Lecture Notes: Base Erosion and Profit Shifting (BEPS)

Introduction

• Topic: Base Erosion and Profit Shifting (BEPS)
• Aim: Discuss the broad changes and business impacts of BEPS rather than focusing on detailed tax regulations.
• Panel Introduction:
  • Kelvin: Group Risk and Insurance Manager at International SOS
  • Araki: Representative of Japan Risk Specialists
  • Goga: Head of Tax and Revenue Practice Group at SH Alamo and Coe

Background on BEPS

• Origin: Response to public and political pressures post-GFC.
• Focus: Multinationals not paying fair taxes, led to OECD's BEPS project.
• Purpose of BEPS: Address tax base erosion and profit shifting by multinationals.
• Inception: Initiated by G20, led by OECD, reporting in 2015.

Current Tax Environment

• International Tax Rules: Existing rules were used to legally minimize taxes, leading to minimal taxes in major markets like the UK.
• Multinational Practices: Focus on big companies like Amazon, Google, Starbucks.
• Public Pressure: Increased scrutiny on tax practices during austerity periods.
• Project Development: OECD tasked to address these issues, now countries are implementing the BEPS actions.

BEPS Impact on Business

• Key Actions:
  • Increased risk of double taxation.
  • Greater documentation and reporting obligations.
  • Enhanced scrutiny and audits from tax authorities.
• Focus on Captives:
  • Action Items most relevant to captives include transfer pricing, risk management, financial capacity to assume risks.

Key BEPS Action Items

• Transfer Pricing (Actions 8-10):
  • Alignment of profits with value creation, control over risk, and financial capacity requirement.
  • Recharacterization of transactions if viewed as commercially irrational.
• Controlled Foreign Corporation (CFC) Rules (Action 3):
  • Impact on jurisdictions with enhanced CFC rules.
• Permanent Establishment (Action 7):
  • Lower threshold for establishing a permanent establishment.
• Transparency and Reporting (Action 13):
  • Introduction of country-by-country reporting.
  • Increased visibility over multinational operations by tax authorities.

Implementation and Local Impact

• Global Adoption: Over 85 countries, including Malaysia and Singapore, adopting BEPS measures.
• Malaysia's Position:
  • Updated transfer pricing guidelines.
  • Country-by-country reporting adopted.
• Industry Reaction:
  • Awareness and adaptation among multinationals and captives.
  • Need for documentation and compliance.
• Japan's Reaction:
  • Conservative companies wary of tax planning.
  • Increased competitiveness driving interest in BEPS compliance.

Recommendations and Industry Response

• Panel Insights:
  • Ensure rational business models and adherence to BEPS guidelines.
  • Prepare and maintain robust documentation.
• Captive Strategy:
  • Validate the rationale, substance, and governance of captives.
  • Engage with tax authorities to clarify and educate on captive operations.

Conclusion

• Final Advice:
  • Do not view BEPS as a deterrent; instead, see it as an opportunity to ensure compliance and competitiveness.
  • Engage with industry associations for collective guidance.
  • Continuously review and adapt business practices to align with global tax regulations.

Panel Wrap-Up

• The panel emphasizes the importance of understanding BEPS implications and encourages proactive engagement and compliance efforts to ensure business sustainability and tax compliance.