The OECD set out yesterday final recommendations from the first half of its tax reform programme to tackle Base Erosion and Profit Shifting (BEPS). The OECD's two year BEPS project began a year ago and has 15 main action points. The final recommendations for five of these areas were published yesterday, covering the digital economy, country-by-country reporting, hybrid mismatch arrangements, treaty abuse, and transfer pricing and intangibles.

Two more reports, not previously exposed as drafts, were issued. These cover the sensitive area of harmful tax practices and substance, and the feasibility of a “multi-lateral instrument” to speed the tax treaty changes BEPS seeks to mandate.

All the reports are scheduled for formal official approval by the Finance Ministers of the G20 countries at their meeting in Cairns, Australia, this coming weekend.

Wim Piot, partner and Tax Leader at PwC Luxembourg, said:

"The BEPS project marks the most significant change to international tax in modern times. Yesterday’s announcements will have a big impact on global companies, whether through greater compliance demands or impacting how they are structured. Despite many expecting the OECD's proposals to be watered down to achieve consensus, the first part of the OECD's ambitious package has been delivered on time and intact. The scale and scope of change surpasses what many people had anticipated at the outset.

However, the OECD’s consultation with stakeholders over the last year, and the process of consensus-building between tax authorities, has helped. Notably for Luxembourg, the OECD has seen that investment funds have a special status in international tax, which needs recognition and protection.

The new report on harmful tax practices has promised that in 2015 the OECD will be looking at the tax ruling practices of all its members. But it also has some good news for Luxembourg, as the OECD have given the tax rules for risk capital companies (SICARs) and family wealth management companies (SPFs) a clean bill of health.  On the other hand, the report suggests that – along with other EU countries such as the UK – Luxembourg’s tax exemptions for intellectual property may have to be cut back drastically. But this is a political hot potato, and there may be more debate before the final position is settled. The detail of the new report notes that the UK and Spain could not accept all the proposals.”

The impact on businesses will depend partly on how the rules are implemented by tax authorities across the world. There's a risk standard trading structures could be affected, regardless of whether there's any tax avoidance motive. More disputes between businesses and tax authorities are inevitable as the rules get amended, particularly where tax authorities previously blessed the arrangements in question. The OECD's work to improve dispute resolution will be a crucial next phase of the BEPS project to ensure a smooth transition.

Caroline Goemaere, partner and BEPS Leader, added:

"The recommendations on country by country reporting won't come as surprise to global companies. The big worry for businesses is how tax authorities will be able to share this information, and whether it will always remain confidential. The OECD still has work to do here. Another concern is that different tax authorities will now begin to demand even more information, which would add to the administrative and cost burden for businesses. ”

While the importance of yesterday’s milestone should not be underestimated, the implementation part of the BEPS project is likely to be more controversial, with different tax authorities likely to have different views on what's acceptable and what's not. Equally important is continued commitment from governments, tax authorities and businesses, whose combined efforts can help rebuild trust in the tax system in a way that supports global trade and economic growth.