26 October 2015
The OECD’s radical proposal means significant reform for international tax
The Organisation for Economic Cooperation and Development (OECD) delivered a significant proposal for global tax reform at the G20 Finance Ministers meeting in Lima, Peru, this October. It outlined the organisation’s final Base Erosion and Profit Shifting (BEPS) project guidelines, designed to rewrite the global rules governing the taxation of multinational corporations.
In November, the proposal will be taken up by the G20 Leaders Summit in Antalya, Turkey. The urgency and significance of the BEPS plan will undoubtedly become apparent in the wake of these G20 meetings as individual countries evaluate, debate and enact legislation to codify its proposals.
The change has already begun with several countries – including the UK, Australia, Spain, Mexico, the Netherlands, Poland, South Korea and China – having proposed new corporate tax rules reflecting the tenets of the BEPS Action Plan even before it was officially delivered.
Despite the accelerating pace of change, however, according to the findings of a new survey by Thomson Reuters, one-quarter of corporate tax and transfer pricing directors say their companies will fail to meet the first deadline proposed by the OECD.
This survey of 180 corporate executives and tax and transfer pricing directors, across 35 countries and more than 20 industries was conducted to gauge multinationals’ preparedness for BEPS. It found that European companies are more intently focused on BEPS planning than their peers around the world. Almost half of European respondents said they spend between two and 15 hours per week on BEPS activity, compared with a quarter in the Americas and Asia Pacific.
BEPS will dramatically affect international tax professionals working in companies around the world, which raises the question of why so many multinational companies are delaying their preparations. The survey found that they have been waiting for the OECD project to be finalised and, in some cases, they are waiting for their peers to move first.
Another potential reason for the delay is that the US has been largely absent from the BEPS party. Although Treasury Secretary Jack Lew has said he supports BEPS, the US Congress has voiced concerns about requiring US companies to supply detailed financial data to other nations as part of the BEPS country-by-country reporting requirement. Many corporations have echoed this sentiment. The potential resistance of the US Government could be giving some major corporations an excuse to sit on the sidelines on BEPS preparations until a final decision is made. Despite this, globally, 74% of survey respondents said they will complete their country-by-country analysis by the first due date, 31 December 2017.
Although most countries are already gearing up for BEPS implementation, it is clear that corporations have concerns about how it will work in practice. Aside from multilateral treaties or actions, BEPS implementation depends on how countries implement the action plan through domestic legislation – and the efficacy of this process will only become apparent over time.
Under Item 13 of the BEPS Action Plan, companies with global revenues of more than €750 million (or the equivalent in local currency) would need to begin compiling a country-by-country reporting template for fiscal years beginning on or after 1 January 2016, with submissions to tax authorities beginning 1 January 2017. This means that tax authorities could begin exchanging the first country-by-country reports as early as 2018 – creating unprecedented visibility into companies’ tax footprints.
The new obligation means multinationals will have to report their entire global tax position, effective rates, employees and revenues. This is information that they do not disclose even as public companies today. Many corporations have echoed the concerns that the US government has flagged – the new reporting requirements will expose sensitive financial information at country level.
Being open and transparent with the revenue authority is one thing, but the public release of tax information provided to that authority is quite another. Publicly released information could put companies at a competitive disadvantage if it gives their competitors a glimpse of their global supply chains and where they make their margins. It could be argued there are fundamental issues at stake here, such as confidentiality and taxpayer privacy principles that should not be brushed aside. This discussion is already underway in a number of countries.
These robust requirements will create new challenges and compliance burdens for corporate tax departments and transfer pricing teams.
The timelines may seem distant, but that is an illusion. A start date of January 2016 for country-by-country reporting means that the collection and preparation of data required for compliance should already be underway. Companies that delay action for too long may have difficulty staying abreast of regulatory developments in the various jurisdictions in which they operate. This poses huge workflow challenges for companies that have never had to capture this level of detail in the past.
The survey found that the most immediate BEPS-related concern for multinational corporations is transfer pricing. Just over half of respondents said a transfer pricing issue, most notably documentation and country-by-country reporting requirements, is their greatest concern when it comes to meeting BEPS action plan requirements.
There are a number of implications: the planning and strategy around reporting and the method of operationalising the reporting process. The massive data collection effort alone will require companies to harness the power of technology to help deal with efficiency around the compliance requirements.
In the post-BEPS world it will be necessary to ensure a seamless flow between a company’s transfer pricing policy, implementation and documentation. One way of achieving this is through integration between IT systems and transfer pricing documentation.
Multinational companies without comprehensive tax technology in place for master file and country-by-country reporting will face a number of issues, including a high risk of error and inconsistencies and a higher risk of tax audits.
Then there is the challenge of keeping up. With the BEPS project supported by many countries, each with its own corresponding legislative activity, the onus is on the tax professional to stay up-to-date with the latest state of play for each of the 15 action items in all of the most economically active countries around the globe. This is set to add significant complexity and uncertainty to tax planning and compliance activities.
Technology lays the foundation for a standardised and sustainable worldwide data collection process, enabling multinational corporations to document and report their results to taxing authorities. With research, risk assessments and intuitive analytics, multinational tax departments can remain current amid the evolving legislation.
Companies are evidently anticipating changes to their tax or business operations in advance of BEPS regulations, with two thirds of those surveyed planning to review historical business structures. Thirty percent said they anticipate a restructuring and 28% said they expect to seek an advance pricing agreement or other tax ruling in a country.
Among respondents already changing their corporate structure, the vast majority is acting specifically because of anticipated BEPS legislation, permanent establishment issues and the digital economy.
Business value chains and key profit drivers are also under review. This will be even more important post-BEPS, as price setting (including transfer prices) is a key component of complying with BEPS laws. Additionally, inter-company pricing agreements will likely come under close scrutiny by tax authorities and will therefore need to be reviewed in light of BEPS legislation.
With the increased transparency that BEPS-related legislation will require, multinational corporations are discussing the topic at board level. Fifty-five percent of survey respondents globally have done so – although the number drops to 39% in the US and rises to 63% in Europe. It may be possible to attribute the lower level of discussion around BEPS in the US to the delay in BEPS-related legislative activity and an ongoing tax policy debate between the president and congress during a general election cycle.
With limited resources and aggressive timelines looming, corporate tax and transfer pricing teams face a challenge in addressing the BEPS action plan in time. Companies should begin with a review of historical and current transfer pricing documentation and inter-company policies, in order to identify inconsistencies and inefficiencies that may exist and address them.
Although many multinational corporations are diligently preparing for BEPS, some are constrained by limited resources and others are adopting a potentially dangerous wait-and-see approach. With the first deadline just over 24 months away, companies need to be resolute in their strategy if they are going to be compliant by 2017.
Joe Harpaz is Senior Vice President of corporate tax and accounting and Managing Director of corporate tax and accounting at Thomson Reuters