Latest Developments in Base Erosion and Profit Shifting

Multinational enterprises (MNEs) and tax authorities are bracing for upcoming changes to global reporting around transfer pricing as a result of the Organisation for Economic Co-operation and Development (OECD) rewrite of Chapter V of the OECD Guidelines, presenting a new approach to transfer pricing documentation. This new guidance stems from Action 13 of the Base Erosion and Profit Shifting (BEPS) project which was created to establish greater transparency amongst MNEs.

OECD BEPS Project Action 13 presents a three-tiered approach to transfer pricing documentation: Master File, Local File, and most notably, Country-by-Country Reporting. Quickly becoming the most immediate challenge for MNEs, Country-by-Country Reporting presents new challenges and additional complexity to MNEs as they seek to establish global control, report consistency and effective risk management in the compliance process.

Thomson Reuters total solution offering empowers MNEs to address new compliance standards with confidence.

Newsmaker: OECD’s Pascal Saint-Amans on rewriting the tax rulebook

Reuters’ Editor-at-Large Axel Threlfall discusses a range of issues including the delivery of the Base Erosion Profit Shifting action plan and potential issues arising from the G20 Leaders Summit in Turkey later this year with the OECD’s Pascal Saint-Amans.

Compliance Counterpoint

Joe Harpaz, head of the ONESOURCE corporate tax business at Thomson Reuters, responds to Saint-Amans’s comments on Base Erosion Profit Shifting (BEPS) and the ramifications for multinational companies (MNCs).

What is BEPS?

  • The Organization for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) initiative seeks to close gaps in international taxation for companies that allegedly avoid taxation or reduce tax burden in their home country by engaging in tax inversions (moving operations) or by migrating intangibles to lower tax jurisdictions.

  • The OECD has issued 15 Action Items to address the main areas where they feel companies have been most aggressively accomplishing this shifting of profit — addressing the digital economy, treaty abuse, transfer pricing documentation, and more. BEPS Action Item 13, in particular, aims to transform transfer pricing documentation, forcing multinational corporations to reconsider how transfer pricing details are reported to local tax authorities as well as worldwide with country-by-country reporting.

  • The OECD issued the final recommendations on the 15 Action Items on October 5, 2015. The next steps will be to design and put in place an inclusive framework for monitoring BEPS and supporting implementation of the measures. A significant shift in the overall dynamics of international tax planning and compliance is imminent.

Why should my organisation be concerned about these changes?

  • BEPS will result in a fundamental transformation of the global tax regulatory landscape. Because the OECD is not a government, it will require the tax authorities at countries around the world to pass laws and regulations to support the BEPS Action Plan and compel companies to comply with those rules. As a result, countries will pass domestic tax laws and sign on to treaties and other multinational agreements to support the Action Items as they see fit.

  • As this transformation occurs, consequences for non-compliance will become more costly, onerous and time consuming, and may result in media scrutiny. As robust and consistent tax documentation becomes a requirement, you will want to ensure your organisation optimises its current processes to minimize risk and maintain your reputation.

What are the benefits of leveraging transfer pricing technology in a post-BEPS world?

  • Transfer pricing documentation is already no easy feat. As the BEPS Action Plan is finalized, strenuous and evolving requirements will necessitate transparency to underlying data and a consistent policy of value creation. With information sourced from various functional groups and locations, technology serves as a central repository for data collection, consolidation, and consistent reporting. Leveraging technology enables you to dedicate time to transfer pricing planning, value chain transformation, and more to address demanding tax authorities in the new, transparent transfer pricing environment.

Why should you act now in preparing a BEPS strategy?

  • As countries pass domestic legislation in support of BEPS, changes to the international tax reporting landscape will present new challenges for multinational corporations and their advisors, requiring time, planning and resources to implement the necessary processes to ensure compliance.

  • The best defense is to implement research and technology tools that will allow you to act early and with confidence, giving your tax department the support they need to demonstrate their position. Acting early can help alleviate increased pressures and risks on tax departments and finance operations, as MNCs will need to deliver transparent BEPS reporting to required authorities with efficiency, accuracy, and reduced risk of audit.

BEPS Action Items

  • Action 1: Challenges of digital economy
    Action 2: Hybrid mismatches
    Action 3: CFC rules
    Action 4: Excessive interest deductions
    Action 5: Harmful tax practices and transparency
    Action 6: Treaty Abuse
    Action 7: PE avoidance
    Action 8: Transfer pricing — intangibles
    Action 9: Transfer pricing — risk and capital
    Action 10: Transfer pricing — high-risk transactions
    Action 11: Collect and analyze BEPS data
    Action 12: Disclosure of aggressive planning arrangements
    Action 13: Transfer pricing documentation
    Action 14: Dispute Resolution
    Action 15: Multilateral BEPS instrument