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BEPS project ramps up

The Organization for Economic Cooperation and Development’s (OECD) project regarding how much and where tax is paid by multinationals is ramping up.  The release of the OECD’s Base Erosion and Profit Shifting (BEPS) 15 point Action Plan in July 2013 was also accompanied by an ambitious timeline with phase 1 actions to be completed by September of this year.  The ball has certainly started rolling in this regard with the release of several discussion drafts on three of the actions this month.   We have summarised the key points from each discussion draft below. 

Action 6: Treaty Abuse 

(released on 14 March 2014)

Issue Treaty abuse, in particular treaty shopping, is one of the main concerns.

(A) Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances

Limitation on benefits clause: A specific anti-abuse rule is proposed based on the limitation on benefits provision already included in many US treaties. The rule is designed to limit treaty benefits to companies (and individuals and others) with sufficient presence in the relevant country. 

Purpose rule:In addition to the limitation on benefits clause, the Discussion Draft proposes a broadly drafted general purpose rule aimed at removing treaty benefits from income where one of the main purposes of the arrangements or transaction was to obtain treaty benefits.

Determining treaty residence: The Discussion Draft proposes removing the place of effective management tie-breaker clause for determining treaty residence (where different domestic rules would treat an entity as resident in two countries).  This will be replaced by a requirement that the competent authorities of the two countries endeavour to determine residence, by reference to place of effective management, place of incorporation/constitution and any other relevant factors. 

Minimum shareholding period re dividends: It is proposed that the reduced rates of withholding tax applicable to non-portfolio dividends are restricted to shareholdings that are owned throughout a period of months that includes the dividend payment.  Comments are sought on what the number of months should be.

Withholding taxes on payments to permanent establishments (PE): A new clause is proposed to restrict relief from withholding taxes on payments to a third country PE, to apply where the combined rate of tax paid by the recipient in the PE and residence countries is less than 60% of the tax rate of the residence country.


(B) Clarification that tax treaties are not intended to be used to generate double non-taxation 

The title and preamble to the OECD Model Tax Convention will be amended to clarify that the prevention of tax evasion and avoidance, specifically including but not limited to treaty shopping, is a purpose of tax treaties; countries that enter into a treaty intend to eliminate double taxation without creating opportunities for tax avoidance and evasion.  This title and preamble will be relevant to the treaty’s interpretation.


(C) Tax policy considerations that  countries should consider before deciding to enter into a tax treaty with another country

It is proposed that the model tax treaty include key points for countries to consider in relation to the conclusion, modification (or termination) of a tax treaty.  The avoidance of double taxation remains a main objective of tax treaties in order to reduce tax obstacles to cross-border services, trade and investment. However, other considerations include the ability to eliminate double taxation domestically, increased risk of non-taxation, excessive taxation from high withholding tax rates, increased certainty and cross-border dispute resolution for taxpayers and the ability of prospective treaty partners to provide assistance in the collection of taxes and exchange of information.   

Deloitte Comment One of the concerns with the wide-ranging proposals is the degree of uncertainty that will exist in applying a purpose test. It will also likely be difficult to apply such a test on a consistent basis. This uncertainty will create practical issues for businesses seeking to understand whether the benefits of a treaty will apply to their transactions. Comments on this draft are due on 9 April 2014.

Action 2: Hybrid Mismatch Arrangements 

(Two documents released on 19 March 2014 )  

Issue Hybrid mismatch arrangements can be used to achieve unintended double non-taxation or long-term tax deferral by creating two tax deductions for one borrowing, generating deductions without corresponding income inclusions or misusing foreign tax credit and participation regimes.

The discussion draft recommends neutralising hybrid mismatches on a standalone basis without reliance on counterparty jurisdictions.  The draft recommends countries include “linking rules” within domestic legislation:  a primary rule would apply whenever a mismatch arises and a secondary or defensive rule to apply in circumstances where the primary rule does not apply. 

Two approaches are being considered – either identify transactions which are of most concern and specifically include them within the scope of the rules (e.g. hybrid instruments held by related parties), or, define exceptions from a broad rule (e.g. widely held hybrid financial instruments).

Further changes to domestic law are recommended for hybrid financial instruments (restrict dividend exemptions for deductible payments and proportionate limitation of withholding tax credits) and for reverse hybrid and imported mismatches (intermediate jurisdiction tax filing and information requirements).

The Discussion Draft includes a proposal for a new model treaty provision which sets out that an entity that is fiscally transparent under the tax laws of either country will be treated as if it is resident in the recipient country for the purpose of accessing the treaty, but only to the extent that the recipient country, in its domestic law, treats the entity as a resident in respect of the income concerned (and therefore taxes it). Reference is made to the work undertaken in respect of BEPS Action 6: Preventing the granting of treaty benefits in inappropriate circumstances.

Deloitte  Comment


One of the challenges with hybrids has always been – which country is being disadvantaged? The OECD has tackled this head-on with its view that a hybrid should be countered without asking the question at all. 

The proposals are likely to impact many hybrid financing arrangements between a number of jurisdictions.

Given that the changes are mainly effected through changing domestic law, it can be expected that once final proposals have been agreed in September, 2014, some countries may start to legislate soon thereafter. 

Comments are due by 2 May 2014.

Action 1: Tax Challenges of the Digital Economy

(released on 24 March 2014)

Issue The Action Plan identifies changes in business as a result of the digital economy as one of the main threats to base erosion. The main issue is the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under the current international rules.
Discussion points

Unlike the previous discussion drafts – there are no recommendations as there is no current consensus view at this stage.  This is the most controversial issue to date because some countries want a minimalist approach whereas other countries do not.  Therefore, this document is intended to provide stakeholders with substantive proposals for comment.

The document states that BEPS tax planning in the digital economy will be significantly limited by the other actions of the BEPS project in any event.  However there is more that could be done to restrict tax planning in the digital economy.  The additional suggestions here include:

  1. Amendments to the permanent establishment definition,
  2. Withholdings taxes on digital transactions, and
  3. Consumption tax (VAT) options.
Deloitte Comment

Tackling the fast-moving digital economy presents an enormous challenge to tax authorities around the world, making it probably the hardest issue faced by the OECD.  The OECD is clear that ‘structures aimed at artificially shifting profits to locations where they are taxed at more favourable rates, or not taxed at all, will be rendered ineffective by ongoing work in the context of the BEPS project’. There are no proposals for new digital taxes, however the draft seems to imply that unilateral approaches may be considered should the preferred multilateral solutions fail to reach consensus. 

Comments on this draft are requested by 14 April 2014.


As to what this means for New Zealand, our tax rules are fairly robust already in comparison to some other jurisdictions and are continually finessed. Still, we can expect more domestic changes in light of these discussion drafts once finalised. Common sense will be required so that New Zealand maintains an appropriate tax setting balance. In this regard the Minister of Revenue Todd McClay is obviously conscious of this concern recently stating “Countering BEPS helps to level the playing field. Moreover, if New Zealand suffers base-erosion due to BEPS, other taxes must increase to make up the difference, which can reduce the efficiency and competitiveness of the New Zealand economy.”

The discussion documents and further Deloitte commentary is available on BEPS Central which is Deloitte’s one stop shop for information on the BEPS project. Deloitte has also held recent DBriefs presentations on these discussion drafts which can be accessed here.

Tax Alert April 2014 contents


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