The rise of the digital economy coupled with increased globalization and more fluid movement of capital has undeniably changed the way multinational corporations operate, providing them with immeasurable opportunities for global tax planning. With tax regulations still grounded in the past with little regard for intangibles or global risk management, companies also have been able to capitalize on gaps in transfer pricing rules and reduce the tax they pay. However, this practice, broadly known as base erosion and profit shifting (BEPS), will soon be finalized with policy recommendations by the Organisation for Economic Co-operation and Development’s (OECD) action plan on base erosion and profit shifting.
Although the OECD does not make laws, the widespread adoption of its international tax guidelines is looming—and in some countries, already in motion. This will bring about extraordinary change as countries worldwide begin to implement BEPS-related policies via domestic laws or bilateral tax treaties to align with the new global guidelines.
On June 8, the OECD released a package of final measures under BEPS Action 13: Country-by-Country Reporting Implementation Package. This package involves requiring multinational companies to provide aggregate information related to the global allocation of their income and taxes paid together with certain indicators of the location of economic activity (e.g., number of employees), as well as information about which entities do business in a particular jurisdiction and the business activities each entity engages in.
Specifically, the OECD Action 13 guidance includes a three-tiered, standardized approach to transfer pricing documentation,
- A master file of information relevant for all multinational company group members.
- A local file referring specifically to material transactions of the local taxpayer.
- A country-by-country (CbC) report of information relating to the global allocation of the multinational corporation’s income, taxes paid, and other economic activity information (the template).
The CbC implementation package will require multinational companies with global revenues of more than €750 million (currently about US$850 million, although the United States has not yet set its own reporting threshold) to start using the reporting template for fiscal years beginning on or after January 1, 2016, with submissions to tax authorities starting after January 1, 2017. This means that tax authorities could begin exchanging the first CbC reports in 2018.
How the World Is Reacting
While many countries are moving forward with developing regulations to comply with BEPS, others are taking more of a wait-and-see approach.
Australia, for example, has released draft legislation to implement CbC reporting. It is expected to be passed into law before the end of this year. South Korea has also released draft legislation covering the master and local files, although it does not yet include CbC reporting (but is expected to soon). Spain has already adopted master file, local file, and CbC reporting, effective from the 2016 fiscal year. While the U.S. Treasury has indicated that it intends to promulgate CbC regulations in the coming months, it is becoming engaged in a tug-of-war with Congress as to its authority to implement OECD BEPS proposals.
Preparing for Country-by-Country Reporting
With regulations fast approaching, multinational companies without comprehensive tax technology in place for master file and CbC reporting could face a number of issues, including:
- A high risk of error and inconsistencies.
- A potentially higher risk of tax audits.
- Issues resulting from personal productivity vs. multinational workflows.
- Lack of visualization of the chain-reaction of policies, positions, and impacts.
- Difficulty capturing, recreating, and demonstrating the audit trail.
- Limited tax and transfer pricing team resources.
How can corporate tax and transfer pricing teams address these challenges in a timely manner? By reviewing their historical business structures and value chains, and automating and managing their intercompany transactions with systematic discipline, worldwide. This is where up-to-date guidance and comprehensive tax technology become a necessity.
With so many countries active in global commerce, tax practitioners at multinational corporations must keep up to date on each country’s adoption of BEPS principals and corresponding legislative actions by subscribing to the latest news, analysis, and guidance on BEPS-related activities.
Together with current guidance, use of tax technology is key. With comprehensive tax technology that leverages and validates data, provides control and flexibility, and offers analytics, multinational organizations can effectively manage master file and CbC reporting requirements.
With BEPS actions already being implemented (especially with respect to CbC reporting), the time is now for corporate tax departments to start enacting processes and procedures to manage increased scrutiny of their value chains and key profit drivers that the new era of BEPS regulation brings.
Terry Hayes, CPA, CTA, is a senior tax writer with the tax and accounting business of Thomson Reuters in Sydney, Australia. Hayes heads the Thomson Reuters Australian tax newsroom, as well as the ASEAN Tax Bulletin. Hayes chaired a BEPS thought leadership panel at the IFA Congress in Mumbai, India, in October 2014. Hayes’ experience stems from senior levels in the Australian Taxation Office and the Big Four environment. He is also a registered tax agent and has been with Thomson Reuters for almost 30 years.
Robert Sledz is an editor and author for Thomson Reuters Checkpoint with the tax and accounting business of Thomson Reuters. Sledz holds a J.D. from Syracuse University College of Law and an LL.M. in taxation from Georgetown University Law Center. Sledz is a member of the New York, New Jersey, and District of Columbia bars and has general knowledge of recent corporate and individual tax developments in Europe and the Americas from his previous editing work at Bloomberg BNA.