Action 1 addresses the tax challenges of the digitalisation of the economy, and specifically aims to identify and address the main challenges that the digitalisation of the economy poses for the existing international tax rules.

A final report on Action 1 was issued in October 2015 alongside the final reports on other BEPS actions. The Action 1 final report includes few specific recommendations, as the potential solutions identified could involve changes to the tax framework that go beyond those required by BEPS. Therefore, it was agreed that this area should continue to be monitored.

Work on this area was reinvigorated in 2017 when the OECD released a request for input regarding the tax challenges raised by digitalisation and for potential options to address these challenges, as part of the ongoing work of the Task Force on the Digital Economy (TFDE). This has led to further reports from the OECD and to a renewed commitment by the OECD and G20 to try to reach a consensus solution.

There are two pillars included in the current work program:

• Pillar 1: Reallocation of profit and revised nexus rules: This pillar involves work on potential solutions for determining where tax should be paid and on what basis, as well as the proportion of profits that should be taxed in the jurisdiction of the customer or user.
• Pillar 2: Global anti-base erosion mechanism: This pillar involves work on a system that would ensure that multinational enterprises pay a minimum level of tax, regardless of whether they have highly digitalised businesses. This work is intended to address remaining issues identified by the OECD/G20 BEPS initiative by providing countries with new tools to prevent their tax base from being shifted to jurisdictions that tax profits at less than the minimum rate.

In the absence of an international agreement on the taxation of the digitalised economy, some countries have either proposed or introduced an interim unilateral tax on certain digital services. These digital services taxes (DSTs) generally apply to gross revenue that is derived from “users” in those countries. The revenues in scope generally include those from online advertising, the sale of customer data, and subscriptions or other fees from online marketplaces and other intermediation platforms.

On 5 June 2021, the G7 finance ministers discussed the Pillar 1 and Pillar 2 proposals and reached an agreement on key elements of the global tax reform. Pillar 1 would still entail the reallocation of a share of the global residual profit of certain businesses to market countries, but this would only apply to very large global businesses. Pillar 2 would apply where income is not subject to a minimum effective tax rate in each country in which a business operates of at least 15%. The G7 also agreed on the need for coordination between DSTs and the new Pillar 1 rules and the expectation is that in due course unilateral DSTs will be withdrawn.

A conceptual agreement on both Pillar 1 and Pillar2 still needs to be reached by OECD/G20 Inclusive Framework members and progress towards a consensus agreement was made at the meeting in June 2021 when key components of global tax reform were agreed by 131 of the 139 Inclusive Framework members. Significant technical work is still needed to achieve implementation, including a multilateral instrument to facilitate double tax treaty changes.

Action 2 aims to neutralize the effects of hybrid mismatch arrangements.

The Action 2 final report released on 5 October 2015 sets out recommendations for domestic law provisions to counteract hybrid mismatch arrangements. The report also recommends changes to the OECD model tax convention to prevent hybrid entities from obtaining treaty benefits in inappropriate circumstances and to allow the application of the recommended domestic legislative provisions.

On 27 July 2017, the OECD released a report setting out recommendations for dealing with branch mismatch arrangements, to bring the treatment of such structures in line with the treatment of other hybrid mismatch arrangements addressed in the 2015 report.

The OECD has not issued any further documents related to Action 2. However, at the EU level, similar provisions to those recommended in the 2015 and 2017 reports are included in the European Union (EU) Anti-Tax Avoidance Directives (ATAD 1 and 2). These directives require EU member states to implement domestic rules to counteract hybrid mismatch arrangements. Most of these rules were required to have effect from 1 January 2020.

Action 3 aims to develop recommendations regarding the design and strengthening of controlled foreign company (CFC) rules. A final report on Action 3 was released by the OECD as part of its 5 October 2015 package of final reports. The Action 3 report sets out the building blocks for effective CFC rules that would enable jurisdictions that choose to implement such rules to prevent the shifting of profits to low-taxed foreign subsidiaries of a multinational enterprise.

No further Action 3 reports have been published by the OECD. However, at the EU level, CFC rules subsequently were included in ATAD 1, which requires EU member states to implement CFC rules. The implementation deadline was 1 January 2019. In addition, Pillar 2 of the ongoing work on the tax challenges of the digitalisation of the economy would appear likely to prevent or limit the perceived abuse of existing CFC rules.

Action 4 aims to limit base erosion involving interest deductions and other financial payments. A final report on Action 4, which was published as part of the OECD’s 5 October 2015 package of final reports, includes recommendations for domestic rules to restrict interest deductions by reference to a proportion of the profits of an entity or group. The report recommends a fixed ratio rule that would allow an entity to deduct interest and other financial payments up to a fixed percentage of its earnings before interest, tax, depreciation, and amortization (EBITDA) and a group ratio rule that would allow groups with higher levels of external debt to deduct net interest equal to the group’s net interest-to-EBITDA ratio.

An updated report on Action 4 was released by the OECD on 22 December 2016. The report includes further guidance on the design and operation of the group ratio rule and suggests approaches to deal with the risks posed by the banking and insurance sectors.

As with Actions 2 and 3, discussed above, the EU subsequently has introduced requirements that are similar to the recommendations in the Action 4 report. ATAD 1 requires EU member states that do not already have rules that are as effective as those set out in the directive to introduce a fixed ratio interest rule, which had to be implemented by 1 January 2019. The rule limits the deduction of (net) interest expense to 30% of an entity’s EBITDA.

On 11 February 2020, the OECD released final guidance on the transfer pricing aspects of financial transactions. The guidance forms follow-up work in relation to Action.

Action 5 aims to identify and counter harmful tax practices, taking into account transparency and substance. A final report on Action 5 was released by the OECD as part of its 5 October 2015 package of final reports. The Action 5 report elevated the importance of substantial activity in assessing whether a preferential regime is potentially harmful and set a new standard (the nexus approach) for substantial activity in intellectual property or patent box regimes. In addition, the report sets out a new framework for the compulsory spontaneous exchange of information in relation to tax rulings on preferential regimes.

Action 5 and the work of the Forum on Harmful Tax Practices (FHTP) is one of the BEPS minimum standards, meaning that this work continues and that countries that are part of the Inclusive Framework are subject to peer review in respect of the FHTP’s standards.

Further reports, therefore, have been published since October 2015, including a number of progress reports and peer review reports.

Action 6 aims to prevent treaty abuse by developing model treaty provisions to prevent the granting of treaty benefits in inappropriate circumstances. A final report on Action 6 was released by the OECD as part of its 5 October 2015 package of final reports.

Preventing treaty abuse is another of the BEPS minimum standards, and there are two elements to this. One element is that jurisdictions should introduce a preamble into their tax treaties stating that the treaties are not intended to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements. The other element is that jurisdictions should include a specific rule in their tax treaties preventing treaty abuse, including treaty shopping. These two elements are now incorporated within the provisions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), which was signed by the first jurisdictions on 7 June 2017 (see Action 15, below).

Subsequent documents have addressed some of the outstanding points not dealt with in the October 2015 report, such as the treaty entitlement of pension funds and investment vehicles that do not qualify as “collective investment vehicles” (non-CIV funds), respectively.

Current work on Action 6 primarily is focused on peer reviews to ensure that the agreed minimum standard is implemented by members of the Inclusive Framework.

Action 7 aims to prevent the artificial avoidance of permanent establishment (PE) status, by redefining the threshold for creating a PE, to prevent BEPS. A final report on Action 7 was released by the OECD as part of its 5 October 2015 package of final reports.

The Action 7 report includes changes to tackle arrangements where a nonresident company makes sales in a jurisdiction through a commissionaire or a dependent agent that does not formally conclude contracts in the jurisdiction, as well as changes to prevent the exploitation of the specific activity exceptions (including warehousing) in the PE definition set out in article 5(4) of the OECD Model Tax Convention on Income and Capital (“OECD Model Tax Convention”). The changes set out in the Action 7 report were subsequently incorporated into article 5 in the 2017 update of the OECD Model Tax Convention.

The Action 7 report also mandates the development of additional guidance on the attribution of profits to PEs (under article 7 of the OECD model tax convention), taking into account the changes to the PE definition. Subsequently, the OECD issued several documents, including two discussion drafts. A final report, Additional Guidance on the Attribution of Profits to Permanent Establishments, was issued in March 2018.

Actions 8, 9, and 10 are grouped together by the OECD, as these items cover guidance on several key transfer pricing areas. A final report on these actions was released by the OECD as part of its 5 October 2015 package of final reports. Action 8 covers transfer pricing issues relating to transactions involving intangibles, as well as cost contribution arrangements (CCAs). Action 9 addresses the contractual allocation of risks and the resulting allocation of profits to those risks, which may not correspond with the activities actually carried out. The scope of Action 9 includes the transfer pricing considerations in respect of the level of returns to funding provided by a capital-rich group company. Action 10 focuses on other high-risk areas, such as the recharacterization of transactions, the use of transfer pricing methods in certain abusive situations, and management fees, among other things.

On 23 May 2016, the OECD’s governing body, the OECD Council, approved the amendments to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”), as set out in the 2015 BEPS reports on Actions 8-10 and Action 13. A discussion draft on the changes to the OECD Guidelines was released on 4 July 2016. Amendments were reflected in the 2017 edition of the OECD Guidelines, released on 10 July 2017.

Following work previously undertaken by the OECD/G20 in relation to Actions 8-10 on aligning transfer pricing outcomes with value creation, two consensus reports were released by the OECD in June 2018.

One consensus report contains guidance on the use of the profit split method and expands the guidance on determining when the profit split method may be applied. The guidance on the application of the profit split method was incorporated into the OECD Guidelines, replacing the previous text.

The other consensus report provides guidance on the approach to be adopted for hard-to-value intangibles (HTVI) and aims to provide a common understanding among tax authorities on how to apply adjustments resulting from the application of this approach. The guidance on HTVI also was incorporated into the OECD Guidelines, as an annex to chapter VI.

On 11 February 2020, the OECD released final guidance on the transfer pricing aspects of financial transactions. The guidance will be incorporated into the OECD Guidelines, at chapter I and chapter X. This will be the first time guidance and examples on the transfer pricing aspects of financial transactions will be included in the OECD Guidelines.

The OECD also has published a number of Transfer Pricing profiles for countries.

Action 11 aims to establish methodologies to collect and analyze data on BEPS and the actions to address it. A final report on Action 11 was released by the OECD as part of its 5 October 2015 package of final reports. The Action 11 report assessed available data and concluded that there were significant limitations that constrained the analysis of the scale and economic impact of BEPS, but nevertheless concluded that the impact was significant. Despite the limitations in the data, the report sets out a dashboard of six indicators of BEPS. The report also presents a toolkit to assist countries in evaluating the fiscal effects of BEPS countermeasures and makes recommendations regarding data and tools for future analysis, including a recommendation that the OECD should work with governments to report and analyze more corporate tax statistics and present them in an internationally consistent way.

The ongoing work under Action 11 includes a Corporate Tax Statistics database developed to facilitate the study of corporate tax policy and measures and to monitor the effectiveness of the BEPS project. The first edition, published in January 2019, covers data on corporate tax revenue and rates, as well as tax incentives related to innovation and information on intellectual property regimes. The second edition, released in July 2020, in addition contains information on enacted CFC rules and interest limitation rules as well as data collected as part of the country-by-country report (Action 13).

Action 12 aims to provide a framework for the design of mandatory disclosure rules for countries that choose to adopt them. A final report on Action 12 was released by the OECD as part of its 5 October 2015 package of final reports. The Action 12 report sets out recommendations for the design of mandatory disclosure rules that would enable jurisdictions to obtain early information on potentially aggressive or abusive tax planning schemes. The report also sets out recommendations for rules targeting international schemes, as well as recommendations for the development of more effective information exchange and cooperation between tax authorities.

While there have been no follow-up publications specifically related to Action 12, elements of the design framework set out in the Action 12 final report are reflected in the OECD’s March 2018 report, Model Mandatory Disclosure Rules for Common Reporting Standard (CRS) Avoidance Arrangements and Opaque Offshore Structures. In addition, the EU has adopted amended EU directive on administrative cooperation, 2018/822 (DAC6) that requires all EU member states to implement legislation requiring taxpayers or their advisers to report cross-border transactions and CRS avoidance to the EU authorities, where the transactions have certain hallmarks. Domestic legislation implementing the directive was required to enter into effect on 1 July 2020, although the reporting requirements apply to relevant transactions entered into on or after 25 June 2018. A delay to the deadlines was approved by the European Council in June 2020, in response to COVID-19. However, some EU member states continue to apply the original deadlines.

Action 13 aims to reexamine and develop rules on transfer pricing documentation, to enhance transparency for tax authorities while taking into account the compliance costs for business. A final report on Action 13 was released by the OECD as part of its 5 October 2015 package of final reports.

To achieve the objective of providing tax authorities with useful information to assess transfer pricing and other BEPS risks, the OECD Action 13 report put forward a three-tiered structure consisting of the following:

• I. Master file: A document containing standardized information relevant for all members of a multinational enterprise (MNE) group;
• II. Local file: A document referring specifically to material transactions of the local taxpayer; and
• III. Country-by-country (CbC) report: A document containing certain information relating to the MNE group’s income and taxes, together with certain indicators of the location of economic activity within the MNE group.

From 2016 through 2020, the OECD released additional guidance on various aspects of the implementation of the transfer pricing documentation and CbC reporting requirements under Action 13, including local filing requirements, exchange of CbC reporting information, and peer reviews.

Action 14 aims to make dispute resolution mechanisms more effective by developing solutions to address issues that prevent countries from resolving treaty-related disputes under mutual agreement procedures (MAPs).

A final report on Action 14 was released by the OECD as part of its 5 October 2015 package of final reports. The Action 14 report includes measures that form part of a BEPS minimum standard and that aim to strengthen the effectiveness and efficiency of the MAP process and ensure timely, effective, and efficient resolution of treaty related disputes. In addition, the Action 14 report sets out a number of best practices. Two consequences of the report were a peer review process to evaluate the implementation of the minimum standard and the reporting of MAP statistics under a newly developed reporting framework, MAP Statistics Reporting Framework.

The Action 14 peer review process was launched at the end of 2016, with the aim of reviewing 79 jurisdictions between 2016 and 2021. The process consists of two stages. In stage 1, a jurisdictions’ implementation of the Action 14 minimum standard is evaluated and recommendations for improvements may be made to help the jurisdictions to become fully compliant with the standard. The assessment schedule for stage 1 peer reviews was released on 29 March 2017. Stage 2 measures the implementation of any recommendations from stage 1.

The OECD also has published a number of MAP profiles for countries.

Action 15 aims to develop a MLI to enable jurisdictions to quickly and consistently amend bilateral tax treaties in line with certain BEPS recommendations. A final report on Action 15 was released by the OECD as part of its 5 October 2015 package of final reports. The report sets out the key elements to be addressed by the MLI, and the text of the MLI was agreed in November 2016. The MLI covers tax treaty related measures arising from the BEPS project, namely, recommendations in respect of hybrid mismatches (Action 2), preventing tax treaty abuse (Action 6), changes to the definition of PEs (Action 7), and dispute resolution (Action 14).

On 7 June 2017, the first 68 jurisdictions signed the MLI and committed to implement the minimum standards in respect of preventing treaty abuse and improving MAP via the MLI. In addition, jurisdictions were able to choose whether to adopt certain optional changes by making reservations or notifications in respect of the various articles of the MLI.

The MLI entered into force for the first jurisdictions on 1 July 2018 and is expected to apply to over 1,700 tax treaties. The date for entry into effect for a specific tax treaty will depend on whether the parties to the treaty have listed it as a covered tax agreement (CTA) and the date on which each party completes the MLI ratification process.

OECD.org related links:

• OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors (July 2021): OECD | Deloitte article
  
• Progress report July 2019 - July 2020 – 4th annual progress report of the OECD/G20 Inclusive Framework on BEPS (July 2020)
• Members of the OECD/G20 Inclusive Framework on BEPS (December 2019)
• BEPS project Explanatory Statement: 2015 Final Reports (October 2015)
• Action Plan on Base Erosion and Profit Shifting (July 2013)

Deloitte links:

• Deloitte's 2020 global BEPS survey (June 2020)
• For webcasts relating to the BEPS developments, see Deloitte Dbriefs webcasts