Thought leadership from our experts

OECD BEPS project and trade: new perspectives


From 2013 to 2015, the Organisation for Economic Co-operative Development ("OECD") worked on the Action Plan on Base Erosion and Profit Shifting ("BEPS"). Final recommendations for the BEPS Action Plan were issued in 2015. Although the focus of the BEPS Project is to come up with new international tax rules to address the BEPS issue, it has seismic implications for global supply chains and how multi-national corporations ("MNCs") organize their trade arrangements. Moreover, because there is no consistent implementation or set timeframe for implementing the BEPS Action Plan among the participating countries, MNCs must continuously evaluate their global supply chains from a tax and trade perspective in an ever-shifting regulatory landscape.

Global Trade and MNCs

Technological improvements and enhanced infrastructure have enabled the extension of global supply chains. MNCs have through outbound foreign direct investment accessed less costly resources and unlocked lucrative new markets, enabling them to more effectively tap into global trade flows.

Consequently, a significantly greater proportion of trade is 'within' rather than 'between' corporate groups. This has piqued the interest of tax authorities that perceive potential erosion of their taxable base. In addition, there were potential deficiencies in the international tax system that existing laws could not address. These include, inter alia, (i) a lack of transparency in how MNCs do business and establish their operations (and therefore where taxable profits are earned), (ii) a misalignment of the actual earning of profits between enterprises and profits that would better reflect the creation of economic value between enterprises, and (iii) the mismatch between tax laws in various countries that may result in income that is taxed nowhere or where tax deductions may be claimed twice.

BEPS and the Basics

In recognizing these developments and their importance to their long-run fiscal health, in 2013, the G-20 Finance Ministers called upon the OECD to develop an action plan to identify and address these issues in the international tax system in a coordinated and comprehensive manner.

The OECD BEPS Project sets forth recommendations in its reports, which represent the 15 BEPS Action Items that broadly represent the agreed consensus of the G20 / OECD members. Within the 15 final BEPS Reports, there are some that represent 'minimum standards' to be adopted by countries to counteract BEPS, whereas others consist of updating existing guidance or making recommendations for best practices that may or may not be adopted by BEPS Members.1 The BEPS package aims to equip governments with the domestic and international instruments needed to tackle BEPS activity.2

The minimum standards for BEPS are Actions 5, 6, 13 and 14. Action 5 is aimed at addressing the effect of harmful tax practices, by restricting the ability of tax authorities to grant tax incentives where no economic substance is required in return. It further improves transparency between tax authorities by developing procedures for the compulsory spontaneous exchange of tax rulings related to preferential regimes, cross border unilateral advance pricing arrangement rulings and other rulings that could give rise to BEPS concerns. Action 6 develops model treaty provisions and recommendations regarding the design of domestic rules to prevent treaty abuse. Action 13 updates guidance on transfer pricing3 documentation. It also includes a template for Country-by-Country ("CbC") reporting for improving transparency of how MNCs establish their business models and transfer pricing policies, as well as the economic consequences of those policies in terms of allocation of tax rights. Finally, Action 14 includes solutions for solving treaty-related disputes and includes minimum standards as well as best practices and arbitration.

BEPS Members that have joined the inclusive framework for BEPS have committed to implement these minimum standards in full. Over 100 countries have done so thus far, which represents the majority of world trade flows.

However, of the countries that have already formally joined the inclusive framework for BEPS, many take different views on other BEPS Actions that do not represent minimum standards and therefore there is no consistent implementation. In addition, with respect to the minimum standards, these countries have committed to adopting the recommendations into domestic legislation, but without any universal consensus on when the recommendations should be implemented. Accordingly, countries will adopt different measures at different times and this creates significant compliance challenges for MNCs, with an increasing compliance burden.

Implications of BEPS on International Trade

(1) Transfer pricing and Attributing Profits to Permanent Establishments ("PEs")

One of the issues under the BEPS measures is transfer pricing vis-a-vis global supply chains. The new BEPS measures create the need to evaluate the arm's length nature of transfer pricing models. In this regard, BEPS Actions 8-10 Final Reports provide significantly expanded guidance. In particular, this includes detailed provisions to correctly identify how value is generated within an MNC (in particular through the bearing of risk and the ownership of intangible assets) and to accurately delineate transactions between the enterprises, to ensure that prices can be set at arm's length.

These potential changes to transfer pricing methodologies will result in changing transfer prices, and in turn the potential change of customs valuations. If customs valuation methods are not referred to through this process, and reconciled with the transfer pricing policy, there is a risk that customs authorities will not accept the new prices and that the new prices will raise a red flag for audits. It is therefore essential that both customs and tax consequences are considered when developing methodologies.

Another factor to consider is that changes in transfer pricing policies can affect whether or not an importer may be able to claim benefits under a Free Trade Agreement ("FTA"). To illustrate, the Rules of Origin ("ROO") under an FTA may require that a certain amount of the value of the product exported must be locally generated. If transfer pricing changes the value of local content, then the ROO as applied may remove any FTA benefit that was previously available.

In more extreme cases, changes in transfer pricing rules may be a key driver for a restructuring of supply chain operations, to ensure a target transfer pricing model is in compliance with BEPS. This could further change inter-company transaction and product flows, thus potentially affecting the customs duties and the applicability of FTA benefits.

A related trend is that Action 7, which contains BEPS measures related to PEs, are also pushing enterprises to revise their business models, as certain types of operating model may create increasing audit tension. Therefore, both transfer pricing and PE changes (under Action 7) interact.

An example of a change we see often is where a local sales and marketing support entity, that has sales being made from an overseas entrepreneurial entity (e.g., certain regional or global trading companies); however, the local enterprise in fact undertakes a material role in making sales, the contracts for which are not materially modified by the actual seller. Such cases will likely result in further profits being attributed to the local enterprise under the new PE Guidance. In many cases we have seen a change in this business model to create a nexus of the value generating sales activity with the customer transactions, thereby creating a "reseller" model, i.e. a local distributor in market that makes sales.

See the example illustration of the shift to reseller models.

Finally, for transfer pricing and PE, shifting patterns in the use of transfer pricing methods and the preferences of tax authorities for certain methods have both tax and customs implications that should be considered. For example, the transfer price used for sales between intra-group companies are increasingly under scrutiny from tax authorities, moving away from a transaction net margin method ("TNMM") towards a transactional profit split method. The existing TNMM method, which is fairly prevalent, causes difficulties for customs valuation purposes today. The World Customs Organization recently issued Case Study 14.1 in an attempt to rationalize the TNMM method with customs valuation principles. However, adoption of the transactional profit split method will cause greater challenges from a customs valuation perspective as there is no valuation method for customs purposes which adopts a similar approach that looks at the allocation of profits between a related buyer and seller.

Hence, changes in transfer pricing methods due to BEPS compliance may raise customs valuation questions, thereby having a knock-on effect on how a group may restructure its supply chain to ensure compliance from all angles.

(2) Transparency

Transparency is another issue identified by the OECD as problematic for the international tax system. Under the CbC reporting requirements in Action 13, MNCs are required to report annually in each tax jurisdiction in which they do business. The implications of this includes greater scrutiny from tax authorities. MNCs must therefore evaluate themselves from a tax authority's perspective – wherever they operate – and identify areas that are more likely to be challenged.

In the event of a challenge, defending the basis of the challenge through an appeal or an alternative dispute resolution mechanism will likely be costly and time-consuming as well. Preparing for greater transparency and audits from tax and customs authorities will therefore be required of MNCs. The confidentiality of further disclosures required of taxpayers is also a concern.

From a trade perspective, greater transparency may also result in customs authorities looking at valuation of goods for imports and exports. Due to the information sharing mechanism available under BEPS, MNCs may need to think twice about how they wish to do business.

The intersection of BEPS and international trade is in how supply chains are structured to address BEPS compliance and customs valuation considerations. Tax authorities look at transfer pricing valuation on a yearly basis while customs authorities evaluate value on a transaction-by-transaction basis. Hence, MNCs must consider both of these regulatory requirements, which can be at odds, as they restructure global supply chains.

Additionally, tax and customs authorities are more likely to share information between the governing bodies. For example, Malaysia recently announced that it will establish the Collection Intelligence Arrangement, that is comprised of the Inland Revenue Board, the Royal Malaysian Customs Department and Companies Commission of Malaysia. These bodies will share data amongst each other to enhance efficiency in tax enforcement, collection and compliance. This is a clear indication to taxpayers that there will be a structured mechanism for the relevant authorities to share data and also may indicate an increase in tax, goods and services tax (GST) and customs audits for enterprises. Additional evidence of this trend is found in the World Customs Organization recent release of "Guidelines for Strengthening Cooperation and the Exchanging of Information between Customs and Tax Authorities at the National Level," which provides guidance to customs and tax authorities on how they can better share and exchange information.

(3) Unilateral Action

Apart from the BEPS Action Items, some countries are already taking unilateral steps to address BEPS issues. Countries such as Australia, the United Kingdom and others have introduced new mechanisms to address BEPS. These unilateral actions may or may not be consistent with the BEPS Project recommendations. The Multinational Anti-Avoidance Law ("MAAL") and the Diverted Profits Tax ("DPT") will create an additional layer of complexity to global supply chains.

It remains to be seen whether more countries will adopt unilateral actions. These unilateral actions, in addition to the BEPS recommendations, will require MNCs to review and modify their supply chains in order to comply with an increasingly complex and multi-faceted set of rules. This in turn will require careful assessment to ensure compliance with international trade and customs requirements.


BEPS creates an evolving and changing legal regime that may require the need for significant restructuring of global supply chains of MNCs over a number of years and which will in turn influence international trade. We are already seeing the effects on international trade as operating models are being redesigned to minimize the risk of being challenged by tax and customs authorities.

For instance, for digital economy companies, in particular, there will be changes to the reseller model, which means the buy/sell relationship will be built on the destination country rather than a local agent providing marketing and sales support without sale. There will be changes in warehousing and hub company locations as well.

In order to best address the BEPS issues and its influence on international trade, corporate tax and supply chain personnel within MNCs will need to work closely together to not only ensure BEPS compliance, but also minimal disruption to the global supply chain.

  1. BEPS Members are those countries that commit to the four minimum standards as well as put in place review mechanisms for the other elements of the BEPS Package.
  2. On 25 November, 2016, the OECD announced that the negotiations for the Multilateral Convention to Implement Tax Treaty Related Measures are complete. This will be the instrument to implement the BEPS minimum standards.
  3. One of the recommendations is to address BEPS issues specifically associated with transfer pricing. Transfer pricing is the pricing of products, services and supplies rendered between associate enterprises. Transfer pricing rules require that transfer prices should be determined in accordance with the arm's-length principle. The arm's-length-principle is defined by the OECD as the requirement that transactions between associated enterprises are priced as if the enterprises were independent, operating at arm’s length and engaging in comparable transactions under similar conditions and economic circumstances.