BEPS and Transfer Pricing: Action 9

December 13, 2023

BEPS (Base Erosion and Profit Shifting) Action 9 stands as a vital component in the fight against base erosion and profit shifting, focusing on risk management and capital allocation within business groups. This article will explore in detail the objectives, challenges and benefits associated with Action 9, which seeks to avoid the accumulation of inadequate outcomes arising from strategic risk transfer and disproportionate capital allocation.

Understanding Action 9: Risk Management and Capital Allocation

Action 9 addresses a fundamental problem in international taxation: how companies, in a strategic manner, transfer risks between group entities or allocate capital excessively to minimize their tax burden. This approach seeks to develop transfer pricing rules or special measures that prevent an entity from accumulating inadequate results simply by contractually assuming risks or having provided capital.

Transfer Pricing Rules and Special Measures

The core of Action 9 lies in the adoption of transfer pricing rules or special measures. These rules are designed to ensure that an entity does not accrue inadequate results solely because it has contractually assumed risks or provided capital. The central idea is to align financial results with real value creation, avoiding artificial manipulations of risk management and capital allocation for tax purposes.

Aligning Results with Value Creation

One of the key aspects of Action 9 is the need to align financial results with real value creation. This implies that risk management practices and capital allocation should reflect the effective contribution of each entity in the group to the revenue generation process. By ensuring this alignment, the artificial transfer of benefits to jurisdictions with lower tax rates is avoided.

Coordination with Interest Expense Deductions and Financial Payments

It is essential to emphasize that the work of Action 9 will be closely coordinated with the work on deductions of interest expenses and other financial payments. This coordination is critical to ensure the coherence and effectiveness of the regulatory framework as a whole, comprehensively addressing base erosion strategies related to risk management and capital allocation.

Implementation Challenges: Coordination and Adaptability

Effective implementation of Action 9 faces significant challenges. Coordination across jurisdictions and adaptability to address new forms of risk management and capital allocation are crucial. The complexity inherent in these financial practices requires a proactive approach and constant responsiveness on the part of tax authorities.

Benefits of Action 9: Tax Justice and Transparency

By preventing the accumulation of inadequate results resulting from the artificial transfer of risk and capital, Action 9 promotes tax justice and transparency in the international tax system. Fairness in the allocation of taxes contributes directly to the financial sustainability of jurisdictions and strengthens the integrity of the global tax system.

Conclusion: Moving Towards a More Equitable Tax System

BEPS Action 9 is positioned as an essential tool in building a more equitable and transparent international tax system. By strategically addressing risk transfer and capital allocation, a regulatory framework is established that seeks to align financial outcomes with real value creation. Not only does this approach benefit governments by securing adequate tax revenues, but it also creates a level playing field for businesses, where competition is based on innovation, efficiency, and quality. Effective implementation of these rules will not only contribute to fairer taxation, but also to building a more equitable and sustainable global business environment.