The OECD’s Base Erosion and Profit Shifting recommendations are set to become law next year, and tax teams at multinational firms are working hard to prepare for a whole new set of compliance requirements.
However there are a lot of unanswered questions and, it seems, tax teams will have to figure out the answers themselves. Conversations with the heads of many corporate tax functions around the world show that there are five concerns in particular that they’re focusing on.
The Top Five
Here are five of the most pressing concerns that tax leaders have cited, and their perspectives on how to tackle them.
Reporting GAAP versus local statutory financials: Some companies are thinking about using data based on local statutory accounting principles in their country-by-country reports as they are familiar to all tax administrations. This might do away with the need to explain where differences lie in financial results calculated according to Generally Accepted Accounting Principles (GAAP) and local statutory principles. The downside of this is that it will be more costly to provide data based on local “stat” financials, as it will likely involve a big manual effort to get the data for all entities and countries.
A benefit of not using stat data is that GAAP data can be more easily extracted from a company’s reporting systems, and so cheaper to provide to authorities. Challenges also emerge when transfer pricing documentation doesn’t correspond with local stat numbers and it becomes difficult to provide GAAP explanations for some of these calculations.
Keeping track of BEPS developments and communicating with internal stakeholders: Most companies have dedicated people or a whole team to keep track of developments on BEPS compliance issues, country-specific changes, and so on. But at most companies upward communication to senior managers outside of the tax or corporate finance function as a whole is minimal at the moment.
Some companies have instituted a formal tax policy organization within the tax function. Some firms have senior tax leaders in different jurisdictions who also keep abreast of policies and legislation in that country. Other companies seem to be relying on third-party vendors and work with them to stay abreast of the changes and how they will be implemented.
Communication to some the tax and finance teams’ internal stakeholders has also been relatively light at most companies as well. Most are limiting it to a brief heads-up for management and stakeholders and, if they anticipate extra resource requirements or extra costs associated with creating “country-by-country” or “master file” reports. Some have given a briefing to the audit committee and the board about the general changes that are on the way. These updates center on things such as state-aid, controversy, and general legislation. The intention is to keep them informed to make sure they know that the tax team is working on such a big issue.
Preparing country-by-country reporting: Many companies have either completed or will soon run a trial of the country-by-country financial reporting that is required for compliance with the new regulation. They will use this exercise to identify missing information, understand the time commitment required, and whether there are any glitches with the process. This is a good way to prepare for the new financial reporting requirements and can help tax functions make decisions about the reporting of the master and local files.
After completing their trials, quite a few companies were surprised by the ease with which they were able to find the data. The majority of the information was available, even though they had never needed it before. The biggest challenge seems to have come from making decisions about the type of data (GAAP versus stat financials; see point 1), rather than finding the data.
Defending positions in the master file and local files: Tax teams have definite concerns about the depth of the data (additional details, narratives, etc.) that companies should provide in the “global master file.” Most companies intend to provide high-level information in the master file and more detailed information in the local file.
There are concerns about whether to include information on company structure and intercompany activities in the master file, whether to provide information that defends tax positions taken by the company, and any transfer pricing decisions, or whether to provide more summary information.
Some companies are even planning to create master files for each line of business. The master file will include high-level information and will only address questions asked in the BEPS guidelines. For the master file, high-level information currently being used in filings such as the 10-K can be used.
Software and automation considerations for BEPS compliance: Most companies have not been able to find satisfactory software to help them comply with BEPS recommendations, and specifically software that will help them with country-by-country reports, global master files, and local files.
Some are even skeptical about using existing master and local file tools, as they might not be useful for qualitative analysis, and would still leave tax teams needing to write the majority of the narratives. A possible solution would be to build a “functional master file” with multi-layer descriptions for the master file structure. However, this is hardly a tried and tested method, and tax teams will continue to develop the idea in the coming weeks and months.