BEPS

What it means

BEPS, base erosion and profit shifting, describes practices by which multinational groups move profits to low-tax countries and hollow out the tax base where they actually do business. It is also the name of the OECD and G20 project designed to stop them.

The 2015 project contains 15 actions, including transfer pricing rules, limits on interest deductions, country-by-country reporting and measures against treaty abuse and hybrid mismatches.

The EU transposed some actions into the ATAD directive and other legislation, and double tax treaties were amended through the MLI. The follow-up is the two-pillar solution with the global minimum tax and Pillar One.

How it works in practice

For Slovak companies in multinational groups, BEPS mainly means preparing transfer pricing documentation, proving arm's length prices for intra-group transactions and respecting interest deduction limits.

In audits the tax authority examines whether the profit left in Slovakia matches the local company's functions, risks and assets. A company making losses for years while the group is profitable is a typical audit trigger.

Even small companies with a single foreign related party should set contracts and prices so that they stand up to scrutiny. Related-party rules apply regardless of size.

What to watch out for

Structures that worked ten years ago, such as licensing companies in low-tax countries with no staff, no longer hold. They should be reviewed regularly and given real economic substance.

BEPS rules keep evolving and countries implement them differently. In cross-border transactions it is not enough to know Slovak law; the other country's rules matter too.