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BEPS – do you know what is coming?
As a result of the global financial crisis the necessity for growth has become paramount and fiscal consolidation non-negotiable. There is a general belief, even in developing countries, that governments are losing substantial tax revenues as a result of aggressive tax schemes which result in the eroding of the tax base or the shifting of profits into more favourable tax jurisdictions. Taxand South Africa discusses the key objectives of the OECD’s BEPS action plan, focusing on transfer pricing as a key area for addressing the BEPS issue.
Non-governmental organisations drive corporate social responsibility while civil society demands a fair and balanced tax system, both sometimes blaming the arm’s length principle as the cause for all these problems. Taxpayers require stable and commercially acceptable tax legislation to avoid double taxation and to manage their effective tax rates as they still have an obligation to shareholders to maximise their profits by managing all expenses, including their tax expense. To address these issues the OECD is looking to implement country-by-country reporting that will require taxpayers to set out exhaustive details on how income taxes and business activities are allocated. The focus of the OECD is no longer only the avoidance of double taxation but it also wants to prevent double non-taxation.
Looking at the discussion document already released by the OECD it is clear that transfer pricing is one of the key areas that will be used to address the BEPS issue. The transfer pricing of intangibles (Step 8 of the BEPS action plan) will no longer only depend on legal ownership but where other parties within the group perform, function, uses or contributes assets, or assume risks or cost related to the enhancement, development, maintenance and protection of the intangible the returns on the intangible must also accrue to these other parties through arm’s length compensation which reflects the contribution of each party.
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Also published in Thomson Reuters' Taxnet Pro, 07 July 2014
Multinationals need to determine which transfer pricing structures will be acceptable under the BEPS action plan and which will no longer be acceptable. A profit centre which actively participates in the enhancement, development, maintenance and protection of the intellectual property may still be acceptable while a profit centre with limited functions, risks and assets and very little significant people functions may no longer be acceptable.