Tax planning: be careful out there: don't sleep on BEPS, and keep your eye on legislative, regulatory, and treaty developments - and, yes, hybrid instruments, online commerce, and transfer pricing as well.

• Author: West, Philip R.
• Position: The Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting Final Report, part 4

With the October 5 release of its final report containing a list of fifteen specific actions, the Organisation for Economic Co-operation and Developments (OECD) Base Erosion and Profit Shifting (BEPS) project moved from study, debate, and consensus-building to implementation, monitoring, and--with respect to certain issues--more study, debate, and consensus-building.

When evaluating this project, taxpayers should assess the extent to which it avoids domestic law changes that undercut general international tax standards and leads to double taxation. Taxpayers should also determine the extent that the final report will produce domestic law changes, with respect to hybrids, controlled foreign corporations, interest deductibility, country-by-country reporting, and mandatory disclosure rules, and revised tax treaties incorporating BEPS recommendations, with respect to limitation on benefits and/or a "principal purpose test" rule and modifications to the permanent establishment standard.

Therefore, the long-term impact of the project will not be apparent for some time. But because measures taken in response to BEPS could have a significant impact on the tax consequences of cross-border transactions, structures, and financing, taxpayers should consider the impact of BEPS on their international tax planning now.

Legislative, Regulatory, and Treaty Developments in Planning

Because BEPS-motivated changes could have a material impact on planning, it is important for taxpayers to closely follow legislative, regulatory, and treaty developments in the countries where they operate. Taxpayers and tax advisers reach a level of comfort with respect to the tax consequences of a contemplated transaction based on current law. However, a tax opinion that certain tax consequences "should" or are "more likely than not" to result under current law may have little practical value for a taxpayer if the relevant tax law on which the opinion relies is soon modified. Although tax advisers cannot be expected to predict the future with certainty, and do not assume responsibility to update advice in the event of a change in law or regulation, taxpayers may wish to specifically seek an advisers view on the risk that the expected tax implications of a given transaction will soon change.

Taxpayers should also evaluate existing structures and transactions in light of BEPS developments. In some cases, planning consistent with current law may remain viable unless and until a country implements a change to its domestic law or a relevant tax treaty is renegotiated. Determining whether proactive steps should be taken to modify current planning may take into account the strength of a position under existing law, the benefit being achieved, the likelihood and timing of relevant changes to domestic laws or tax treaties, a company's risk tolerance, reputational concerns, and audit risk (including the risk that a tax authority may seek to, in effect, implement BEPS measures through audit by taking an expansive interpretation of existing law).

...