The broad themes we expect to witness in 2017.
If 2016 was in general terms about understanding the new tax landscape post-BEPS and assessing the impact this will have on your business operating model, we think 2017 has three broad themes:
Tax transparency is going to hit in 2017, with the CbCR requirements taking effect in most countries this year. The UK for example, will require CbCR to be provided from as early as December 2017 (12 months from the end of accounting periods starting on or after 1 January 2016). This is likely to lead to more tax authority questions and engagement on tax and transfer pricing matters. So a coherent, principled and geographically consistent tax and transfer pricing model will be increasingly important to help you mitigate some of the challenging discussions with tax authorities down the road.
HMRC are still wielding Diverted Profits Tax (DPT) as a tool to encourage compliance and to assess corporates with risky structures. Other corporate tax changes, such as the restrictions to loss relief rules, Action 4 changes which could limit the deductibility of interest expenses from the UK, are also going to come into law in 2017. Potential changes to permanent establishment rules, adoption of the OECD’s multilateral instrument and Action 2 and 6 changes (on hybrid structures and treaty abuse respectively) will add complexity to the global picture.
We expect the combined effect could be higher cash taxes for many groups and an increase in the Effective Tax Rate. Taxpayers can develop strategies to mitigate that risk and the cost of enquiries with careful planning.
Firstly compliance will be key. Transfer pricing documentation needs to be brought into line with Action 13 requirements. Many jurisdictions have already incorporated in their tax law the OECD blueprint (and even gone beyond this in some instances) in respect of Master file and Local file requirements. The deadline for preparing this is fast approaching, with some countries’ submission deadlines no later than December 2017. Multinational groups will have little choice but to prioritise this work to ensure compliance across all countries.
More broadly groups will need to prepare more, better and potentially different transfer pricing documentation. BEPS changes to transfer pricing rules – specifically the increased focus on the role of decision making and risk control functions – means the value of retaining a clear evidence trail explaining how the business makes decisions and how business functions develop has never been higher. Some of your compliance planning may not look like transfer pricing documentation at all, but ‘governance frameworks’ or ‘business mandates’ used commercially should be prepared and/ or closely scrutinised.
So what might happen in 2017? With Brexit, new US President Trump and multiple major European elections this year there is perhaps more uncertainty in the geopolitical climate than at any time for a generation – market uncertainty is a realistic expectation for the year to come.
But let’s be optimistic, we hope that the commodity price rally at the back end of last year and early this year (as seen through the rise in copper and crude oil prices in Q4 2016 and uplift in coffee prices in January 2017) continues. Certainly the relatively low prices we have seen have subdued the commodities sector – even though many traders thrive through price volatility – it is likely easier for physical traders (particularly those with physical assets) to earn profits in a rising market.
Regulatory change is also on the horizon. MIFID II developments have seen delays, but the European Commission published details of key exemption tests in December 2016. An article on the likely impact of MIFID II on commodity traders is attached to this message. In short, anyone trading commodity derivatives will need to undertake an ancillary business test to determine whether or not they can remain unregulated from January 2018. More commodity traders, were they to continue operating the same way, may need to become an authorised investment firm or, for those already regulated, to have further business activities come under the regulated umbrella.
The immediate concern forcommodity traders will be assessing the impact of the ancillary business test. We note that time is tight with only a few months before action is needed. If changes are required, some form of restructuring may be hard to avoid. This brings into question, the continuing reliability of your existing transfer pricing arrangements, as well as what an alternative commercially justifiable and competitive business operating model looks like for you.
Key messages for commodity trading tax professionals in 2017: