More than 90 countries are now committed to adopting the Organisation for Economic Cooperation and Development’s catchily named Base Erosion and Profit Shifting recommendations on international taxation.
This has meant a lot of work for multinational companies’ tax departments and for those elsewhere in the finance function, and could mean a big change in how much – and to whom – companies pay tax (although detractors claim it’s not enough).
What it will also mean is that the 90 countries are likely to amend their domestic laws and bilateral or multilateral treaties with other countries. Companies are required to comply with these new regulations starting in 2017 (using full-year 2016 financial figures and beyond).
Different World, Different Taxation
More and more globalization, myriad local versions of tax regulations, and the fact that an ever-increasing proportion of companies’ assets are digital or intangible (intellectual property, logos, brand names, etc) – making it easy to move capital from jurisdiction to jurisdiction – have given firms many opportunities to exploit the gaps in national regulations and reduce their tax liabilities, especially through transfer pricing.
And it is these loopholes that the BEPS plan wants to close, based on three “pillars” that aim to strengthen the current taxation structure:
Ensure uniformity in domestic tax laws that govern international movement of goods and services.
Base the calculation of how much tax a company owns in a given jurisdiction on where relevant economic activity takes place.
Increase transparency of the information disclosed to national tax authorities.
CFOs: Time to Help Your Head of Tax
The important thing for CFOs to realize is that BEPS is less of a compliance requirement, and more the need to improve risk management processes and practices, and how business information and data flows within their firm.
The BEPS recommendations are almost certainly going to change the management of international taxation, and the most pressing priority is to provide corporate tax functions with the ammunition they need to prepare. After getting over FIN 48, corporate tax functions are again at the center of attention, and they need to be given a seat at the table, be involved in important business decisions, and most importantly, given the CFO’s full support.
There are five topics that CFOs should be aware of, and of any developments, as well as supporting their tax function in preparing for.
More disclosures required: Of the 15 “action items” on which BEPS recommendations are organized, it’s the action item 13 “Transfer Pricing Documentation and Country-by-Country Reporting” that needs the most attention and effort from companies to comply with.
The intention is to provide more information to tax authorities through “master files” and “country-by-country reporting (CBCR)”. Companies will be required to submit a global master file detailing the company’s organization structure, intangible property, tax positions, as well as a local file with transfer pricing information related to the local jurisdiction.
The CBCR template is regarded as the biggest change emanating from the BEPS project, disclosing key country-specific financial data and main business activities associated with each.
The power of tax planning will be reduced: BEPS recommendations are slated to have a direct impact on tax planning activities and reduce their efficacy, especially for the tax positions or strategies that involve the movement of cross-border capital.
With such transactions coming under scrutiny using additional CBCR disclosures, CFOs can expect their firm to be asked to pay more tax.
Internal data practices and processes will need to be overhauled: The ability to comply with CBCR and prepare the master/local file centers on the company’s ability to collaborate and coordinate with the local businesses for data.
Many companies lack the technology or the processes to consolidate and aggregate the positions in a way that can be disclosed accurately. This is going to be the single biggest cause of failure to meet the disclosure timelines, and by now, steps should have been taken to address it.
More instances of double taxation: Some aspects of the BEPS action plan are still vague and need further clarification. There are certainly concerns about countries using the differing interpretations of what they can claim as “taxable” to increase a company’s tax bill in the jurisdiction. As more than one country could do this, this could lead to even higher tax payments as the income gets taxed in more than one country.
A company might try to limit this through mutual agreements, but they will either have to pay someone for the time and money this will take to do or they will have fewer resources to resolving existing discussions with authorities.
Compliance with BEPS will cost more money: Complying with the newer requirements will require an overhaul of processes, especially the way information flows within the organization, which will often require new or upgraded technology and IT infrastructure.
Tax functions will require help from experts and external advisors on topics like tax planning, process improvement, a global rise in tax audits, and so on. All these will require more money, more people, or both.