Finance embraces OECD’s report on Base Erosion and Profit Shifting

In a press release dated February 16, 2013 (paragraph 20), the Department of Finance welcomed the OECD’s report addressing “base erosion and profit shifting” (BEPS) by multinational enterprises (MNEs), and acknowledged that an important part of Canada’s fiscal sustainability is securing its revenue base. In the OEDC’s report, BEPS was largely recognized as legal under current international and transfer pricing principles. However, those principles have not kept pace with changes in business practices brought about by globalization and digitalization of the economy (see pages 27-28). The OECD report concludes that there is an urgent need for a comprehensive, coordinated, innovative, and timely response to address BEPS, and identified six pressure areas in need of change (see page 52). These areas (of needed change) are as follows: (1) new rules to neutralize hybrid entities or arrangements and arbitrage structures that generally seek to exploit mismatches in tax treatment between two or more countries’ tax systems, (2) changes to existing transfer pricing rules that currently focus on legal structures (including contractual risk allocation) that produce undesirable results from a policy perspective – particularly in the area of intangibles, (3) new tax jurisdiction (source) rules that more appropriately deal with digital goods and services, (4) more robust anti-avoidance rules (both domestic and international) to support the foregoing, (5) more effective rules addressing intra-group financial arrangements that generate deductions free of withholding tax in high-tax source countries, and (6) more robust solutions to address harmful (low) tax regimes, including transparency and substance.