Base Erosion and Profit Shifting Action Plan: Effects on PE Funds
BEPS ( "Base Erosion and Profit Shifting") is a tax strategy which is driven by asymmetries and mismatches amongst different jurisdictions in terms of tax issues. In general, mainstream of this strategy is benefiting from the difference between actual business operations and tax reporting domicile. As a consequence of these strategies, corporate tax income of governments has been dramatically decreasing which force them to increase indirect taxes such as VAT and special consumption taxes. Thus, an unbalanced tax liability emerges through taxpayers across the world.
OECD revealed an action plan against to BEPS threatening in July 2013 is mostly lead by double non-taxation approaches by multinational companies. This plan includes 15 related actions for the purpose of preventing operations related to inappropriate taxable profit separation. G20 Countries including Turkey has welcomed this report and three substantial concepts came into prominence which are coherence, substance and transparency.
Impacts of OECD "BEPS" Action Plan
- Digital Economy: Upward trend on digital operations demonstrated the importance of developments on international tax rules including direct and indirect taxation. Cross-border supply of digital goods and services causes issues on collection of VAT that will resolved by alternative actions.
- Limitations on Hybrid Funds Instruments: New provisions will be designed domestically by OECD countries oppose to non-taxation and double deduction issues which are mostly subject to hybrid fund instruments. A compliance between local laws and Model Tax Convention of OECD is highly expected by September 2014.
- Combating Interest Rate Deductions: Controlling the excessive interest rate deductions which are related to third-party debts, will increase the effectiveness of transfer pricing mechanism.
- Transfer Pricing Supervision for Intangibles: These rules will define intangibles clearly and bring new developments on pricing of intangibles that will ensure profits are in line with the value creation by intangibles use.
- Risk and Return Balance on Transferring: OECD "BEPS" action will also cover accuracy of returns with appropriate risk matters on transfer pricing.
- Transparency: Recommendations are designed to disclosure of aggressive tax planning arrangements by taxpayers. Furthermore, a common template will be applied on transfer pricing documentation amongst countries that will enhance transparency of tax administrations.
- Multilateral Instrument: A multi-jurisdictional guideline will enable to standardize the international tax matters and streamline adaptation of the countries without obliged to carry on treaty-by treaty route.
Effects on Private Equities
Transfer pricing actions will be taken by 2015 that Turkish companies are highly recommended to review their transfer pricing policies. "BEPS" action plan will examine the companies which are lack of value creation although they have excessive profits. Corporations which are operating in Turkey, will be scrutinized in the event that they make substantially high payments to their offices are locating outside of Turkey. In line with these circumstances, Private equities are forecasted to be under the spotlight in terms of their capital gains and allocations by new reporting requirements which will be implemented by different tax authorities from different countries. Turkish private equities will be affected by "BEPS" provided that their fund structuring is situated in tax haven countries.