The OECD’s action plan on BEPS
Some high profile multinational corporates (MNCs) have made public headlines lately with regards to their tax strategies.
Some high profile MNCs have made public headlines lately with regards to their tax strategies. The Organization for Economic Co-operation and Development (OECD) believes that, due to the interaction of different tax systems and international tax rules, certain profits remain untaxed. The OECD launched an action plan which should eliminate any possibilities of taking advantage of local tax laws. Corporates are about to see a whole new set of compliance obligations following the base erosion and profit shifting (BEPS) initiative.
What is BEPS?
Base erosion and profit shifting refers to tax planning strategies to exploit gaps and mismatches in tax regulations that allow companies to allocate profits to low tax regimes. The OECD action plan on BEPS consists of 15 actions. These actions are based on three main pillars: coherence of international tax rules, reinforcement of economic substance and increase of transparency.
The BEPS action plan was introduced as a result of multiple factors. Due to the financial crisis many OECD countries are facing increased public deficits. This creates the need to increase tax revenues. Tax authorities argued that relying on domestic tax and local transfer pricing rules is not sufficient. Media (and public) attention has started to focus on large corporates that appear to have a low effective tax rate (ETR). Although many protests lack technical knowledge, the public perception is that international tax rules do not deliver the revenues they are meant to capture.
What will be the impact of the BEPS action plan?
One of the major topics addressed by the OECD action plan is intercompany financing transactions. The way intercompany financing is structured is often predominantly driven by tax planning. Interest on debt financing is usually tax deductible, a corporate might benefit from allocation of interest expenses in a country with a high tax rate, while having the interest income taxable at a low rate. The action plan will restrict interest deduction in certain situations (for example ‘hybrid mismatch arrangements’).
Corporates might also be confronted with additional reporting requirements. BEPS guidelines provide a template for new minimum standards on country-by-country (CbC) reporting. This should give tax administrations a global picture of the operations of MNCs. This CbC reporting requires corporates to report an extensive list of financials in each tax jurisdiction. Additionally a master file has to be created with key information about the group’s global operations and a local file which should contain detailed transfer pricing analysis of transactions undertaken by the local taxpayer.
CbC disclosure requirements apply for financial years commencing on or after 1 January 2016. The CbC reporting is due within one year, so ultimately at the end of December 2017. This means the BEPS action plan will have effect from 2016 onwards.
To get a good understanding of the BEPS action plan, the first step for corporates would be to assess what the current discussions and recommendations are. From that assessment a corporate should further analyze the impact of the implementation of the action plan. The OECD’s action plan will not have the same effect for every corporate. One thing is sure though, the action plan will have its impact on the treasury department. So you’d better prepare as soon as possible.