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BEPS – International Tax Reform

Tax Treaty Related Measures, the Multilateral Convention presented last November by the OECD, is now supported by 70 Ministers and high-level representatives who participated in the signing ceremony on 7th June. The Treaty itself will influence the legislations of the states involved, including Serbia

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The main goal of the Treaty is to Prevent Base Erosion and Profit Shifting (BEPS), based on three core principles: coherence, substance and transparency. The intention of the project is to prevent tax planning that exploits gaps and non-compliance of tax regulations, in order to reduce the tax base or “artificially” shift profits to countries with more favourable tax jurisdictions, where economic activity either does not take place or takes place on a small scale.

It is clear that existing rules give businesses too much opportunity to arbitrage tax rates and regimes. Existing international taxation law fails to keep up with the global nature of modern business models.

The BEPS will be applied alongside existing tax treaties, modifying their application in order to implement additional measures.

There is no doubt that all measures will impact greatly on Serbian legislation, but at this moment two significant changes might impact on foreign companies planning an investment in Serbia.

One of the changes is to taxation on the transfer of dividends. Applicable DTTs stipulate that certificates of residence are sufficient for using DTT protection. In practice, the tax administration rarely requires the provision of proof of beneficial ownership. If necessary, such proof can be provided by way of proper agreement or an excerpt from the register.

BEPS proposes implementing an additional condition whereby the beneficial owner must prove that, in a certain period of time prior to dividend payment (365 days), they possess the proprietary rights on the basis of which dividends are paid.

The question that remains is not only how global companies will be influenced, but also how the domestic tax administration will prepare itself for these major changes

Another proposed far-reaching change is preventing the artificial avoidance of the status of a permanent establishment (PE) through commission arrangements. DTTs prescribe that no PE will be established when a foreign company conducts business through an intermediary or general commission agent. Sometimes these provisions are used fraudulently i.e. the parties involved negotiate in the source country, while the agreement is formally concluded in the foreign country.

This modus operandi is used to erode the base in the source country – where the sale actually occurs. In order to prevent this, BEPS prescribes that there is PE when the commissioner regularly concludes agreements on behalf of a company, for providing services by that company or for transfer of ownership. It is considered that this proposition has economic justification and should, therefore, be accepted by Serbia. However, the process of identifying such entities and PE remains as-yet-unknown and, if adopted, will represent a huge challenge in terms of practical application.

BEPS constitutes an unprecedented change in international taxation and will have a significant impact on the taxation of multinational companies, given the expectation that it may amend at least 2000 tax treaties. It is anticipated that the proposal will have an impact on a broad range of multinational companies in the coming years.

The question that remains is not only how global companies will be influenced, but also how the domestic tax administration will prepare itself for these major changes… Developments in this area should be monitored and existing arrangements should be carefully evaluated with a view to potential treaty changes across the world.