The current BEPS landscape: What to do now
INSIGHT ARTICLE |
Current status of BEPS
Countries have begun implementing legislative changes since the final recommendations of the Base Erosion Profit Shifting (BEPS) Project were released by the Organisation for Economic Co-operation and Development (OECD) last October. By way of example, along with other countries, the U.K., France, and Japan have issued legislation on country-by-country reporting relating to Action item 13. In addition, Australia has introduced a bill relating to Action item 1, extending goods and services tax to the business to consumer supply of digital products, services, and intangibles.
Recently, the OECD announced a new framework in which all interested countries and jurisdictions were invited to join global efforts (lead by the OECD and the G20 countries) to review the implementation of four minimum standards:
- harmful tax practices
- tax treaty abuse
- country-by-country reporting
- dispute resolution
The new framework is also meant to ensure ongoing data gathering on the tax challenges in the digital economy and measurement of the impact of BEPS. The framework also aims to facilitate monitoring for the implementation of the remainder of the BEPS package and standard-setting. Notably, the work remaining includes action on transfer pricing and further initiatives on tax treaties. In addition, an Action item 6 discussion draft, just released on Feb. 29, 2016, addresses the treaty residence of pension funds.
What is the current state of play in the US?
The United States supports the final BEPS outputs. On Dec. 21, 2015 the Internal Revenue Service and Treasury Department released proposed country-by-country regulations modeled on the OECD recommendations which were issued under Action item 13, and have announced a plan to finalize them by June 30, 2016. Moreover, the newly released U.S. Model Treaty includes provisions on special tax regimes, and is currently under consideration as part of the OECD’s continued work on treaty abuse under Action item 6.
In early February, the Obama administration released its fiscal year 2017 Budget Proposals and the Treasury department released its General Explanations of the Fiscal Year 2017 Revenue Proposals. Several international tax proposals are aimed at addressing concerns targeted by the BEPS project, such as planning involving hybrid entities and arrangements, avoidance of tax on digital goods and services, and excessive interest expense. Proposals also include a new minimum tax on foreign earnings, and one-time tax on previously untaxed foreign profits.
What does this mean for US multinationals?
While American multinationals continue to wait on potential legislative changes in the United States, they must still pay attention to BEPS changes occurring outside the country. The creation of a large and inclusive forum for discussion and decisions on implementing BEPS measures is ground breaking, and triggers cross-border cooperation, that will likely yield greater consistency for implementation across the world, including stepped up enforcement due to wide-spread monitoring. Implementation of BEPS measures will happen quickly, making it unwise for companies to take a wait and see approach.
Specific items to watch
Withholding tax leakages are possible. Where intermediate holding companies with no substance are utilized to make use of a treaty, the treaty may no longer apply. This could lead to an unplanned withholding tax liability.
Hybrid financing structures that allow deductions for payments that are not included in the income of the counter-party jurisdiction could be subject to rules that deny deductions or inclusion of income.
Funding arrangements could be affected by changes in safe harbor ratios based on an income based ratio of net interest to EBITDA of the entity or group as a whole.
Transfer pricing structures such as business models which allocate profits according to the group’s value chain are in the spotlight. BEPS measures attempt to tighten the transfer pricing rules in relation to e-commerce, risk allocation and intellectual property by aligning the profits from the arrangement with its economic substance.
Commissionaire structures must be reviewed in light of new permanent establishment rules and companies must navigate the murky waters of new wording on dependent agents.
Transfer pricing documentation is more burdensome. Country-by-country reporting is the first deadline for BEPS implementation and companies need to be prepared to report out data in 2017 or in some cases, even sooner.
What should US companies do in the next six months?
Preparation and risk analysis are key in order for U.S. companies to navigate country changes and new developments from the OECD, as several outstanding substantive items are completed. It is imperative that companies look at their global operational and tax footprints, assess how the various BEPS action items impact operations and where BEPS is relevant. Companies should then develop a scorecard approach to assess priority items in combination with related local country developments.
Engage in strategic planning in order to be flexible enough to adapt to specific BEPS driven changes. Coordinate tax planning, treasury functions and operations and develop a strategic plan that includes BEPS priority items and identification of key potential risk areas and steps for change to meet new requirements. Implement strategies to change existing non-compliant structures and protect the effective tax rate and maintain clear communication lines with company stakeholders including executive teams, treasury, and accounting.
Evaluate current systems in light of preparedness for compliance obligation changes. The increased transparency under the BEPS outputs gives governments better insight into the total business dealings of internationally active companies and puts pressure on companies to report data accurately. Assessment of whether current systems are ready to handle increased levels of data and reporting is crucial.
Monitor new country changes in order to stay abreast of country changes. Changes are happening fast with no slowdown in sight. Companies will need to assign dedicated teams to keep track of developments on BEPS compliance issues and country specific changes or engage advisors to work with them to stay up-to-date on the changes.