BEPS in the Boardroom

BEPS in the Boardroom

Robin Walduck sets out why the effects of BEPS will be felt by the wider business, and what this means for you and your colleagues inside and outside of the tax department.

Partner and Head of International Tax & Treasury

KPMG in the UK

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BEPS in the Boardroom

The OECD’s Base Erosion and Profit Shifting (“BEPS”) project has been high profile for us in the tax world for some time. Until now, there has been a temptation by the wider business to view BEPS as a “tax issue”, with an assumption that its effect will be largely limited to the tax department. Now, as we move into the implementation phase of the OECD’s recommendations, the tangible effects are becoming clearer. In this article, Robin Walduck sets out why the effects of BEPS will be felt by the wider business, and what this means for you and your colleagues inside and outside of the tax department.

From the obvious, to the not so obvious

An obvious area of concern is Treasury: the BEPS actions will likely lead to increased costs of capital, which will need to be quantified and built into forecasts. These costs will be driven by various factors: for example, a group may no longer get the same level of tax deduction for its interest expenses due to domestic law restrictions, and the internal provision of funds through intra-group cross-border financing may become less efficient.   

In contrast, an area which may not have been considered is the effect of BEPS on People and Resource. Going forward, it will be necessary for a multinational group to maintain a full and accurate record of where all its internationally mobile employees are, in particular senior executives and market-facing representatives at the time they make important decisions relating to the business. Under the new expanded Permanent Establishment definition, business activity by individuals is more likely to create a taxable nexus.

From the corporate to the individual

The corporate impact of BEPS is widely acknowledged, with perhaps the most obvious area being the introduction of new disclosure requirements.  Country-by-Country Reporting is now accepted as a necessary part of corporate reporting, with an increasing acceptance that public reporting will soon follow.1 Indeed, at the end of March, an impact assessment by the EU Commission concluded that public Country-by-Country Reporting should be adopted in the EU.

BEPS may also have a personal impact for those executives rewarded through long term incentive plan (“LTIP”) remuneration schemes. To the extent that BEPS measures result in reduced EPS for the group, LTIP performance could be affected – and this could well be the case if the impacts of BEPS are not proactively managed.  

What does this mean for you?

As we in tax are well aware, BEPS is here, it is radically changing the global tax landscape and its effects will be felt across the business. The only matter for debate is the speed of implementation of the OECD’s recommendations, and at the time of writing, the signs support a largely rapid uptake. The challenge now is driving this message home with colleagues outside of tax; in the next six months BEPS will inevitably rise up the Boardroom agenda, gaining traction with teams across the full breadth of the business.  

In the meantime, we recommend you continue with your work in assessing your financing, operating and legal structures through a post-BEPS lens. Any progress you can make in quantifying the impact of BEPS will add weight to your discussions with the business and will help prioritise your BEPS action plan. Considering the impact of BEPS will be especially important for any “live” transactions – whether an M&A deal, a material investment in infrastructure, or an operational restructuring project. The ripple effect of BEPS should not be underestimated.  

From an international tax standpoint, BEPS may well level the playing field to some extent if the recommendations are adopted in full in a consistent manner by governments. The progression towards a more transparent corporate environment will potentially result in commercially sensitive information becoming more readily available, which will have an impact in the market. But this comes with a big caveat: we are only at the beginning of the process of implementation, and the road is long and potentially rather rocky.

Tax Matters Strategies

Tax Matters Strategies

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1In our recent Competitiveness Survey, only 31% of respondents still oppose the introduction of the OECD’s Country by Country Reporting proposals, whilst 50% support voluntary public reporting.  

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