How might BEPS affect the Channel Islands?

Posted: 06/10/2015

Yesterday marked the culmination of over two years of work by the OECD to combat Base Erosion and Profits Shifting (BEPS) by consulting on changes to aspects of the international tax framework that were seen to allow abuse by multinational corporations.  

The BEPS programme has included 15 action points and the OECD released a final report for each action.

Click here to view all 15 reports from the OECD, along with a high-level explanatory statement.  
 
According to the OECD, the BEPS package represents the first substantial – and overdue – renovation of the international tax standards in almost a century, and Pascal Saint-Amans, who has been leading the OECD’s BEPS initiative, stated during a press interview following the release that these reports will mark a paradigm shift in the international tax environment. 

Although it remains to be seen how widely the proposed rules will be adopted, the BEPS agenda has already led to a material change in tax authority behaviour and certain countries are leading the charge.  For example, the UK pre-empted the OECD by a few hours to announce the implementation of a country-by-country reporting regime that will start in 2016.
 
Justin Woodhouse, Tax Partner, PwC Channel Islands, believes that there are a number of ways in which BEPS may impact the Channel Islands.

"Although not necessarily aimed at Channel Islands businesses, the outcomes of this project could have significant and wide ranging impacts on businesses with entities or activities in Jersey or Guernsey," he explains. "For instance, the new rules will ensure that mobile income from intellectual property is taxed appropriately, whilst businesses will also have to look carefully at how they use hybrid entities, holding companies and intercompany loans.

"There will also be a much greater focus on the substance of activities in any given location, a more stringent focus on documentation and reporting, and a new definition of what creates a permanent establishment and a taxable presence onshore. Organisations in the Channel Islands will need to look carefully at all of these issues to make sure that they comply the new rules."

Woodhouse singles out the following as areas of potential impact on the islands:
• Neutralisation of benefits from the use of hybrid entities or instruments (e.g. check-the-box entities or certain forms of financial flows), ultimately eliminating double deductions or double non-tax;
• Stronger CFC rules aimed at ensuring mobile income related to intellectual property and services is taxed appropriately;
• New interest deduction and financing rules that could limit the benefits from the use of intercompany loans;
• Increased transparency related to rulings and special tax treatments;
• Changes in international tax treaties that could make it more difficult to use holding companies in some locations to limit the impact of withholding taxes;
• A new definition of what creates a permanent establishment, potentially greatly lowering the threshold of what could create a taxable presence onshore;
• New breadth and scope of transfer pricing rules that will put a much greater focus on the 'substance' of activities and could give tax authorities augmented powers to recharacterise actual transactions; and
• Greater documentation and disclosure requirements, including a new two-tier transfer pricing documentation rule and country-by-country reporting to each jurisdiction where a business has operations.


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