What is BEPS?

Increasing number of international and offshore companies’ owners are expected to change the structure of their business, including also relocation of activities within their groups. The reasons for such important changes are the international tax standards and the tax information exchange agreements. Financial institutes of the EU and Liechtenstein (except Austria) started to collect information on the bank account holders. The tax information will be sen to the competent tax authorities. Switzerland and Austria will start collecting banking information from the October of 2016.

As more and more questions are arriving to the experts of Crystal Worldwide about BEPS, perhaps it worth to take a closer look and understand the basic concepts of the new international standards. The BEPS is not directly part of the information exchange standards (CRS, AEoI), but their purpose and usage are connected.

So, what is BEPS?

BEPS is the abbreviation of the English acronym of the term “Base Erosion and Profit Shifting”. This means that some firms with international background, typically multinational companies reduce their tax burden through administrative and tax planning tools. These firms redeploy the bulk of their profit into law tax or no tax jurisdictions. Of course, this is not acceptable for the high-tax countries, where the almost always deficient treasuries could use very well the missing amount of tax revenues. Therefore, G20 organisation of the most developed countries created an initiative within the framework of the OECD, called BEPS actions. The objective of the BEPS is to force all entities to pay their taxes where the activity takes place.

One of the most interesting aspects of the BEPS is, that the concerned countries are expected to harmonize their corporate taxes. This means that perhaps the time of introducing a common corporate tax regime is approaching in the European Union. Unfortunately, it is also conceivable, that due to the lobbying power of the high-tax jurisdictions, the rate of the new common corporate tax will not be the lowest available and even more countries will be forced to levy higher taxes. According to concerns of financial experts, the local taxation forced by the BEPS can create the double taxation again. The first BEPS standard to enter into force is about the transfer pricing between affiliated companies. Probably next year, most of the OECD member states will introduce the new international standards for the transfer pricing of the financial transactions, the sharing rules of the transaction profit and first of all, the “new approach of the taxation, in case of the profit sharing of the immaterial properties (intangible assets)”. New standards will also settle questions related to the place of taxation.

Interestingly, even experts of OECD, who created BEPS do not hide their opinion, that vast majority of the tax planning techniques, which they want to prevent are legitimate and have nothing to do with any kind of tax fraud. BEPS is not specifically created against illegal tax planning, however automatic tax information exchange agreement of the financial institutes should stop scams.

In the next sections of our article series, we will show the BEPS standards and the practical applications!


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