What Is BEPS?
It is an acronym for “Base Erosion and Profit Shifting.” BEPS is a project led by the Organization for Economic Cooperation and Development (OECD) and the G20 to reform the global tax system.
BEPS Process
The implementation of the BEPS project consists, to date, of 2 phases, as detailed below:
I Phase: BEPS 1.0.
It consists of a block of 15 shares, providing national and international tax administrations with instruments to avoid tax evasion. Given that it did not address all the challenges of the increasingly widespread digital economy, the next phase of BEPS was released: BEPS 2.0.
II Phase: BEPS 2.0.
The Inclusive Framework on Base Erosion and Profit Shifting of the OECD and G20 has agreed to implement a two-pillar approach to address the tax challenges resulting from the digitization of the economy.
- Pillar I: Targeted at addressing the challenges of the digital economy.
- Pillar II: Global taxation standards.
The consensual two-pillar approach plays a key role in the fairness and equality of our tax systems and in strengthening the international tax framework against the new and changing business models. The global minimum tax referred to in Pillar II establishes a minimum threshold for corporate tax competition that will ensure multinational companies will be subject, in each jurisdiction, to a minimum effective tax rate of 15%, regardless of where they operate, to ensure a level playing field. The Pillar II global minimum tax is actually being implemented by over 50 jurisdictions.
Pillars I and II
Pillar I
Application Scope
Companies within the scope of Pillar I are multinationals with a global turnover exceeding €20 billion and a profitability of over 10% (i.e., profit before tax/revenue) calculated by an averaging mechanism.
Pillar I – Amount A
Amount A reallocates the taxable income of multinational groups to avoid double or non-taxation.
- Regarding in-scope multinationals, 25% of residual profits, i.e., profits exceeding 10% of revenues, will be allocated to market jurisdictions through an allocation factor based on revenues.
- Those Multinational Group companies contributing over €1 million to the Group’s consolidated revenues, or if they are located in a country with a GDP of less than €40 million, €250,000 will be sufficient to qualify for a share of the Multinational Group’s profit.
Pillar I – Amount B
Amount B provides a framework for the simplified and streamlined application of the Arm’s Length Principle regarding basic marketing and distribution activities in the country, focusing on the needs of lower-capacity countries, which are often related to the lack of adequate comparables determining the Arm’s Length Principle compliance in the local market.
Pillar II – Global taxation rules
This is a model of tax rules to ensure multinational groups pay a minimum level of tax on their global profits. Therefore, these rules provide for the treatment of a multinational group with a single taxable unit, compared to the treatment of each entity as a separate taxpayer.
Application Scope
For Multinational Groups with revenues of € 750 million, as established in BEPS Action 13 (Country-by-Country Report for Peru). In order to comply with the aforementioned threshold, they must calculate their effective rate of income in each jurisdiction where they operate and pay complementary taxes for the difference between the effective rate and the minimum tax rate of 15%.
Conclusion
In summary, the OECD Pillars proposals constitute a complex system aimed at partially reducing international tax competition generated by the transfer of capital. This proposal would increase tax collection from large multinationals, which would be currently attractive in an economic crisis. Conversely, they are still unclear if beneficial for developing or smaller countries, such as Peru, when limiting its competitiveness in a global scenario where innovation and economic growth have focused on tax incentives.
