The Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting action plan is likely to have a major impact on tax planning at multinational corporations by both tax professionals and corporate treasurers.
Tom Driscoll, U.S. managing partner for international tax, transfer pricing, and indirect tax at Deloitte Tax LLP and Melissa Cameron, a principal in Global Treasury Advisory Services at Deloitte & Touche LLP, believe tax professionals will be facing a “Global Tax Reset” as a result of the OECD BEPS action plan.
“There is new country legislation in reaction to BEPS, increased sharing of information among country tax authorities, and pressure on some governments to re-assess tax policy in order to address high levels of spending and sovereign debt,” they wrote in response to questions from Accounting Today. “For tax professionals whose companies have worldwide operations, this reset environment includes greater tax uncertainty, increased risk of double-taxation, expanded data requirements, increased public disclosure, and likely more cross-border governmental disputes.”
While the U.S. has yet to enact BEPS-related legislation—although country-by-country reporting regulations are imminent—they believe tax professionals should be aware the changes from BEPS that will have the biggest impact on U.S. businesses are likely to come from outside U.S. borders. Tax professionals should be actively addressing BEPS-related issues now, ahead of fiscal year 2016.
In terms of what tax advisors should tell their clients or the companies they work for about the OECD’s BEPS package and how to adjust to them, Driscoll and Cameron say that while some countries may choose to wait to implement the final OECD actions, several countries have already become early adopters and are embracing the OECD’s country-by-country reporting proposals.
“In addition, more than 80 countries have expressed interest in joining a multilateral effort to more rapidly implement BEPS measures,” they pointed out.
Even though no immediate BEPS related legislation is expected in the U.S., Driscoll and Cameron said tax advisors can help their companies and clients prepare for the change by asking the following questions:
1.What are the expected and potential changes ahead and how could they impact our business? Businesses should think about their current strategic and operational choices, including their financing, intellectual property, supply chain and transfer pricing, to determine if these still make sense in light of the changes and to contemplate strategies and scenario planning with 2014 and 2015 data, including enabling technology. For companies going through an M&A transaction, it is important that due diligence efforts are taken to assess the risk of the target in light of the changing global tax landscape.
2. How will this impact our industry? The OECD’s BEPS actions will affect different industries in different ways. For example, in the life sciences and technology industries, the focus will be on intellectual property, which plays a central role in value creation. In contrast, in supply chain intensive industries, such as manufacturing, the focus will weigh heavily on taxable presence concerns and transfer pricing considerations.
3. When should I start planning? To have sufficient time to reshape business or strategic choices for the global tax reset, businesses should to act now and analyze how various changes may impact their global tax burden and increase their risk exposure.
The changes also promise to have an impact on corporate treasurers. “These effects start with the business, as supply chain, intellectual property and procurements structures need to be evaluated for compliance with these rules including potential impacts to liquidity and FX exposures,” Driscoll and Cameron wrote. “The required changes may impact personnel assignments and organizational design, treasury practices and treasury systems. Treasurers need to evaluate their financing structures around the world in light of tighter restrictions on interest deductions.”
Tax advisors are already reacting to the OECD’s final BEPS initiative. “Tax and finance executives have said they have concerns with the increased compliance burden of BEPS, according to an October Deloitte poll that surveyed 1,110 executives,” Driscoll and Cameron wrote. “Other concerns included double taxation of income and an increased effective tax rate in income from cross-border transactions. The poll also found that country-by-country reporting topped the list of priorities for organizations, with the cost of compliance as a significant concern in regard to country-by-country reporting.”
In addition, they pointed out, the IRS has indicated that it anticipates new transfer pricing audits on U.S. companies’ compliance and tax planning procedures, in light of the final BEPS guidelines. In a separate Deloitte poll last month, more than one-fifth of respondents said their transfer pricing team has spent less than 20 hours this year on the business implications of transfer pricing, while only 6.9 percent of respondents cited more than 100 hours have been spent in this area. More than one-third of the respondents said they have not spoken to their company’s senior management or board about how transfer pricing changes will impact their company.
“The tax law changes resulting from the OECD’s work will introduce a host of new issues and challenges for companies in the U.S.,” said Driscoll and Cameron. “To identify and address areas of concern, businesses should analyze the impact of the proposals to evaluate business model and treasury impacts, as well as develop compliance strategies when vulnerabilities are identified.”
In a phone interview, Cameron said she foresees an impact on the CFO and the finance team. “The OECD has estimated that from a taxation perspective that they expect the effective tax rates of companies on average to increase somewhere between 4 and 10 percent,” she said. “This immediately attracts the attention of the CFO. It’s attracting the attention of the marketplace, investor relations and so on.”
She noted that at this point approximately 15 countries have taken legislative action in advance of the OECD coming out with their final recommendations.
“Others now are going through the process of reviewing these final proposals and legislating locally,” she said. “For a CFO, there is an opportunity here to not only identity the impacts but be proactive in responding to this assessment.”
The BEPS action plan is supposed to cover multinational corporations that earn more than 750 million euros in annual revenue. While the reporting is slated to start in 2017, it will actually begin capturing data in January of next year.
“The data will enable taxing authorities around the world to not only see what overall taxes are being paid, but where they are being paid and how that relates to earnings,” said Cameron. “This in and of itself will give greater transparency to taxing authorities around the world as to what structures are embedded within the organization. The days of doing a specific transaction with a ruling from a jurisdiction maybe in or outside of the BEPS initiative will have much greater transparency and impact than it may have previously. This is clearly a big change. Every company will need to look at this differently based on their own fact patterns.”