From BEPS 1.0 to BEPS 2.0

By Le Khanh Lam - Partner, Head of Tax and Consulting Services RSM Vietnam

The OECD/G20 BEPS project has identified the tax challenges of the digitalisation of the economy in the 2015 BEPS Action 1 Report. According to Action 1, digitalisation can not only exacerbate BEPS issues, but also raise a series of broader tax challenges. The recent challenges were acknowledged as going beyond BEPS, which were identified as relating to the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among jurisdictions. Several potential options to address the above concern were discussed in Action 1, but more were ultimately recommended.

At the end of Action 1, the OECD has called for continued work with the further report to be produced this year. The evolution of the OECD/G20 BEPS project, from securing political commitment to take action in 2013 to the finalisation of detailed actions to counter BEPS, has ended the first phase of the OECD/G20 BEPS project, which is commonly referred to as BEPS 1.0.

Monitor and implement

After the BEPS action plans have been published, the implementation phase began. The establishment of an OECD/G20 Inclusive Framework on BEPS in 2016 is a case study of multilateralism, which is effective in the face of global tax challenges.

All countries and jurisdictions joining the framework will participate in this review process, which allows members to review their own tax systems and to identify and remove elements that pose BEPS risks.

The Inclusive Framework on BEPS is primarily concerned with reviewing the implementation of the minimum standards (Actions 5, 6, 13, and 14) agreed in the BEPS project and the results of the peer reviews show strong implementation throughout the world.

As requested by G20 Finance Ministers at the meeting in Baden-Baden in 2017, the Inclusive Framework issued the Interim Report 2018 the following year, on tax challenges arising from digitalisation. It featured an in-depth analysis of tax challenges, including remaining BEPS risks, and the questions of how taxing rights on income generated from cross-border activities in the digital age should be allocated among jurisdictions.

In addition, the Interim Report identified three characteristics frequently observed in certain highly-digitalised business models. They included scale of mass; heavy reliance on intangible assets; and importance of data, user participation, and their synergies with intangible assets.

However, the conclusions from the analysis were not consented on. The members of the Inclusive Framework committed to continue working together to finalise a report in 2020 aimed at providing consensus-based long-term solutions.

In line with the analysis included in Action 1 and the Interim Report 2018, the members of the Inclusive Framework suggested many proposals which focused on the allocation of taxing rights and other unresolved BEPS issues.

The proposals were grouped into the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy and divided into two pillars.

The first pillar focuses on the allocation of taxing rights and describes the different technical issues that need to be resolved to undertake a coherent and concurrent revision of the profit allocation and nexus rules.

Meanwhile, pillar two focuses on remaining BEPS issues, and describes the work to be undertaken in the development of a global anti-base erosion proposal that would, through changes to domestic law and tax treaties, provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

What next?

For a solution to be delivered in 2020, the outlines of the architecture will need to be agreed as soon as possible.

Throughout 2020, the Inclusive Framework, Steering Group, and Working Parties will work on agreeing the policy and technical details of a consensus-based, long-term solution to the challenges of the digitalisation of the economy and will deliver a final report by the end of 2020.

The two pillars of BEPS 2.0 could lead to important changes in the global tax framework. The final outcome of BEPS 2.0 could dramatically transform the prevailing international tax and transfer pricing landscape under which the multinational enterprises operate.

Taxpayers should stay closely informed of the developments in BEPS 2.0 as well as assess and evaluate the potential impacts of these concerns for reaching changes.