Base Erosion and Profit Shifting (English)

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Definition and Description about BEPS Action Plan released by OECD

Base Erosion and Profit Shifting

Base Erosion and Profit Shifting (BEPS, 세원잠식 및 소득이전, 稅基侵蝕與利潤移轉)

Definition

1
Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.

OECD had been released a project named BEPS (Base Erosion and Profit Shifting) to set up an international framework to combat “tax avoidance” by multinational enterprises (“MNEs”, 다국적기업).

Structure of BEPS Action Plan

  • Address the Digital Economy
  • Hybrids
  • Controlled Foreign Companies (CFC) Rules
  • Interest Deductions
  • Harmful Tax Practices
  • Treaty Abuse
  • Permanent Establishment Status
  • Transfer Pricing
  • BEPS Data Analysis
  • Transfer Pricing Documentation
  • Dispute Resolution
  • Multilateral Instrument

Controlled Foreign Companies

Income Tax System designed to limit artificial deferral of tax by using offshore low taxed entities.

CFC Rule

  • The countries which are located at Tax Haven
  • The countries which haven’t double tax agreements

Tax Avoidance

Double Irish with a Dutch Sandwich

is a tax avoidance technique employed by certain multinational companies.

  • Requirements
    • Company (Korea, United States, other countries) (HQ)
    • 2 Ireland based companies (IA, IB)
    • 1 Netherland based company (NA)
    • 1 Tax Haven company (such as Bermuda, Virgin Island) (TH)
  • Example (Company)
    • HQ company sell intellectual property to TH company.
    • TH company revalue intellectual property more higher.
      • revalue will be translated as an intangible asset under GAAP, IFRS
    • TH company licensed intellectual property to IA company.
    • IA company licensed intellectual property to NA company.
    • NA company licensed intellectual property to IB company.
    • IB company sells software to customer.
  • Example (Customer)
    • Customer pays $10,000 to IB company.
    • Reversely transferred as a royalty.
    • TH company accumulates the cash and lend cash to HQ company.

Single Malt

Similar to the Double Irish technique, but instead of using a Bermuda or Virgin Island located at Caribbean island, the Malta and its double tax treaty with Ireland to avoid taxation of certain multinational companies.

Responses

  • United Kingdom
    • Diverted Profits Tax (“DPT”)
  • Republic of Korea
    • Adjustment of International Taxes Act (“국세조세조정에 관한 법률”)
  • Republic of China
    • CbC (Country-by-Country) Report, Master File and Local file required
    • “內地稅新頒函釋-核釋營利事業得免送交集團主檔報告及國別報告認定標準。”
    • https://law.dot.gov.tw/law-ch/home.jsp?id=18&parentpath=0,7&mcustomize=newlaw_view.jsp&dataserno=201912100001
  • New Zealand
    • Taxation (Neutralising Base Erosion and Profit Shifting) 2018
    • http://www.legislation.govt.nz/act/public/2018/0016/14.0/DLM7505806.html
  • Hong Kong Special Administrative Region
    • the Inland Revenue (Amendment) No. 6 Bill 2017

anti-BEPS Tax Regimes

  • U.S. Tax Cuts and Jobs Act of 2017
  • EU Commission 2018 Digital Services Tax

To be continue..