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The Base Erosion and Profit Shifting (BEPS) project by the OECD

Published on: 11 augustus 2020
Type of publication Insight
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In 2013, the OECD announced the Base Erosion and Profit Shifting (BEPS) project. Its objective was to establish recommendations for better aligning profits, rather than through strictly legal allocation, with actual value creation. Of the 15 actions initiated under BEPS, four were causally related to Transfer Pricing, with several others also having indirect impact on Transfer Pricing. In October 2015, the OECD published reports on these various actions, resulting in the OECD Transfer Pricing Guidelines being amended accordingly in the course of 2016 and onward.

Substance over form

The first take-away from the BEPS project is that compliance with the principle of ‘substance over form’ has come to be of utmost importance in enabling a group to justify allocation of its profit between various group entities.

Having a non/low-substance entity in a tax haven owning all group-IP (and as such reporting significant profits) may have worked before BEPS; but this certainly will not be the case after BEPS. As a result, most groups have reconsidered their IP-structures and have already wound up – or are in the process of doing so – such non/low-substance IP-structures. However, not only IP-structures but also regular ‘sales agent/commissionaire’- and/or ‘toll/contract manufacturing’-structures must be (re)assessed in this respect.


The second take-away from the BEPS project is the call for transparency from the public; that is to say, groups should provide more information on how they do their business and allocate their profits.
As a result of Action 13, the OECD Guidelines now prescribe a 3-tier model regarding Transfer Pricing documentation, i.e. a country-by-country report, a master file, and a local file. Going from the country-by-country report toward the local file, the level of detail increases (significantly) and should give tax authorities around the world better tools for assessing Transfer Pricing policies in place within a group.

Although the 3-tier approach by the OECD is a good initiative toward creating transparency, unfortunately different jurisdictions have set different thresholds for when it should be applied (especially regarding Master and Local File obligations) and/or have added some ‘local flavour’ to OECD requirements as well. As a result, being (and remaining) fully compliant – and transparent – may have become quite a burdensome challenge for the multinational enterprise group (MNE).

Impact of BEPS on Transfer Pricing

The multilateral instrument
In Action 15 of the BEPS project, the OECD has created a multilateral instrument (MLI) for creating a situation wherein all existing tax treaties can ‘easily’ be adjusted to the outcome of the BEPS project without one-on-one negotiations for every tax treaty in place. For Transfer Pricing purposes, this is most important regarding the definitions of a permanent establishment/permanent representatives (see below).

Although indeed a good initiative, the MLI did prove to offer numerous ‘opt-ins’ and ’opt-outs’, while the starting date of the MLI also differs from one jurisdiction to the next. As a result – at least until all tax treaties involved have been fully renegotiated – knowing which part of the MLI will apply in a specific situation (which conclusion might change over time, should the applicability of the MLI kick in later on) - is an extensive exercise which must be carefully processed to ensure structuring that is optimal to tax and transfer pricing.

More Permanent Establishments (PE)/Permanent Representatives (PR) to be recognised and (correctly) remunerated
Another effect of the BEPS project is the broadening of the PE/PR definition, because of which a PE/PR will be recognised frequently. Because each PE/PR is considered a separate taxpayer, such additional recognition implies additional Transfer Pricing documentation and allocation activities. However, the broadened PE/PR definition might be a reason for disputes; additionally, there is the question of whether the broadened definition applies to the situation at hand. Furthermore, not all jurisdictions have accepted the 2011 Authorized OECD Approach (AOA) on the allocation of profits to a PE yet. Therefore, there may also be additional discussion on how to determine appropriate profit allocation.

More Transfer Pricing disputes/litigation
The two take-aways discussed above have created a situation in which there is increased awareness regarding Transfer Pricing within the various tax authorities.

As a result, generally, once a tax authority starts assessing a tax return and/or commences a formal audit, one of the first questions raised relates to Transfer Pricing, i.e. providing the tax authority with Transfer Pricing documentation to substantiate positions adopted. Because each tax authority may have its own view regarding the allocation of functions/assets/risks and as such may challenge the allocation of profits to various group entities, although the overall profit of the MNE does not change, it is expected that Transfer Pricing disputes/litigation will arise with increasing frequency. How such situations evolve depends largely on the level of knowledge available at the respective tax authority and the local advisor/client, i.e. more thorough knowledge of Transfer Pricing principles means more effective theoretical discussions and likelihood of reaching a mutually acceptable solution.

Digital economy
In Action 1 of the BEPS project, the issue of taxation of the digital economy was discussed. However, in the 2015 report, no conclusions could be reached, and this aspect remained on the agenda for further discussion. In 2019, the OECD issued a ‘Unified approach’ regarding taxation of the digital economy. The suggestions stated in this ‘Unified Approach’ differ significantly from the arm’s length standards as applied thus far in Transfer Pricing discussions. As such, the acceptance of this ‘Unified Approach’ may significantly impact Transfer Pricing practice as well.


Should you have further questions on this topic, please contact our Transfer Pricing experts via [email protected] and they will contact you to answer them, without charge, of course.

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This content was published more than six months ago. Because legislation and regulation is constantly evolving, we recommend that you contact your Baker Tilly consultant to find out whether this information is still current and has consequences (or offers opportunities) for your situation. Your consultant will be happy to discuss the latest state of affairs with you.