Base Erosion and Profit Shifting

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On 8 October 2021, the OECD released a further statement in relation to the BEPS 2.0 proposals, aimed at addressing taxation of the modern digital economy. This is the latest development in the attempts to more equally share the tax revenue relating to digital services that have led to some…

On December 13, 2018, the Internal Revenue Service (the “IRS”) and the Department of the Treasury (the “Treasury”) released proposed regulations (the “Proposed Regulations”) with respect to the “base erosion and anti-abuse tax” (the “BEAT”) under section 59A of the Internal Revenue Code.[1]

The BEAT was enacted in 2017 as part of the tax reform act.[2] The BEAT is an additional tax that has the effect of a minimum tax on certain large U.S. corporations that make deductible payments to foreign related parties. The BEAT is designed to prevent these U.S. corporations from using deductible payments to reduce (or “base erode”) their corporate tax liability.

The Proposed Regulations clarify which taxpayers are subject to the BEAT and how the BEAT rules apply. The Proposed Regulations are generally effective for taxable years after December 31, 2017, and a taxpayer may rely on them before they are finalized so long as the taxpayer applies them consistently for all taxable years before they are finalized.

This post provides background and summarizes some of the most important aspects of the Proposed Regulations. For more information, please contact any of the Proskauer tax lawyers listed on this post or your regular Proskauer contact.

On Friday December 22, 2017, the President signed into law H.R.1, commonly referred to as the Tax Cuts and Jobs Act (TCJA). This is the most sweeping change to the US federal income tax laws in over three decades, and it will affect every US taxpayer, including participants in the capital markets. The purpose of this blog post is to focus on some of the provisions of the TCJA that will impact interest bearing debt, including leveraged loans and high-yield bond offerings. For background and a more detailed discussion of the TCJA provisions generally, please see, House of Representatives and Senate Conferees Reach Agreement on the Tax Cuts and Jobs Act (H.R. 1).

Yesterday afternoon, the House of Representatives passed the Tax Cuts and Jobs Act (H.R. 1) (the “House bill”). The House bill is identical to the draft bill approved by the House Ways and Means Committee on November 10. Late last night the Senate Finance Committee approved its own conceptual version of the Tax Cuts and Jobs Act. An initial, descriptive version of the Senate Finance Committee bill (for which actual statutory text is still forthcoming) prepared by the Joint Committee on Taxation (the “JCT”) was released on Thursday, November 9. The Senate Finance Committee subsequently revised the bill significantly, as reflected in the JCT descriptions of the modifications released on Tuesday, November 12, and a further amendment[1] released late last night (as modified, the “modified Senate bill” and generally, the “Senate bill”). The modified Senate bill varies in certain important respects from the House’s bill.

The modified Senate bill introduces significant changes to the Senate bill released last week. Perhaps most significantly, the modified Senate bill would repeal the provision of the Affordable Care Act (ACA) requiring individuals without minimum health coverage to make “shared responsibility payments” (commonly referred to as the “individual mandate”). The modified Senate bill also provides for most changes to individual taxation to sunset after December 31, 2025, including the repeal of the individual AMT, the reduced rate for pass-through entities, the reductions in ordinary income tax rates and brackets, the repeal of itemized deductions, the increased standard deduction, and the expanded exemption for estate and generation-skipping transfer taxes. Notably, the reduced corporate rate cut of 20% (reduced from 35%) effective in 2019 would be permanent.

We have outlined below some of the significant changes in the latest draft of the Senate bill, and summarized the key differences between the modified Senate bill and the House bill. Because the Senate has not yet released legislative text, this summary is based only on the JCT’s descriptions of the Senate Finance Committee’s bill (in its original and modified form) and the November 16 amendment (as published on the Senate Finance Committee website).

On June 7, 2017, ministers and high-level officials of 68 jurisdictions convened to formally sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), originally published on November 24, 2016 (the “Multilateral Instrument,” or “MLI”). The Multilateral Instrument is the product of ongoing efforts by the Organisation for Economic Co-operation and Development (“OECD”) to prevent perceived abuse by certain taxpayers and improve coordination between taxing authorities, including through enhanced dispute resolution. The Multilateral Instrument was designed as a mechanism for implementing widespread treaty reform and coordination within the existing network of bilateral double tax treaties – without requiring separate bilateral negotiations between each pair of contracting jurisdictions. (For more background, please see our prior blog post on the MLI here.) The June 7 event was an important intermediate step towards the effectiveness of the MLI, and is a major step forward in providing multinational coordination to the historically bespoke bilateral tax treaty network.

In our previous post published on 6 December 2016 we described the OECD’s BEPS Project in the context of the publishing of the draft Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”).

One area that the OECD has itself acknowledged requires further consideration is in relation to BEPS Action 6, the final report on which was published in October 2015, which seeks to prevent access to treaty benefits in inappropriate circumstances (“treaty shopping”).

The final report on Action 6 included various proposals designed to prevent treaty shopping, including the proposed introduction into double tax treaties of:

  • a limitation on benefits (LOB) rule that limits the availability of treaty benefits to entities that meet certain conditions
  • a general anti-abuse rule which looks at the principal purpose of the transactions or arrangements in question (the principal purpose test, or PPT),

with the OECD recommending that as a minimum standard either (i) a PPT, or (ii) a PPT with either a “simplified” or “detailed” LOB provision should be adopted.

The European Commission has expressed a general preference for the PPT rather than the LOB provisions. HMRC have indicated that the UK will not adopt the LOB.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”) was released by the Organisation for Economic Co-operation and Development (“OECD”) on November 24, 2016. The Convention is the latest in an ongoing series of releases related to the OECD/G20 Project addressing Base Erosion and Profit Shifting (the “BEPS Project”), which is a major and continuing effort described as “aiming to realign taxation with economic substance and value creation, while preventing double taxation.”[1]  The Convention is the result of multilateral negotiation by over 100 member states (including the United States and the United Kingdom) and observers. While the Convention will not come into force at all until five countries have formally ratified the Convention, once in force the Convention will come into effect for an existing income tax treaty after both contracting parties to that treaty have signed the Convention and any other required home-country ratification processes are completed. The Convention is accompanied by a detailed explanatory statement describing its provisions. The OECD announced that a signing ceremony for the Convention will be held in June of 2017, although a list of expected signatories has not yet been released.

Continue reading for further background on the Convention and a discussion of issues relating to the Convention’s interaction with existing tax treaties, substantive highlights and timetable for implementation. A complete version of the Convention, and the explanatory statement, are linked here and also can be found on the OECD website, http://www.oecd.org. If you would like to discuss any details of the Convention or its impact on multinational enterprises, please contact any of the authors listed here or any member of the Proskauer Tax Department whom you usually consult on these matters.

Country-by-country reporting (“CBCR”) is one of the OECD BEPS deliverables (under Action 13). It is expected to be a significant tool used by tax authorities’ auditors in evaluating a multinational group’s transfer pricing policies. CBCR will present significant challenges to multinationals groups’ internal tax departments, as the tax departments must reconcile public financial reports to their legal entities’ books and accounts and to local tax returns and country-by-country template reports. CBCR is also expected to be used by journalists and politicians to challenge the tax positions of multinational groups, where information can be accessed publicly.