BEPS gathers pace but concerns remain
The OECD’s BEPS Action Plan is designed to revolutionise the taxation of companies around the globe. It is the most ambitious and coordinated attempt to reach common global tax objectives – in both developed and developing economies – ever and aims to achieve greater fairness in the international tax system and to secure countries’ revenues bases. While the true effects of the OECD’s BEPS initiative are becoming clearer, there are still many unknowns and some areas which are of real concern for multinationals. This topic was discussed today at the Taxand Global Conference 2015 in Milan.
There is strong political impetus to see BEPS succeed and the OECD is urgent, ambitious and determined. The proposals are broad in their scope, but focused around three core principles of coherence, substance and transparency. These proposals are set to change the current international consensus, which took decades to build, leading to a major overhaul of the global tax system. A key hurdle will be consistent implementation, at a country by country level, as jurisdictions try to build these sweeping changes into their existing national legislation, ensuring that no harmful asymmetries are produced.
Due to the size and scale of the OECD’s BEPS proposals there are many complicated areas that MNCs will have to navigate the potential impact of BEPS on them. However, Taxand believes there are three key areas where BEPS is of particular importance.
Firstly is the question of the impact of increasing transparency in relation to reputation and scrutiny. BEPS is focused on increasing transparency both at a country and company level. While being more transparent is seen has having many benefits, it could also increase the level of tax scrutiny for multinationals. Tax reputation continues to be a major and growing issue for corporations. In Taxand’s recent global survey, 77% of survey respondents globally agreed that exposure to the public of corporate tax planning has a detrimental impact on reputation, up from 72% in 2012.
Amazon’s announcement this week to book revenue from retail sales in individual European countries instead of channelling all sales through Luxembourg illustrates the impact that intense scrutiny of corporate tax practices has had. Amazon’s move marks a monumental change in its approach to tax in Europe, which could put significant pressure on other companies to do the same.
Secondly, is the potential for inconsistent application and administration of BEPS-induced changes to domestic laws. The recent UK diverted profits tax, which is arguably consistent with BEPS Action 7, but is an example of a unilateral domestic change, was cited as an example of the concern in this regard. Other areas of concern in particular included Action 6 on treaty shopping, which has within it the inherent conflicts between the US style limitation of benefits rule and the more general principal purpose approach to the denial of treaty benefits. Another is Action 2 relating to hybrid mismatch proposals. Hybrid mismatches have as their genesis the inherent differences between different national legal and tax systems, which differences will never be eliminated, so the potential for inconsistent application, with resultant double (or worse) taxation is, high.
Finally, it is likely that transfer pricing will remain the most significant area of concern for MNCs in a post BEPS world. Transfer pricing is one of the most complex areas the OECD is looking to reform and one on which there is most likely to be significant agreed movement. However, this doesn’t guarantee consistent changes between countries, with the result that dispute avoidance or resolution will become yet more important to taxpayers.
With this in mind, multinationals need to think carefully about how they respond to BEPS, how it will affect the structure of their company, and the new taxes that could come in to play which will affect the economics of doing businesses.
While the timing and fine print around BEPS adoption remains to be ironed out, if the OECD can coordinate all the actions, the outlook is more positive. However, the pace of progress is picking up speed, and BEPS is here to stay.
Your media contact for further queries is:
Barnaby Fry, MHP
T. +44 (0)203 128 8215
Quality tax advice, globally
Multinationals need to:
- Review business operations now and implement changes per BEPS requirements
- Pay attention to TP policy, financing structure, ‘no substance’ companies/ potential treaty shopping and lack of business purpose for structuring
- Prepare to be transparent: consider the appointment of a tax expert at Board level, responsible for managing tax strategy and risks
- Prepare a position on what is coming. Don’t be passive.
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