Base erosion and profit shifting (BEPS) refers to the tax planning strategies used by multinational companies to exploit gaps and differences between tax rules of different jurisdictions internationally. This is done to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity.
The Organisation for Economic Co-operation and Development (OECD) conservatively estimates the annual revenue loss due to BEPS at $100 to $240 billion USD.
BEPS results in tax not being paid in the jurisdiction where economic activity occurs – eroding revenue bases of countries and undermining the fairness and integrity of their tax systems. Although some schemes are illegal, most aren't.
Businesses that operate across borders may use BEPS strategies to gain a competitive advantage over others that operate at a domestic level. Additionally, when taxpayers see multinational enterprises legally avoiding income tax, it weakens voluntary compliance by all taxpayers.
Due to rising government and community concern about BEPS strategies, G20 finance ministers asked the OECD to develop an action plan addressing BEPS issues in a coordinated and comprehensive manner. This resulted in the release of the OECD BEPS 15 Action PlanExternal Link in mid-2013:
- Action 1: Address the tax challenges of the digital economy
- Action 2: Neutralise the effects of hybrid mismatch arrangements
- Action 3: Strengthen controlled foreign company (CFC) rules
- Action 4: Limit base erosion involving interest deductions and other financial payments
- Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance
- Action 6: Prevent treaty abuse
- Action 7: Prevent the artificial avoidance of the permanent establishment status
- Actions 8–10: Assure that transfer pricing outcomes are in line with value creation
- Action 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it
- Action 12: Require taxpayers to disclose their aggressive tax planning arrangements
- Action 13: Re-examine transfer pricing documentation
- Action 14: Make dispute resolution mechanisms more effective
- Action 15: Develop a multilateral instrument to modify bilateral tax treaties
The ensuing work by the OECD G20 Project involving over 60 countries culminated in the October 2015 release of the BEPS final packageExternal Link – 13 reports covering the 15 actions.
Australia is committed to acting to address BEPS risks and has implemented recommendations from BEPS Actions 2, 5, 6, 8–10, 13, 14 and 15.
The legislation to give effect to BEPS Action 2, Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018, received Royal Assent on 24 August 2018. Schedules 1 and 2 introduced new Division 832 of the ITAA 1997 and the necessary amendments to give effect to the OECD Hybrid Mismatch rules. The rules apply to certain payments after 1 January 2019 and income years commencing on or after 1 January 2019.
Australia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) on 7 June 2017 (BEPS Action 15) and it entered into force on 1 January 2019. It is expected the MLI will modify 35 of Australia’s tax treaties to implement integrity provisions to protect those treaties from being exploited and to improve tax treaty related dispute resolutions mechanisms. Australia has also agreed to mandatory arbitration in relation to tax treaty related disputes.
In October 2018, we updated our mutual agreement procedures (MAP) guidance to implement recommendations in BEPS Action 14. Taxation Ruling TR 2000/16 Income tax: international transfer pricing and profit reallocation adjustments, relief from double taxation and the Mutual Agreement Procedure was withdrawn.
An updated PCG 2017/2 Simplified transfer pricing record keeping options was released on 9 January 2019 which implements BEPS Actions 8–10 transfer pricing simplification recommendation for low value-adding intragroup services.
We have fully implemented Country-by-Country (CbC) Reporting (BEPS Action 13), including from June 2018, the exchange of CbC reports with partner jurisdictions via the OECD Common Transmission System (CTS).
As part of the MLI, Australia adopted the principal purposes test in Article 7 to prevent treaty abuse and deny treaty benefits in certain circumstances (BEPS Action 6). An updated PS LA 2020/2 Administering general anti-abuse rules, such as a principal or main purposes test, included in any of Australia's tax treaties, released on 1 October 2020, provides guidance on the administrative process of applying a principal or main purposes test in Australia's tax treaties.
The OECD established the inclusive framework on BEPS implementationExternal Link in December 2015. Aims of the inclusive framework include monitoring implementation of BEPS measures, in particular the minimum standard recommendations for Actions 5, 6, 13 and 14. The OECD has undertaken annual reviews of the implementation of the minimum standards.
The inclusive framework will also support the development of toolkits for low-capacity developing countries. Australia is one of over 140 members of the inclusive framework.
Australia’s current work on implementing the BEPS package
- Hybrid mismatch rules (BEPS Action 2)
- Automatic exchange of information on cross-border arrangements (BEPS Action 5)
- Country-by-country reporting (BEPS Action 13)
- Mutual agreement procedure (BEPS Action 14)
- Multilateral Instrument (MLI) (BEPS Action 15)
- OECD BEPSExternal Link
- BEPS ActionsExternal Link
- Background Brief: Inclusive Framework on BEPS (PDF, 205KB)This link will download a file