Limiting Base Erosion

S. 3921. Introduction

The different Actions of the BEPS Project deal with various problems using different mechanisms through setting minimum standards, addressing best practice recommendations and providing interpretative guidance. The diversity of the proposed actions aims at achieving a coherent and holistic approach to limit base erosion and profit shifting where the shortcomings of applying a particular regime should be captured and addressed by the rules of another Action. Although the direction is undoubtedly set towards a converging reflection of economic substance, it is inevitable that the proposed mechanisms would remain conceptually different and evolve at a different pace and with different objectives.

The hybrid mismatch actions focus mainly on neutralizing tax-abusive outcomes and offer little in defeating the causes, namely the misalignment between the debt and equity classification criteria across the different OECD jurisdictions. On the other hand, in an attempt to compensate for the sound impact on the world of corporate finance, the interest barrier rules of Action 4 keep it technically simple by relying substantially on financial reporting definitions and concepts. Les...