BEPS Project Withholding Tax Quick Guide
Staying abreast of changing regulations and practices is paramount to successfully recovering excess foreign withholding tax. The Base Erosion and Profit Shifting (BEPS) Project is set to change the international tax system through the creation of an international framework to fight abusive tax planning practices. Here’s what you should know:
Breaking down BEPS:
1. What is the BEPS Project? The BEPS Project is a joint initiative between the Organization for Economic Co-operation and Development (OECD) and the G-20 to tackle tax evasion practices, such as treaty abuse as a means to lower tax burden, and other issues.
2. What’s the plan? The BEPS Project initiatives are outlined in 15 Actions, published in 13 reports, that provide participating countries with standards, best practices, and general recommendations that fight abusive tax planning techniques such as:
- moving income away from high tax jurisdictions
- sheltering income from tax authorities
- creating erroneous interest deductions via intra-company loans
- abusing treaty provisions to obtain lower rates or double non-taxation on cross-border investments
Through a coordinated international framework, the BEPS Project strives to close gaps in the current international tax rules that allow investors to arrange financial transactions and business structures for the purpose of evading taxes.
3. Who is participating? The initiative includes input from over 80 non-OECD/non-G-20 countries as well as various international organizations such as the International Monetary Fund, the World Bank Group and the United Nations. Furthermore, the BEPS Inclusive Framework was established so countries and jurisdictions can share their views and needs on BEPS implementation. Current members of the Inclusive Framework, which has 96 members, are highlighted in orange:
Which Actions may impact withholding tax recovery processes?
Action 6: Contains guidance and standards for protecting against treaty shopping, a major BEPS concern, and helps prevent the granting of treaty benefits in inappropriate circumstances. BEPS Project requirements and recommendations may lead to countries amending their tax treaties to include anti-tax evasion measures.
Action 15: Multilateral Convention (also known as Multilateral Instrument or MLI): Curbs multinational corporations’ tax circumvention practices and is designed to be absorbed into existing bilateral tax treaties. At this point, about two dozen countries have expressed willingness to adopt the Multilateral Convention.
The BEPS Project is in various phases of implementation and participating countries are adopting recommendations and requirements into their tax legislations. A signing ceremony for the Multilateral Convention is scheduled for June 7, 2017 in Paris. The OECD continues to review more complex BEPS-related challenges by releasing discussion drafts open to international commentary.