The Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan has brought about profound changes in the international tax regime, particularly affecting how dividends are taxed. This article will provide an exploration of the BEPS Action Plan’s repercussions for dividend taxation. We will examine the regulatory metamorphosis initiated by the 15 actions of the BEPS, focusing on the alignment of tax practices with the locus of economic activity and its implications for multinational corporations’ dividend distributions. Our analysis aims to offer a clear understanding of the evolving tax landscape, equipping entities with the knowledge to navigate the complexities of compliance and strategic tax planning in the post-BEPS era.

Understanding BEPS and Its Objectives

The BEPS project, initiated by the OECD and G20 countries, focuses on strategies that allow MNEs to shift profits to low or no-tax locations where there is little or no economic activity, thereby eroding the taxable base of higher-tax jurisdictions. The Action Plan consists of 15 actions designed to address tax avoidance, improve the coherence of international tax rules, and ensure a more transparent tax environment.

BEPS and Dividend Taxation

One of the principal objectives of the OECD’s BEPS initiative is to ensure that taxation is more closely aligned with the location of economic activity and value creation. This is a significant shift from the historical approach where taxation strategies sometimes relied on the legal structuring of transactions rather than where the substantive business operations took place. For dividends, which represent a share of profits distributed to shareholders, this means a more rigorous examination of where these profits are actually generated and whether the tax strategies employed are in line with BEPS guidelines.

Dividends are often distributed across borders from subsidiaries to parent companies and ultimately to shareholders. In the pre-BEPS era, multinational enterprises (MNEs) would strategically structure their operations to channel these dividends through jurisdictions with favourable tax treaties—a practice known as “treaty shopping.” Such tactics allowed them to significantly reduce withholding taxes, which are taxes deducted at source from dividends sent from one country to another.

The BEPS actions, particularly Action 6, aim to clamp down on treaty shopping by ensuring that tax treaty benefits are not granted inappropriately. Under BEPS, MNEs must demonstrate a genuine connection between the substance of their business activities and the jurisdiction where they claim tax residency. This means that merely having a postal address or a shell company in a low-tax jurisdiction is no longer adequate for claiming reduced withholding tax rates under tax treaties.

To enforce this, the BEPS Action Plan recommends the incorporation of anti-abuse provisions in tax treaties, such as the Principal Purpose Test (PPT). The PPT allows tax authorities to deny treaty benefits, including those related to dividend withholding taxes, if one of the main purposes of the arrangement or transaction was to secure a reduction in tax liability. This test emphasises the need for substantial economic activity—such as significant business operations, staff presence, and decision-making processes—to be conducted in the treaty country for a company to benefit from its tax treaty provisions.

For MNEs, the implications of these BEPS measures are profound. They must now scrutinise their corporate structures and the flow of dividends to ensure compliance. This could involve rethinking global tax strategies, relocating certain business functions to maintain alignment with tax arrangements, and possibly divesting from jurisdictions that no longer provide the desired tax efficiencies. The need for robust documentation and transparency has never been higher. MNEs must be prepared to present clear evidence of the alignment between their tax positions and the substantive economic activities that underpin their profits.

In essence, the BEPS Action Plan is transforming the global tax environment. While it creates challenges for MNEs in terms of restructuring and compliance, it also offers an opportunity to align more closely with the evolving international consensus on fair and effective taxation. This alignment is not just about adherence to regulations but is also becoming increasingly linked to corporate reputation and responsible tax practices in the eyes of stakeholders and the public at large.

Implications for Withholding Tax Recovery

For MNEs, the changes spurred by BEPS can affect the ability to recover withholding taxes on dividends. The increased scrutiny on cross-border tax arrangements means that MNEs must carefully evaluate their structures and the jurisdictions through which they channel dividends. It is no longer sufficient to rely on the existence of a tax treaty; MNEs must now demonstrate substance and ensure that their arrangements withstand the scrutiny of BEPS-compliant regulations.

Compliance and Documentation

Compliance with BEPS measures requires enhanced documentation and disclosure. MNEs must now maintain comprehensive records that demonstrate the economic rationale of their cross-border payments and structures. This includes documenting the corporate group structure, the operational and commercial reasons for holding structures, and the alignment of tax arrangements with value creation.

Operational Changes for MNEs

To comply with BEPS standards and maintain eligibility for reduced withholding tax rates on dividends, MNEs may need to re-evaluate their operational models. This could involve changes to corporate structures, relocation of key business functions to align with tax arrangements, and restructuring of financing arrangements to ensure they are BEPS-compliant.

The Role of Tax Professionals

The complexity of BEPS measures means that MNEs will increasingly rely on tax professionals to navigate the changed landscape. Tax advisors must be well-versed in the intricacies of the BEPS Action Plan and adept at devising strategies that align with the new global tax norms while optimising the tax position of the MNE.

Long-Term Implications

The long-term implications of BEPS on dividend taxation are profound. MNEs can expect continued pressure to increase transparency and eliminate aggressive tax planning practices. Tax authorities are likely to be more aggressive in challenging structures that appear to be established primarily to obtain tax benefits, including the recovery of withholding taxes on dividends.


The OECD’s BEPS Action Plan has ushered in a new era of dividend taxation, emphasising substance over form and transparency over secrecy. For MNEs, adapting to these changes is not optional but a necessity for sustainable operations. The ability to recover withholding taxes on dividends now hinges on robust tax strategies that are compliant with BEPS recommendations. By embracing these changes and seeking expert guidance, MNEs can navigate this new landscape effectively, ensuring that their approach to dividend taxation remains both compliant and efficient.