Senior tax executives are preparing for changes in the tax landscape as a result of the Organization for Economic Co-operation and Development’s base erosion and profit shifting project.
A new survey by Ernst & Young, presented Thursday at its 34th Annual International Tax Conference, found 88 percent of tax directors believe the BEPS project will lead to significant international tax changes globally over the next two years. As a result, 46 percent of the respondents expect to make significant changes to their tax profiles, up from 28 percent last year.
The OECD unveiled its BEPS plan on Monday for curbing multinational corporate tax breaks after previewing the action plan in recent years (see OECD Proposal Could Curb Tax Loopholes Favored by Google, Apple).
“Tax directors are anticipating and preparing for shifts in their company’s tax profile with a growing sense of urgency due to the OECD’s BEPS project,” said EY Americas vice chair of tax services Kate Barton in a statement. “In previous years, fewer tax professionals anticipated significant change, even over a longer timeframe.”
Separately, the International Federation of Accountants commended the OECD and Group of Twenty on delivering a final package of measures in the BEPS project.
“The BEPS Project presents a rare opportunity to cooperatively make international taxation work genuinely better in today’s globalized, digital economies,” said IFAC executive director Russell Guthrie in a statement. “Its success or failure will likely hinge on the effectiveness of international collaboration, without which we may end up with more complexities, divergences and gaps than when we started.”
IFAC calls for cooperation and inclusiveness among governments as the BEPS measures are implemented and negotiation proceeds on a multilateral taxation instrument amending over 3,000 bilateral treaties.
In the EY survey, 61 percent of the respondents said they have been affected by BEPS-driven legislation in at least one country where they operate. While tax executives are concerned about several areas of the BEPS recommendations, 33 percent of the poll respondents said they expect country-by-country reporting to have the greatest impact. Seventy-three percent of the respondents indicated they have already begun to analyze what country-by-country reporting will mean to their companies, a significant increase over 47 percent in a poll last year. Transfer pricing had been the key concern in 2014 and remains the second most prevalent concern this year.
In addition, 33 percent of the respondents said they have already seen tax authorities raising audit issues that reflect BEPS areas, with 64 percent identifying transfer pricing as the most prevalent BEPS-related audit issue. They anticipate making changes, particularly to transfer pricing documentation (56 percent) and methodology (35 percent), along with financing structures (35 percent). In addition, 64 percent of the respondents said they are more likely to consider using the APA process to manage risk and obtain certainty.
“In light of the OECD’s announcement earlier this week, companies now more than ever should take action to identify the impact of these recommendations on their business and tax planning,” said Jeff Michalak, EY Americas lead for International Tax Services. “These BEPS recommendations will likely be followed by inconsistent and uncoordinated country implementations, leading to uncertainty for taxpayers, the possibility of double taxation and potential controversy.”
The EY Tax Reform Business Barometer found 78 percent of respondents believe significant U.S. tax policy changes will reflect consideration of the OECD BEPS project.
Overall, 52 percent of the survey respondents said their companies are currently under audit in five or more countries, an 8 percent increase year-over-year, with 66 percent reporting that the enforcement posture and tactics of foreign tax authorities are more aggressive.
When asked to rank the issues that arise as challenges in their organization’s foreign country audits, survey respondents selected transfer pricing related to goods and services and transfer pricing related to intangible property first and second at 31 percent and 27 percent, respectively.
In addition, 83 percent of the respondents anticipate upward pressure on their global tax rate within the next few years, with 65 percent of them seeing tax law changes as a primary contributor.
Eighty-three percent believe the evolving taxation of the digital economy is important to the future of overall worldwide taxation, affecting primarily nexus, permanent establishment and treaty evolution.
The survey also found 27 percent of the tax executives polled said they are contemplating new operating models for digital transactions. Sixty-six percent anticipate a significant corporate transaction within the next 12 months, with 81 percent of those respondents expecting an acquisition.
Survey respondents cited India (30 percent), the European Union (25 percent) and North America (21 percent) as the most contentious regions for transfer pricing audits.
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