What Is Included in the BEPS Action Plan?

Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational companies that exploit gaps in international tax rules to shift profits to locations with low or no corporate tax rates. In response, the Organisation for Economic Co-operation and Development (OECD) and G20 countries created the BEPS Action Plan. Finalized in 2015, the plan provides governments with internationally coordinated measures to counter these tax avoidance strategies. The goal is to ensure corporate profits are taxed where the economic activities generating them occur and where value is created.

The Three Pillars of the BEPS Framework

The 15 actions in the BEPS project are structured around three pillars: coherence, substance, and transparency and certainty. These pillars work together to close gaps in existing international tax rules that allow for profit shifting.

The coherence pillar strengthens domestic tax rules affecting cross-border activities. It aims to neutralize hybrid mismatch arrangements, which exploit differences in the tax treatment of an entity or instrument between countries to achieve double non-taxation. This pillar also strengthens rules for controlled foreign companies (CFCs), which are foreign subsidiaries of a parent company in a low-tax jurisdiction.

The substance pillar aligns taxation with the location of economic activity and value creation. This prevents the artificial shifting of profits to locations where a company has little or no real business operations. The pillar addresses tax treaty abuse, the definition of a permanent establishment, and transfer pricing rules to ensure reported profits reflect the value-creating activities performed in a country.

The transparency and certainty pillar provides tax administrations with a clearer view of the global operations of multinational enterprises. This is done through improved data collection and disclosure requirements, which help authorities assess risks and conduct audits. This pillar also provides greater certainty for businesses by improving dispute resolution mechanisms.

Key BEPS Action Items Explained

Actions 8-10 reform transfer pricing rules, the process for setting prices for transactions between related entities in a multinational group. Following the “arm’s length principle,” these transactions should be priced as if they were between unrelated parties. These actions ensure transfer pricing outcomes align with value creation, particularly for intangibles. The updated guidance requires an analysis of the parties’ actual conduct, preventing profit allocation based on contracts that lack economic substance.

Action 13 introduced Country-by-Country (CbC) Reporting, requiring large multinational enterprises with annual group revenue of €750 million or more to file a detailed annual report. The CbC report breaks down financial data for each tax jurisdiction where the MNE operates, including:

• Revenues
• Profits before tax
• Income tax paid and accrued
• Number of employees
• Stated capital
• Tangible assets

This gives tax authorities an overview of the MNE’s global allocation of income and activity to better assess BEPS-related risks.

Action 6 prevents the abuse of tax treaties, such as “treaty shopping.” This occurs when a company establishes a shell company in another country to gain access to its favorable tax treaty benefits. Action 6 provides model treaty provisions to counter these arrangements, including a “principal purpose test” (PPT) that denies treaty benefits if obtaining them was a principal purpose of a transaction.

Action 7 addresses the artificial avoidance of Permanent Establishment (PE) status. A PE is a fixed place of business that gives a country the right to tax a foreign enterprise’s profits. Companies have circumvented the PE definition through strategies like using commissionnaire arrangements where a local agent sells goods for a foreign company. Action 7 tightens the PE definition to prevent companies from operating in a country without creating a taxable presence.

The Multilateral Instrument

Implementing the BEPS treaty recommendations would have required renegotiating thousands of bilateral tax treaties. To overcome this, Action 15 led to the Multilateral Instrument (MLI). The MLI allows jurisdictions to efficiently amend their existing bilateral tax treaties to incorporate the BEPS measures.

The MLI functions as an overlay, modifying existing tax treaties without direct bilateral negotiations. It covers treaty-related BEPS measures, including those on hybrid mismatches, treaty abuse, permanent establishment, and improving dispute resolution. This process ensures the BEPS recommendations can be implemented consistently across many treaties.

Participation in the MLI is flexible. Countries designate which of their existing tax treaties they wish to be covered, referred to as Covered Tax Agreements. The instrument contains a mix of minimum standards that all participants must adopt and optional provisions that countries can choose to apply. This allows countries to tailor the implementation to their specific tax policies.

The MLI entered into force in 2018, and many countries have since ratified it, bringing their tax treaties in line with BEPS minimum standards. The MLI sits alongside a bilateral treaty and modifies its provisions but does not replace the treaty itself. This approach provides a practical mechanism for the widespread adoption of anti-avoidance rules.

Introduction to BEPS 2.0

Following the initial project, the OECD/G20 Inclusive Framework developed a two-pillar solution known as BEPS 2.0. This phase of tax reform addresses challenges from the digitalized economy. It aims to ensure all multinational enterprises (MNEs) pay a fair share of tax, particularly those in the digital sector earning significant income from a market without a physical presence.

Pillar One focuses on reallocating taxing rights. Its Amount A component proposes reallocating a portion of profits from the largest MNEs to the jurisdictions where their customers are located. This targets MNEs with global turnover above €20 billion and profitability above 10%, though its implementation depends on a future multilateral convention. Pillar One also includes Amount B, a framework to simplify transfer pricing for routine marketing and distribution activities, available for adoption in 2025.

Pillar Two introduces a global minimum corporate tax rate. It ensures large MNEs with annual revenues over €750 million are subject to a minimum effective tax rate of 15% on their profits in every jurisdiction. This is achieved through the Global Anti-Base Erosion (GloBE) rules, which trigger a top-up tax if the effective tax rate in a jurisdiction is below the 15% minimum.

The GloBE rules consist of the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). The IIR requires the MNE group’s ultimate parent entity to pay the top-up tax in its home country. The UTPR serves as a backstop, applying the tax in other jurisdictions where the group operates if the low-taxed income is not subject to an IIR. These two pillars of BEPS 2.0 represent a fundamental shift in the international tax landscape.