BEPS: Cure the disease, don’t kill the patient!

BEPS action plans are the most significant development in the global tax landscape in a century. They close loopholes in tax laws that allow multinational enterprises (MNEs) to artificially shift profit to low or no tax countries where there is no real economic activity.
The 15 BEPS action plans are based on three core principles: coherence, substance and transparency. 
Coherence aims to align domestic tax systems as well as international tax rules in order to close the gaps and mismatches of these rules which open up opportunities for ‘double non-taxation’. 
For example, some MNEs obtain double non-taxation by using hybrid financial instruments such as perpetual bonds. These instruments are treated as debt in the issuing country, where the interest is tax deductible. At the same time, they’re recognised as equity in the country of the perpetual bondholders, where dividend received from abroad is exempt from tax. The alignment would ensure that either the income recipient is taxed or payment is disallowed as tax deductible for payer in cases of hybrid mismatch such as this.
Substance requirement would align the allocation of profit taxation right with economic activity, and prevent the granting of double tax treaty benefits under inappropriate circumstances. 
For example, Company A is responsible for developing, enhancing, maintaining and exploiting intangible assets. The intangible assets are however registered under Company B’s name as the legal owner of these intangibles. Based on a BEPS action plan, Company B should be remunerated only for performing a legal protection function and nothing else. Company A should be the one who is entitled to the remaining profit generated from these intangible assets.
Transparency aims to ensure that both taxpayers and tax administrations’ inappropriate practices can be detected and dealt with. 
For example, MNEs need to disclose 3-tier transfer pricing documentation (ie local file, master file and country-by-country report) to provide tax administrations with the global picture of their operations, and not only the local picture as in the past. Tax administrations themselves are also required to disclose any tax preferential regimes given to taxpayers to other members of BEPS Inclusive Framework.
In this attempt to protect tax bases from perceived inappropriate tax planning by MNEs, it’s essential that actions undertaken by various tax administrations must be coherent. Otherwise, the good intention of resolving double non-taxation could unintentionally lead to a rise in ‘double taxation’.
Therefore, countries that would in-troduce BEPS action plans into domestic laws should do so by following the BEPS recommendations as much as possible. Deviations from the BEPS recommendations could result in increased double taxation, and ultimately disrupt international trade and investment which has helped maintained global political stability for many decades. 
After all, although the medicine should be strong enough to cure the disease, it shouldn’t be too strong that it kills the patient!

Contributed by NIPHAN SRISUKHUMBOWORNCHAI, partner and PARINYA LIMVORANUNT, manager for tax and legal services at PwC Thailand.