The post Base Erosion and Profit Shifting world

The post Base Erosion and Profit Shifting world

The Base Erosion and Profit Shifting (BEPS) Action Plan tries to address the arbitrage between different tax rates and different interpretations of tax principles which arise as a result of tax sovereignty. The aim is to produce a revised set of guidelines to help eliminate non-taxation and ensure that profits are correctly allocated to the functions or activities that give rise to them. This will maintain the objective of minimizing double taxation and reduce the unnecessary burden of compliance on tax payers. We recommend multinational life sciences companies should review their organizational structures and perform scenario planning to assess the likely impacts of the BEPS work-streams. In particular, focus should be given to how the existing structures would be viewed should information regarding the supply chain and taxes paid in each country be made available to the public.

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The potential impact of BEPS

In this report, we provide a factual description of the issues arising as a result of the complexities of the international tax systems and their impact on life sciences businesses.

Impact 1:

Life sciences companies which rely on the use of representative offices or third parties as their in-country representative may have to adapt their structure if the OECD recommends a change to the exemptions surrounding the creation of a permanent establishment.

Impact 2:

It may be necessary to demonstrate a stronger association between the owner of an intangible asset and any activity which has a material effect on the value of that intangible. In theory, activities including (but not limited to); the control of budgets, the control of strategic decisions and the control of research programs, may need to be linked to the place of ownership of the intangible.

Impact 3:

The need for more transparency in transfer pricing documentation and the request for country-by-country reporting may result in more tax audits and potential disputes over where profit should be allocated for tax purposes.

Impact 4:

The collection and use of structured and unstructured patient data may begin to constitute an intrinsic value generating intellectual property in the country in which it is collected; this may result in a taxable nexus.

The outputs from the BEPS Action Plan are rapidly taking shape. Businesses that understand the implications and adapt their business model in line with the direction BEPS is going should minimize the impact of inevitable inefficiencies in the system caused by a lack of certainty as to which markets adopt which recommendations.

The four actions

life sciences companies should consider taking in the medium term.

Review the use of the representative offices within global business operations, quantify the impact that a change in the definition of a permanent establishment may have and consider restructuring to reduce the potential impact on post tax revenues.

Action 1:

Review the use of the representative offices within global business operations, quantify the impact that a change in the definition of a permanent establishment may have and consider restructuring to reduce the potential impact on post tax revenues.

Action 2:

Assess the relationship between the owner of all intangibles across the business and measure the relationship between business activities ensuring that they are commensurate to the revenues generated in the place of ownership.

Action 3:

Establish a robust transfer pricing documentation system so that exposure to audit and transparency demands will not result in a change to where profits are able to be allocated for tax purposes.

Action 4:

Develop a system which is able to measure the value of data that is collected through business activities enabling you to predict the potential of a data asset to become taxable and the amount of taxable profit which would be generated.

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