In July 2012, G20 leaders assigned the Organisation for Economic Cooperation and Development (OECD) the task of reforming the international tax system by setting up the Base Erosion and Profit Shifting (BEPS) project. After approval within the next few months and when companies adopt the regulation early next year, corporate treasury departments will have to start complying with international tax rules and provide documentation for transactions. Treasury Insider talks to Ryan Dudley, head of international tax at global accounting and consulting firm Friedman LLP about the current attitude towards the BEPS regulation and which countries he believes will support BEPS as a new legislation.
Recent reports state that treasury departments are not fully aware of the regulations in place. Could you explain what the BEPS project is?
BEPS is an initiative which has the objective of preventing businesses from engaging in aggressive cross border tax planning, with a goal of protecting the tax bases of various countries in which those businesses operate or are based. The BEPS project has arisen out of a greater focus in recent years on corporations that have significant earnings being generated in very low tax jurisdictions, despite having minimal operations or activities in those jurisdictions. As a result, base eroding the revenue in high tax jurisdictions has been the impetus for this project. This reflects an evolution in the digital economy, where more and more business can be done online and you don’t necessarily have a bricks and mortar shop in order to derive revenue in a location and as such, the ability of mid-size companies to draw profits away from high tax jurisdictions has increased substantially. It’s no longer an issue limited to the operations of Fortune 500 companies. Even mid-size companies can engage in transactions that will shift profits into low tax jurisdictions.
How do you think the BEPS 15 step action plan has been received since 2012?
At this point in time, the 15 steps or actions have not actually been adopted by the OECD or by anyone else. The OECD plans to approve the 15 actions in September, the G20 finance ministers will approve them in October and then the G20 leaders in November. It’s really going to be by the end of the year that these action points will be adopted. Countries will then start looking to introduce these rules into their legislation, regulations and administration for tax purposes. One action point that has attracted a lot of attention is the country by country reporting standard, which is in a very advanced stage of development and could be implemented very shortly after the actions have been approved.
How will compliance of this regulation impact treasurers?
Treasurers will have to re-evaluate their cross border corporate structures to ensure that they are not put in a position where they will have double taxation, where multiple countries may try to claim that they have a right to tax a certain amount of income. Structures that may have been implemented in the past to obtain tax benefits will need to be revisited to ensure that those structures are still going to be respected. The other very significant impact that is likely to arise will be the additional reporting requirements, particularly in relation to companies with revenues in excess of 750 million euros. The country by country reporting regime would require an enormous amount of information so that treasurers will be able to prepare a report that sets out financial information for their global operations on a country by country basis. The idea behind the country by country reporting programme is that it will allow tax authorities to assess risk when profits are being shifted, because they will be able to see there are large pools of profits that are subject to low tax in a particular jurisdiction where there are little or no assets or employees. But to comply with the reporting obligations, treasurers are going to potentially need to change their entire accounting systems in order to capture the information in a way that tax authorities will want it presented to them.
How do you think corporations will react to the OECD requirement to create country by country reports?
If G20 leaders were to approve these rules in November and then immediately organise for the country by country rules to be adopted in 2015, 2016 would be the first reporting period and 2017 would be when the first country by country reports are created. That being said, it is difficult to believe that companies with 750 million euros of revenue would be able to create integrated financial reporting systems to generate reports, in a matter of weeks or months. An enormous effort will need to be made to compile information from various general ledgers and other accounting systems within the group and will then need to be processed if the information is going to be delivered in the form of a country by country report.
BEPS ensures that treasurers provide effective documentation of transactions, what do you predict this will mean for risk in the future?
From a risk perspective, I think that treasurers are going to face many more enquiries and have to provide much more information. Part of the BEPS programme is that there will be more sharing of information. To the extent that information is reported in one way to one government according to the local rules and then reported in a different way in a country by country report, there are going to be inconsistencies which may give rise to additional questions and more effort going into collecting information, organising information, reconciling information and then finally, preparing the reports. For some companies this report will contain very sensitive information, therefore the security of that report will be a risk. You would hope that this sort of information would not leak out of a tax authority, or be shared with countries that may not have the same safeguards to keep that information safe.
What do you think the attitude will be towards companies who do not adopt BEPS?
Companies may not have a lot of choice. Laws will change and companies will have to comply with the law. They may object to some of the laws and seek to minimise the impact of additional reporting, but BEPS will not be optional for them. One of the more interesting things will be how different governments introduce BEPS and whether governments will wholeheartedly adopt BEPS or selectively adopt components of BEPS, bearing in mind that some of the rules being proposed by the OECD would need to go through a legislative process in order to be approved.
What countries do you think are more likely to adopt BEPS?
Many of the larger EU countries are likely in favour of BEPS and are likely to adopt it rapidly. Countries like Australia have come out strongly in favour of BEPS. I think some smaller European countries may adopt the regulations but in a more selective manner. For example, Luxembourg has a very favourable intangible property regime. The question will be whether they will adopt BEPS in such a way that they may lose any benefit associated with that favourable regime. The US has also said that they would support various components of BEPS and I believe that the US Treasury is generally in favour of country by country reporting. However, the US has also raised concerns about certain other components and any changes requiring legislative approval will have problems in the current political environment. Whether the US would adopt the whole package is to be seen.
How will tax guidelines help the treasury environment to evolve in the future?
Treasurers will need to be aware that if countries do not adopt these rules immediately, they will probably move towards these rules gradually. They will need to bear in mind that at some point in the not too distant future, these BEPS principles may be adopted by relevant countries and they’ll need to modify their structure to adhere to that. This will be another variable that will change plans as treasurers expand their operations to different countries and structure their operations in new markets and new manufacturing jurisdictions.