BEPS: Base Erosion and Profit Shifting


Last week I had the privilege of attending the Business and Economics Committee Meeting of the American Chamber of Commerce in Thailand. Jack Sheehan, Partner at DFDL, and Steven Carey, MD of Quantera Global, gave a very interesting and informative presentation about BEPS.

Until very recently, I have heard almost nothing about the OECD BEPS initiative. BEPS stands for “Base Erosion and Profit Shifting” and it is basically an action plan to address aggressive transfer pricing (or perhaps more accurately described as “Transfer Mis-Pricing”) by multinational organizations to minimize or avoid taxation.

When companies conduct business across multiple jurisdictions, they frequently supply products or services to related entities. This creates opportunities for both double taxation of profits and also opportunities to shift profits between the related entities. Ideally, each company would honestly value products and services based on classical “arms-length” transfer pricing standards. This would allow profits to be earned by each entity in the jurisdiction where the profits are actually generated, and pay taxes on those profits accordingly.

However, it is becoming increasingly common for companies to adjust the pricing of products and services to shift profit from entities or jurisdictions with a high tax burden to an entity or jurisdiction with a low or no tax burden. Several companies, including Starbucks, Amazon, and Google, have recently been accused of aggressively implementing transfer pricing based profit shifting activities to avoid taxation on massive global earnings.

Dual tax treaties have been negotiated between many countries to protect companies and individuals from being double taxed on income arising from various types of cross border transactions. However, companies are now aggressively pursuing various loopholes and strategies to achieve “double non-taxation” on income, leveraging rules intended to protect them from double taxation on such income.

In early October 2015, the Organization for Economic Co-operation and Development (OECD) published its detailed 15 step plan to reform the system of international taxation. This plan, which is expected to be implemented by members nations of the OECD and other national jurisdictions starting in 2016, is potentially the most significant revision to the international system of taxation since the 1920’s.

One of the primary reforms proposed by the BEPS ties revenue recognition and profit  more closely to real economic activity. This proposal is similar to the system of formulary apportionment, the kind of system used by the USA to tax corporations at the state level.

Thailand has also been closely monitoring Transfer Pricing issues, and in May 2015 issued a new Draft Transfer Pricing Act. This act will amend the Thai Revenue Code to implement measures to prevent tax evasion through the use of transfer pricing schemes. The Draft Transfer Pricing act has been approved by the Thai Cabinet and is expected to be enacted by late 2015 or during the first quarter of 2016.

Under the new Act, firms having related party transactions will be required to prepare and submit transfer pricing documentation. Such documentation must be submitted within 150 days of the end of an accounting period. Failure to submit transfer pricing documentation will be subject to a penalty of THB 400,000.

Transfer Pricing investigations are reportedly a top Thai government agenda, following the pace of other ASEAN countries. The Thai Revenue Department is also devoting more staff resources to Transfer Pricing investigations.

The Thai Government is reportedly closely monitoring and reviewing the BEPS recommendations. The Chinese government strongly backs the OECD BEPS proposals, but China is reportedly staking out its own proposals in a few specific areas in a bid to capture more taxes.

Many Thailand based companies, especially Thailand based subsidiaries of multinational companies, will fall under the jurisdiction of the new Transfer Pricing act, and will also likely be impacted when the BEPS rules are implemented and incorporated into existing Dual Tax Treaties. All Managers and Directors of such Thailand based companies should diligently review their exposure to Transfer Pricing related issues, and implement prudent measures to ensure compliance with Transfer Pricing rules.

It is a privilege to do business in Thailand, serve the Thailand community, and to earn profit from our Thailand based activities. Paying fair taxes in Thailand on profits derived from Thailand based activities is the honorable and just behavior of any responsible Thailand based entity, organization, or individual.

Frank T.