BEPS: From measures to action plans

BEPS: From measures to action plans

Can the OECD's BEPS recommendations lead to value creation?

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BEPS: From measures to action plans

Following the publication of the FY16 Finance Bill, the UK Government has signalled its commitment to the OECD’s Base Erosion and Profit Shifting (BEPS) Project and the 15 recommended actions. These actions are intended to equip governments and tax authorities with the information needed to address perceived aggressive tax avoidance and ensure that profits are taxed where most of a multinational's key economic activities are undertaken and value created. 

They cover the tax spectrum and as this is a complex area to navigate, it should not be left to the finance department in isolation to steer a business through the BEPS waters. 

Why? Because BEPS initiated forthcoming tax regulation changes will have a huge business impact. Company directors and executive management need to understand these changes as their bearing is felt on future legal structures, financing arrangements and commercial operating models. Questions and challenges from stakeholders are also to be expected, with investors, the media and general public all expecting answers. 

As the OECD BEPS recommendations are not mandatory, there is uncertainty in the short-to-medium term about how countries may start implementing them. Some countries like the UK and Australia, have moved quickly to implement the new guidance. Others may take a more piecemeal approach. No two reformed regimes will look alike, as countries remain keen to use tax policy as a source of competitive advantage. The latest European Commission proposals suggest that these recommendations are likely to be implemented across EU countries.

The significant changes under BEPS that multinationals need to be aware of include:

  • Action 7 - proposed changes to the definition of a Permanent Establishment (PE) has significantly widened the circumstances in which a dependent agent PE can be created. This change generates uncertainty regarding the taxable presence of sales, marketing and procurement activities.
  • Actions 8 to 10 – legal ownership of an intangible no longer provides a right to all (if any) of the return generated from its exploitation. Instead the location of key functions performed in relation to the intangible determines the extent and where profits are to be recognised. Commercial reality is important, since transactions can be disregarded if the conduct of the parties is not considered by tax authorities to match the contractual arrangements. Returns for risk should also be allocated to the party which controls it and has the financial capacity to assume it. These proposals cement the importance of underlying substance and value creation over legal ownership or funding.
  • Action 13 - contains revised guidance on transfer pricing documentation based on a three-tier approach: a master file, local files and country-by-country reporting. These three elements are designed to provide tax administrations with relevant and reliable information to perform a risk assessment. Companies will need to be careful about the language they use in these reports as they will be read not just by domestic tax authorities, but potentially any authority where the company does business. 

A theme has appeared, and that is the realignment of taxing rights with economic substance coupled with demand for transparency. Critical to this realignment is the identification and evaluation of value creation. As an example the master file requirement is completely new and it has to contain a value chain analysis, and details of a multinational’s intangible property and financing arrangements. This information in conjunction with the other reporting requirements builds a substantial profile picture of a multinational. 

Profiling a multinational’s risk exposure should therefore top a BEPS to do list. Understanding this profile in context with a value chain analysis will enable multinationals to:

  • Support documentation requirements
  • Align operating models to reality
  • Develop sustainable operating models
  • Prepare for discussions with tax authorities and stakeholders

Therefore tax and finance departments should step out of their silos and work together with the business to react appropriately to BEPS.

For further information contact Kirsty Rockall

Base Erosion and Profit Shifting

Base Erosion and Profit Shifting

The global tax landscape is fundamentally changing and BEPS is putting tax firmly on the strategic business agenda.

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