting.

Developing country measures to challenge BEPS is often hindered by lack of information.

Developing countries face difficulties in building the capacity needed to implement highly complex rules and to challenge well-advised and experienced MNEs.

The lack of effective legislation and gaps in capacity may leave the door open to simpler, but potentially more aggressive, tax avoidance than is typically encountered in developed economies.

Developing countries and international organisations identify the following key BEPS issues as being of most relevance:

Base erosion caused by excessive payments to foreign affiliated companies in respect of interest, service charges, management and technical fees and royalties.

Profit shifting through supply chain restructuring that contractually reallocates risks, and associated profit, to affiliated companies in low tax jurisdictions.

Significant difficulties in obtaining the information needed to assess and address BEPS issues, and to apply their transfer pricing rules.

The use of techniques to obtain treaty benefits in situations where such benefits were not intended.

Tax loss caused by the techniques used to avoid tax paid when assets situated in developing countries are sold.

In addition, developing countries often face acute pressure to attract investment through offering tax incentives, which may erode the country’s tax base with little demonstrable benefit (included in this report, not as an integral part of BEPS, but of first order concern to developing countries that impacts on the tax base).

It would seem that these « findings » could also directly apply to any developped country, including Canada for that matter. Quite frankly, they actually form the basis of the BEPS initiative itself…

In other words, based on these « key findings », we still fail to see how more rules and more compliances measures will somehow enable developing countries in their bid to (finally) get access to a level playing field as far as international tax is concerned…

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard « at » localhost
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