Summary of Base Erosion and Profit Shifting package
This appendix provides a brief overview of the Base Erosion and Profit
Shifting (BEPS) package by action item and the Australian Government's response
following the release of the final reports.
Action 1: Address the Tax
Challenges of the Digital Economy
The digital economy and its business models present some key features
which are potentially relevant from a tax perspective—mobility, reliance on
data, network effects, the spread of multi-sided business models, a tendency
toward monopoly or oligopoly, and volatility. The digital economy has also
accelerated and changed the spread of global value chains in which
multinational enterprises integrate their worldwide operations.
BEPS risks are exacerbated in the digital economy and many of the
broader BEPS measures will apply to the digital economy. Measures have been
developed to level the playing field between domestic and foreign suppliers in
relation to the collection of Goods and Services Tax (GST) in the country where
the consumer is located.
Additional work has been done in relation to broader tax challenges of
the digital economy, such as nexus and data, but this analysis and the
potential solutions go beyond BEPS issues. As such, OECD and G20 countries have
agreed to monitor developments and consider whether existing international tax
standards are able to deal with tax challenges raised by developments in the
In response, the Australian Government noted its intention to introduce
an integrity measure to apply the GST to digital products and services imported
by Australian consumers. This measure was passed into legislation on 4 May 2016 as part of the Tax
and Superannuation Laws Amendment (2016 Measures No. 1) Act 2016. Other
measures, particularly the multinational anti-avoidance law and diverted
profits tax, have also changed the behaviour of some multinational companies in
the digital economy which have created a taxable presence in Australia.
Action 2: Neutralise the Effects of
Hybrid Mismatch Arrangements
Hybrid mismatch arrangements exploit differences in the tax treatment of
an entity or instrument between tax jurisdictions to achieve double
non-taxation, including long‑term deferral. The adoption of a common
approach to hybrid mismatches will facilitate the convergence of national
practices through domestic and treaty rules to neutralise such arrangements.
This approach will prevent double non-taxation by eliminating the tax benefits
of mismatches but not adversely impact the use of these instruments in
cross-border trade and investment.
Essentially, the final report recommends that hybrid mismatch
arrangements be neutralised as follows:
- Where there is a deduction/no inclusion outcome, deny the payer
the deduction (primary response) or require the inclusion of the income
- Where there is a double deduction outcome, deny the deduction in
the parent jurisdiction.
The Australian Government tasked the Board of Taxation to examine and
consult on how best to implement the new anti-hybrid rules in the Australian
legal context and report back by the end of March 2016. Following this consultation process, the government committed to implementing
this action in the 2016-17 Budget and is also developing specific rules to
eliminate hybrid mismatches that occur in relation to regulatory capital known
as Additional Tier 1 (AT1). Development of the enabling legislation to
implement these hybrid mismatch rules is ongoing.
Action 3: Designing Effective
Controlled Foreign Company Rules
Controlled Foreign Company (CFC) rules address the risk that taxpayers
with a controlling interest in a foreign subsidiary can shift income into a
CFC. Without such rules, CFCs provide opportunities for profit shifting and
long‑term deferral of taxation. The final report sets out recommendations
in the form of six building blocks for the design of effective CFC rules
- definition of a CFC;
- CFC exemptions and threshold requirements;
- definition of income;
- computation of income;
- attribution of income; and
- prevention and elimination of double taxation.
As Australia already has strong CFC rules and these meet the OECD best practice
guidance, the government considers that no action is necessary at this stage.
Action 4: Limiting Base Erosion via
Interest Deductions and Other Financial Payments
Multinational groups may achieve favourable tax outcomes by adjusting
the amount of debt in a group entity. Groups may multiply the level of debt at
the level of individual group entities via intra-group financing or use
financial instruments to make payments that are economically equivalent to
interest but have a different legal form (and may not be captured by
restrictions on interest deductibility). This is potentially a significant issue for Australia which has a relatively
high corporate income tax rate.
The final report recommends a fixed ratio rule which limits an entity's
net deductions for interest (and payments economically equivalent to interest)
to a percentage of its earnings before interest, taxes, depreciation and
amortisation (EBITDA). The approach can be supplemented by a worldwide group
ratio rule which allows the entity to exceed this limit in certain
Australia has had thin capitalisation laws since 2001 but amended them
in October 2014 to prevent further erosion of the Australian tax base.
Australia does not have a fixed ratio rule but instead employs a safe harbour
debt limit of 1.5:1 on a debt‑to‑equity basis. This amendment also
introduced a worldwide gearing debt limit to provide flexibility for inward
Action 5: Counter Harmful Tax
Practices More Effectively, Taking into Account Transparency and Substance
As part of the BEPS Project, the Forum on Harmful Tax Practices was
tasked with revamping its work on harmful tax practices to prioritise improving
transparency, including the spontaneous exchange of rulings related to
preferential regimes and on requiring substantial activity for any preferential
regime. The final report sets out a minimum standard to assess whether there is
substantial activity in a preferential regime. In the area of transparency, a
framework has been agreed for mandatory spontaneous exchange of information on
The Australian Government indicated that the Australian Taxation Office
has already implemented exchange of rulings.
Action 6: Preventing Treaty Abuse
Taxpayers engaged in treaty shopping and other treaty abuse strategies
undermine tax sovereignty by claiming treaty benefits in situations where these
benefits were not intended to be granted, thereby depriving countries of tax
revenues. The final report includes a minimum standard on preventing abuse including
through treaty shopping and new rules that provide safeguards to prevent treaty
abuse and offer a certain degree of flexibility regarding how to do so.
In its response, the Australian Government indicated that the new treaty
anti‑abuse rules would be incorporated into the negotiation of new and
Action 7: Prevent the Artificial
Avoidance of Permanent Establishment Status
Tax treaties generally provide that the business profits of a foreign
enterprise are taxable in a jurisdiction only to the extent that the enterprise
has in that jurisdiction a permanent establishment to which profits are
attributable. The final report includes changes to the definition of permanent
establishment to address techniques used to avoid tax obligations.
The Australian Government has introduced the Multinational
Anti-Avoidance Law as part of the Tax Laws Amendment (Combating
Multinational Tax Avoidance) Law 2015 to address issues relating to the
avoidance of permanent establishment in Australia and considers this
legislative measure is consistent with the BEPS action. In addition, other
recommendations in the BEPS final report relating to this action are in line with
Australia's treaty practice.
Actions 8, 9 and 10: Assure that
Transfer Pricing Outcomes are in Line with Value Creation
Transfer pricing rules are used to determine the conditions, including
the price, for transactions within a multinational group. The existing
standards have been clarified and strengthened, including the guidance on the
arm's length principle and an approach to ensure the appropriate pricing of
hard‑to‑value intangibles within the arm's length principle. The
final report also contains revised guidance on contractual allocations of risk
and other high‑risk BEPS concerns so that transfer pricing rules secure
outcomes that better align operational profits with the economic activities
which generate them.
The Australian Government does not consider that a fundamental change is
required to Australia's transfer pricing rules.  However, legislation to amend and update transfer pricing rules to be
consistent with the 2015 OECD BEPS Report was included in the Treasury Laws
Amendment (Combating Multinational Tax Avoidance) Law 2017.
Action 11: Measuring and Monitoring
Given the complexity of BEPS and existing data limitations, economic
analyses of the scale and economic impact of BEPS are currently constrained and
improved data and methodologies are required to fill this gap in knowledge. The
final report recommends taking better advantage of available tax data and
improving analyses to support the monitoring of BEPS in the future, including
tools to assist individual countries evaluate the fiscal effects of BEPS and
the impact of BEPS countermeasures.
The Australian Government response indicates that further work on
methodologies to measure progress is required.
Action 12: Require Taxpayers to
Disclose their Aggressive Tax Planning Arrangements
The lack of timely, comprehensive and relevant information on aggressive
tax planning strategies is one of the main challenges faced by tax authorities
worldwide. Early access to such information provides the opportunity to quickly
respond to tax risks through informed risk assessment, audits, or changes to
legislation. The final report provides a modular framework which will allow
countries to design a regime that fits with the need to obtain early
information on aggressive or abusive tax planning schemes and their users. It
sets out best practice recommendations for rules targeting international tax
schemes, and for the development and implementation of more effective
information exchange and cooperation between tax administrations.
The Australian Government, through the Australian Taxation Office, is
considering the costs and benefits for Australia of adopting disclosure rules.
Action 13: Re‑examine
Transfer Pricing Documentation
Improved and better‑coordinated transfer pricing documentation will
increase the quality of information provided to tax administrations and limit
the compliance burden on businesses. The final report recommends a minimum
standard on Country‑by‑Country reporting reflecting a commitment to
implement the common template in a consistent manner. Country‑by‑Country
reports should be filed in the ultimate parent entity's jurisdiction and shared
automatically through government‑to‑government exchange of
information. Country‑by‑Country reports will enable tax
administrators to better assess transfer pricing risks and target their
resources while multinationals will also see benefits from a more limited
In December 2015, the Australian Government adopted Country‑by‑Country
reporting as part of the Tax Laws Amendment (Combating Multinational Tax
Avoidance) Act 2015. The Country‑by‑Country reporting regime
applies in relation to income years starting on or after 1 January 2016.
Action 14: Make Dispute Resolution
Mechanisms More Effective
The changes introduced by implementing the recommendations arising from
the BEPS Project may lead to some uncertainty, and could, without action,
increase double taxation and disputes between countries in the short term.
Improving dispute resolution mechanisms is therefore an integral component of
the work on BEPS issues.
The mutual agreement procedure (MAP) is the mechanism set out by the
OECD Model Tax Convention through which differences and difficulties regarding
the interpretation or application of the convention can be resolved on a
mutually‑agreed basis. Countries have committed to a minimum standard
with respect to the resolution of treaty‑related disputes.
Australia is one of twenty countries to have declared their commitment
to provide for mandatory binding MAP arbitration in their bilateral treaties as
a mechanism to guarantee that treaty‑related disputes will be resolved
within a specified timeframe.
Action 15: Develop a Multilateral
Tax treaties are based on a set of common principles designed to eliminate
double taxation that may occur in the case of cross-border trade and
investments. Governments have agreed to explore the feasibility of am
multilateral instrument that would have the same effects as a simultaneous
negotiation of thousands of bilateral tax treaties. The goal is to streamline
the implementation of the tax treaty‑related BEPS measures and to have
the multilateral instrument open for signature by 31 December 2016.
Australia, along with 86 other countries, is working to update bilateral
treaties with BEPS outcomes. On 7 June 2017, Australia, along with 67 other jurisdictions, signed the
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting. Australia confirmed its positions on a provisional
basis, to be confirmed on ratification of the Convention. Legislation will be
introduced into the Australian Parliament as soon as practicable to give the
Convention the force of law in Australia.
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