It has been over a year since the Organisation for Economic Co-operation and Development (OECD) released its final report on base erosion and profit shifting (BEPS). The BEPS Project is a global tax initiative designed to increase transparency and level the tax playing field among participating countries.
Essentially, BEPS represents the OECD’s tax policy recommendations, which it calls “actions,” and which have been endorsed by the G-20 finance ministers. If implemented by tax jurisdictions around the world, these actions would ensure that corporate income is taxed in the jurisdiction in which it is incurred, and could eliminate corporate use of tax havens.
Last fall, the OECD finalized 15 actions for combating the loss of tax revenue due to gaps in tax policy and enforcement. (See Figure 1, below.) The actions are not binding or enforceable at a global level; rather, they represent a set of principles that tax authorities around the world can refer to in crafting their own local BEPS-compliant tax policies and rules.
Now the BEPS Project is setting recommended minimum standards for these 15 actions. It has completed standards for four of them:
- Action 5—Counter harmful tax practices more effectively.
- Action 6—Prevent tax treaty abuse.
- Action 13—Re-examine transfer pricing documentation and country-by-country reporting.
- Action 14—Make dispute resolution mechanisms more effective.
As governments and taxing authorities enact the BEPS minimum standards, some companies will need to significantly change business practices across their organization. For example, as country-by-country reporting is adopted in participating countries, corporate treasurers will have to assist the tax function in identifying income, whether through the implementation or modification of technology or redesign of a process that may not capture the level of detail required.
It’s crucial for multinational enterprises to stay informed about the BEPS implementation timeline for every country in which they operate.
BEPS Project Gets Inclusive
Another BEPS change that occurred over the past year is a significant expansion in geographic scope. In February 2016, the OECD and G-20 finance ministers introduced the concept of the inclusive framework, which allows more countries to join the BEPS Project as “associates,” a status that puts them on equal footing with the originating members. The standards for the inclusive framework were agreed upon in July 2016 in Kyoto, Japan.
The OECD has added more than 85 developed and developing countries to the list of BEPS Project associates over the past year. To be eligible for the inclusive framework, participating countries must:
- Review and monitor the implementation in their tax jurisdiction of the BEPS Project’s current minimum standards for Actions 5, 6, 13, and 14;
- Participate in the development of minimum standards for the project’s remaining 11 actions;
- Implement decisions based on results of monitoring;
- Gather data on all actions; and
- Support deployment of BEPS actions and standards in developing countries, by participating in the development of implementation toolkits.
The inclusive framework expands the reach of the BEPS Project to countries beyond the G-20, and it enables the OECD to hold participating countries accountable for abiding by the minimum standards assigned to BEPS program actions. The development of the review process is still under way; the level of monitoring for each action is being determined, and how the OECD and member countries will hold each other responsible is still undecided. Moreover, as BEPS participants assist in developing and deploying implementation toolkits, they prepare for rapid rollout of the BEPS package to additional countries.
In these ways, the inclusive framework is accelerating the progress being made by the OECD on leveling the tax playing field. Over the course of the next year, the OECD and BEPS associates are expected to develop minimum standards for the remaining actions, and they will be monitoring compliance with the minimum standards already in place. Eventually the scope of BEPS will encompass more than 100 countries, which will force major multinationals to look at their financial operations in nearly every country in which they operate.
The fact that each participating country has the ability to shape its own legislation creates complexity for organizations working across multiple tax jurisdictions. Treasury functions should be prepared to support their tax teams’ compliance with BEPS-related changes to tax rules around the world.
For example, the implementation and monitoring of Action 13—transfer pricing documentation and country-by-country reporting—will likely have a heavy impact on many multinationals. Tax departments should consider a change in how they report income in all the affected tax jurisdictions, and they will likely lean on treasury to supply income and revenue information by country, as well as information about any applicable transfer pricing. Multinational organizations may also have to defend their transfer pricing treatments in both the United States and other participating countries. Treasury teams should be working today to understand what information will be required by their corporate tax function, as well as the applicable taxing authorities, in order to properly address country-by-country reporting.
Every multinational will have to handle BEPS in a distinct, original way, based on its unique corporate structure. Companies operating in several different countries may turn to EY and/or other thought leaders that have been monitoring the global progress of BEPS, and that can be a valuable resource to companies looking to make sense of the changes.
What Should Treasury Do Now?
As the BEPS Project continues to gain momentum, it is important for treasury and the rest of the organization to keep up with the changes. Some companies will likely react to the new regulation on a country-by-country basis, but proper planning and precise execution at a bird’s-eye, global level is a better way to effectively manage the risks BEPS poses to the organization’s bottom line.
When EY works with clients to plan for BEPS, we use a phased approach. (See Figure 2.)
We recommend that our clients address BEPS in four phases:
Identify. The first step is to understand the OECD guidance and BEPS Project actions. Specifically, look at what aspects of the organization are likely to be impacted by BEPS, and in which tax jurisdictions the company is performing each of these activities.
The organization may benefit from the assignment of a program manager who would run point for the planning and implementation of the company’s response to BEPS-related changes in tax laws. This program manager would then engage cross-functional stakeholders from various parts of the business (e.g., tax, treasury, legal) to determine what effects BEPS may have on the organization. The program manager would create a comprehensive view of the organization’s vulnerabilities to BEPS and would communicate with key stakeholders in the interdependent functions across the organization.
Diagnose. After identifying the possible effects of BEPS on different parts of the organization and getting a consolidated view, the program manager should begin to diagram how BEPS actions can be expected to change the company’s target operating model. This process may include—but is not limited to—looking at the current legal entity structure, internal financing mechanisms, and financial accounting and reporting.
The cross-functional BEPS team, led by the program manager, should analyze how each BEPS minimum standard, whether already in place or in development, will impact the organization immediately and in the future. This will set the stage for determining what financial impact prospective changes in the operating model might have on the bottom line. Some processes and practices may become more complex, leading to higher technology costs. New limitations on internal financing may mean that funding of entities in certain jurisdictions becomes more costly. And certain cash pooling structures may be limited, which would require treasurers to figure out alternative funding strategies.
Design. Analyzing the impact that BEPS actions and minimum standards will have on the organization’s operating model will lay the groundwork for the BEPS program manager and cross-functional project team to create a new target operating model that specifies the desired future state of the company’s people, processes, and technology.
Personnel will be responsible for creating new reporting and performing new responsibilities. Processes may need to be redesigned or created to support new required tasks under BEPS regulations. And the need for multinational companies to gather data with more granularity could place pressure on the treasurer to reconfigure technology or processes to capture the appropriate level of detail. BEPS compliance could require changes to other IT systems, as well, including systems in finance, the supply chain, treasury, HR, and more.
Deploy. Once the company has a plan for incorporating anticipated BEPS regulations into its operating model, it is ready to implement the changes.
Change management will be important in achieving the desired result. A clear road map and timeline should be communicated among the cross-functional team members, to ensure that resources are in place to execute on the agreed-upon plan. The program manager should remain the point person, in order to maintain a centralized view of organizational changes and to identify any setbacks or obstacles that could be avoided during the lifespan of the implementation.
As the plan is being executed, the organization should consider focusing on any financial statement impact that may be experienced. There are likely to be effects on transfer pricing arrangements, and many participating countries are requiring companies to include a consolidated version of the country-by-country reporting in their annual statements. Also, the company’s auditors will likely ask for BEPS proof documentation during the course of the audit to perform necessary risk assessments. Any significant changes to the company’s financial statements may require further action from the organization, which is why it is important to have a diverse, cross-functional group of stakeholders involved from the onset of the process.
The Future of BEPS
The OECD continues to gain acceptance and participation among developed and developing countries. Significant changes in the global tax landscape will continue to progress, and treasury managers need to understand the effects BEPS will have on their organizations. As participating countries continue to enact legislation to combat base erosion and profit shifting, multinational corporations should prepare by designing the right course of action.
Zachary John, CTP, is a senior with the Global Treasury Services group at Ernst & Young LLP. He has more than six years of experience in corporate treasury and focuses on helping clients optimize their treasury function. (www.ey.com/treasury)
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. Some of our services for audit clients and their affiliates may be restricted in order to comply with applicable independence standards. Please ask your EY contact for further information.