Base Erosion and Profit Shifting (BEPS) actions were developed in the context of the Organisation for Economic Cooperation and Development (OECD) /G20 BEPS Project. The 15 BEPS actions equip governments with domestic and international rules and instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.
Action 1: Addressing the tax challenges raised by digitalization
The BEPS examines new global trends which foster trading without physical presence thereby enabling tax avoidance through the shifting of profits by multinational enterprises (MNEs) to low or no-tax jurisdictions.
The BEPS report outlines a two-pillar plan to address the challenges raised by digitalization. Pillar One involves the reallocation of taxing rights by digital companies from their home country to markets where they have business activities and make profit regardless of their lack of a physical presence in such market. Pillar two seeks to introduce a global minimum corporate tax rate that countries can use to protect their tax bases. Global Minimum corporate tax rate is 15%.
Action 2: Neutralizing the effects of hybrid mismatch arrangements
Hybrid mismatch arrangements are cross-border arrangements used in aggressive tax planning to exploit differences in the tax treatment of an entity under the laws of two or more tax jurisdictions to achieve double non-taxation. The OECD set out a model of treaty provisions and recommendations regarding the design of domestic rules to neutralize the effects of hybrid instruments and entities. “Once translated into domestic law and tax treaties, the recommended rules will neutralize the effect of hybrid mismatch without disturbing any other tax, commercial or regulatory outcomes”.
Action 3: Controlled Foreign Company (CFC)
The Action 3 recommends approaches to attribute certain categories of income of foreign companies to shareholder(s) in order to counter offshore structures that shift income from the shareholder jurisdiction and strip the tax base of their country of residence.
The OECD 2015 Action 3 report sets out recommendations for the design of effective CFC rules, which include the definition of a CFC, exemptions and thresholds, approaches for determining the type of income subject to the rule, computation of CFC income, the attribution of CFC income to shareholders and measures to eliminate the risk of double taxation. Rules that are relevant include (i) significant people functions (SPF) and (ii) key entrepreneurial risk – taking functions.
Action 4: Limitation on Interest Deductions
The Action 4 recommendations aim to limit base erosion through the use of interest expense to achieve excessive interest deductions or to finance the production of exempt or deferred income. The 2015 Action 4 report on Limiting Base Erosion Involving Interest Deductions and Other Financial Payments established rules that linked an entity’s net interest deductions to its level of economic activity within the jurisdiction, measured using taxable earnings before interest income and expense, depreciation, and amortization (EBITDA).
Action 5: Harmful Tax Practices
The work looks to address the harmful effects of preferential tax regimes. To counter harmful tax practices more effectively, the BEPS Action Plan mandated a revamp of the work on harmful tax practices, with a priority and renewed focus on requiring substantial activity for any preferential regime and on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes.
Harmful tax practices refers to countries issuing highly favourable tax rulings and implementing preferential tax rules/regimes to attract foreign income, thereby eroding the tax bases of other countries.
- Reviewed (no harmful regime exists and no recommendations)
Action 6: Prevention of tax treaty abuse
Treaty shopping typically involves the attempt by a person to indirectly access the benefits of a tax treaty between two jurisdictions without being a resident of one of those jurisdictions. BEPS Action 6 addresses treaty shopping through adoption of treaty provisions that form part of a minimum standard that members of the BEPS Inclusive Framework have agreed to implement. It also includes specific rules and recommendations to address forms of treaty abuse.
- The 2022 review is currently ongoing.
Action 7: Permanent Establishment status
The work carried under BEPS Action 7 provides changes to the definition of permanent establishment in the OECD Model Tax Convention to address strategies used to avoid having a taxable presence in a jurisdiction under tax treaties.
- changes to ensure that where the activities that an intermediary exercised in a jurisdiction are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise, that enterprise will be considered to have a taxable presence in that jurisdiction unless the intermediary is performing these activities in the course of an independent business.
- changes to restrict the application of a number of exceptions to the definition of permanent establishment to activities that are preparatory or auxiliary nature and will ensure that it is not possible to take advantage of these exceptions by the fragmentation of a cohesive operating business into several small operations;
- changes to address situations where the exception applicable to construction sites is circumvented through the splitting-up contracts between closely related enterprises.
- Permanent Establishment Amendments in Finance Act 2019, Finance Act 2020 (WHT as final tax), Finance Act 2021. 6 definitions of what will constitute a Permanent Establishment.
- Significant Economic Presence Order.
BEPS Actions 8-10 address transfer pricing guidance to ensure that transfer pricing outcomes are better aligned with value creation of the MNE group. The report contains revisions to the OECD Transfer Pricing Guidelines to align transfer pricing outcomes with value creation. The revised guidance focuses on intangibles; risks and capital; and high-risk transactions.
- Extensive local legislation embodying the BEPS recommendations in place. (Transfer Pricing Regulations)
Action 11: BEPS data analysis
The BEPS Action 11 report Measuring and Monitoring BEPS established methodologies to collect and analyse data on the economic and fiscal effects of tax avoidance behaviours and on the impact of measures proposed under the BEPS Project. Such measurement and monitoring is necessary to inform both policymakers and taxpayers of the effectiveness of the BEPS measures and the extent to which BEPS issues continue to exist.
- Fiscal Policy Reforms Committee
- FIRS, International Tax Department
Action 12: Mandatory Disclosure Rules
BEPS Action 12 provides recommendations for the design of rules to require taxpayers and advisors to disclose aggressive tax planning arrangements. These recommendations seek a balance between the need for early information on aggressive tax planning schemes with a requirement that disclosure is appropriately targeted, enforceable and avoids placing undue compliance burden on taxpayers.
The 2015 OECD report on Mandatory Disclosure Rules provides a modular framework that enables countries to design a disclosure regime that fits their need to obtain early information on potentially aggressive or abusive tax planning schemes, as well as the promoters and users of such schemes.
Action 13: Country-by-Country Reporting
Under BEPS Action 13, all large multinational enterprises (MNEs) are required to prepare a country-by-country (CbC) report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which it operates. This CbC report is shared with tax administrations in these jurisdictions, for use in high-level transfer pricing and BEPS risk assessments.
Nigeria signed the Country-by-Country Multilateral Competent Authority Agreement (CbC MCAA) on the 27th of January 2016 and thereafter introduced the Income Tax (Country-By-Country Reporting) Regulations in 2018 as an administrative framework for CBC reporting in Nigeria.
OECD formulated BEPS Action 13 ‘Transfer Pricing Documentation and Country-by-Country Reporting’ through public consultation, which provides a template for multinational enterprises (MNEs) to render their annual filing across different tax jurisdictions in which they do business.
Country-by-Country (CBC) report filed by MNEs generally contain aggregate data on the global information relating to the amount of revenue, profit or loss, income tax paid, income tax accrued, capital, accumulated earnings, number of employees, and assets of each jurisdiction in which the MNE Group operates.
A Group MNE having total consolidated group revenue of less than N160,000,000,000.00 during the Accounting Year immediately preceding the Reporting Accounting Year as reflected in its Consolidated Financial Statements for such preceding Accounting Year is Excluded from filing.
The BEPS Action 14 Minimum Standard seeks to improve the resolution of tax-related disputes between jurisdictions. Inclusive Framework jurisdictions have committed to have their compliance with the minimum standard reviewed and monitored by its peers through a robust peer review process that seeks to increase efficiencies and improve the timeliness of the resolution of double taxation disputes.
Many tax treaties between jurisdictions contain a MAP provision providing for a process used to resolve such disputes. However, further effort is needed to ensure that access to MAP is available and that MAP cases are resolved within a reasonable timeframe and implemented quickly.
Mutual Agreement Procedure (“MAP”) is a dispute resolution process in which the competent authority in Nigeria and the foreign competent authority (“CA”) settle tax disputes affecting a taxpayer. The issues may be double taxation of a taxpayer and the interpretation and application of a specific Tax Treaty. Also, the Article on MAP in Nigeria’s tax treaties recognizes this reconciliation procedure.
Taxpayers are not directly involved in MAP negotiations except for presenting views and assisting in fact-finding. The Nigerian CA and the CA of Treaty Partners have an active role in the negotiation process.
- Guidelines on Mutual Agreement Procedure in Nigeria – the guidelines apply to countries that have a tax treaty with Nigeria.
Action 15: Multilateral Instrument (MLI)
The Multilateral Instrument offers concrete solutions for governments to close loopholes in international tax treaties by transposing results from the BEPS Project into bilateral tax treaties worldwide. The MLI allows governments to implement agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.
- In 2017, Nigeria signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. The MLI is a single agreement between many countries. It allows a country to make concurrent changes to all or some of the DTAs that it has with other countries.
- Nigeria has also submitted its MLI position. This means that proposed changes to the country’s 19 DTAs can easily be tracked and known.
Please do not treat the foregoing as tax advice as it is only an expression of our Tax Information Service. All enquiries should please be directed to our TaxThursday Desk at email@example.com; +234 700 TAXAIDE or any of our following personnel: