BEPS – new international tax rules: what German enterprises should know
By Dr. Heino Büsching
Base erosion and profit shifting (BEPS) are a headache for many countries. They have been trying for some time to curb the ensuing losses in tax revenue. Such losses occur when multinational enterprises shift their profits to low-tax countries or even achieve double nontaxation. Furthermore, BEPS can impair the competitiveness of enterprises that operate only nationally.
Increasing globalization and digitization have intensified the need for profit delimitation between individual countries and enhanced the significance of intangible assets, in particular. Media coverage of tax-avoidance strategies used by some multinational enterprise groups has also brought BEPS into the public’s focus.
Against this background, the G20 initiated the BEPS project in 2012. Subsequently, the OECD developed an action plan with 15 measures (actions) in order to take coordinated steps against BEPS. The final reports on the BEPS project were submitted in fall 2015 and ratified by the G20. The individual actions must now be implemented by the involved countries through regulations of relevant national laws and by way of international treaties. What changes may ensue from this that will affect German enterprises?
Against tax avoidance strategies: project actions
Of the BEPS project actions, the broadened definition of permanent establishment in Article 5 of the OECD Model Convention (Action 7) is at the start likely to be of significance for German enterprises. This action is intended to counter tax strategies by way of which permanent establishment status is avoided. This particularly expresses the interest of the import-oriented countries that demand their share of the tax base. By way of example, using commissionaire arrangements instead of working with distributors or artificially splitting up business activities are both deemed undesired tax strategies. The broadened definition of permanent establishment affects not only multinational enterprise groups, but also export-oriented small and medium-sized enterprises (SMEs). Now German enterprises must even more carefully check whether their activities abroad give rise to a permanent establishment.
Actions 8 through 10 contain revisions to the OECD transfer-pricing guidelines with the objective of guaranteeing that earnings are taxed where the value is actually created. The topical focus is on transfer-pricing issues in connection with controlled transactions concerning intangibles (Action 8) and the treatment of contractual risk distributions (Action 9). The revisions primarily affect multinational enterprises, which must review and update their existing transfer-pricing structures. Furthermore, additional paperwork is to be expected.
Action 13 contains revised OECD guidance on transfer-pricing documentation on the basis of a three-tiered standardized approach. In accordance with this, multinational enterprises must provide the tax authorities with comprehensive information about their worldwide business activities and transfer-price policies (master file) and prepare country-specific documentation in each country (local file). Groups of companies with consolidated turnover of more than 750 million are furthermore obliged to submit a country-by-country report each year that details the global distribution of their earnings and taxes. The enterprises will be burdened with further costs related to the paperwork necessary for this.
Some actions of the BEPS project are of only minor significance from a German perspective. This applies, for example, to the OECD recommendations for valid rules concerning the taxation of controlled foreign corporations (Action 3) and the common approach for limiting base erosion through interest deductions (Action 4). Such rules already exist in Germany in the form of the controlled foreign corporation rule (§ 7 through § 14 of the German Foreign Transactions Tax Act [AStG]) and the interest-rate ceiling (§ 4h of the German Income Tax Act [EStG] as read with § 8a of the German Corporate Income Tax Act [KStG]). As a result, there is no need for action in Germany regarding these measures. German multinational enterprises must, however, keep an eye on the implementation of these actions in other countries.
MNEs are affected
BEPS Action 2 (hybrid mismatch arrangements) will also affect multinational enterprises (MNEs). The essence of this action is that interest deduction in one country is also juxtaposed against corresponding taxation in another country. The reason for the hybrid mismatch is that the countries autonomously decide about the qualification of such financial instruments and legal entities. The intention is for corresponding taxation to be enforced by linking rules. This sounds easier than it is because such financing structures often exist throughout several levels. At the EU level, the legislature responded by amending the Parent Subsidiary Directive by way of which corresponding taxation is intended to be achieved. This does not affect nonmember countries of course.
It remains to be seen whether improved planning security and calculability, thanks to uniform international tax standards, will be a positive consequence of the BEPS project for enterprises. The intended strengthening of SME competitiveness compared with multinational enterprise groups would be welcome as well.
These advantages come with a high price. Particularly at multinational enterprises, they will be outweighed by significantly higher expenses for paperwork and compliance. Reviewing and adjusting the tax strategy can also cause significant costs to be incurred. In addition, the revisions due to the BEPS project result in legal uncertainty with regard to the transfer prices. The risk of using the data made available through the country-by-country reporting motivated by industrial policy should not be overlooked either. In this regard, assurances must be made that data to be collected cannot be misused for other purposes. Especially in the area of transfer prices, it will come down to mutual agreement procedures also efficiently safeguarding the rights of the enterprises with respect to the countries concerned. Otherwise, the risk of double taxation exists. Additional costs may also be in store for export-oriented SMEs, however. To avoid negative tax consequences caused by having a permanent establishment abroad, SMEs must review and, if need be, make costly adjustments to their distribution channels.
What has to be done
The German legislature is challenged to implement the agreed results of the BEPS project with sound judgement in order to keep the burden on German enterprises as limited as possible. The decisive point for the success of the BEPS project will, however, be whether or not as many involved countries as possible bindingly implement the agreed results. Without uniform implementation, enterprises are threatened with additional burdens owing to double taxation.
The EU Commission has recently published a draft directive to set minimum standards for implementation in order to guarantee the greatest uniformity possible in the adaptation of the results from the BEPS project because even within the EU the rules differ considerably. The implementation process will show whether the actions of the BEPS project prove advantageous or disadvantageous to German enterprises.