Addressing International Tax Planning in the Changing BEPS Landscape

The Organization for Economic Co-operation and Development (OECD) is an international economic organization of 34 countries founded in 1961 to stimulate economic progress and world trade, with the United States being a founding member.

Today OECD provides a platform for its members to identify and coordinate domestic and international economic policies.

In response to a number of highly publicized governmental hearings regarding how certain multinationals (e.g., Apple, HP, Starbucks, etc.) achieve low effective tax rates on their foreign earnings, in 2013 the OECD undertook a major review of international tax policy and best practices via the Base Erosion and Profit Shifting (BEPS) Project. Some results of BEPS include:

  • Implementation of controlled foreign corporation rules by Chile, effective October 1, 2015
  • Denial of the participation exemption in Japan for foreign dividends where the dividend was tax deductible by a paying subsidiary, effective for tax years beginning on or after April 1, 2015
  • Abolishment of the Double Irish structure effective from January 1, 2015
  • Implementation of a General Anti-Avoidance Rule in India, now proposed to be effective from April 1, 2017

Although by no means complete, these results give a small insight as to the BEPS principles and action plan adopted by the OECD and the G20 countries in 2013 to combat perceived abuses in international corporate taxation.

BEPS – What is it?

To be clear, not every tax holiday, tax incentive, or reduced tax rate is or should be immediately suspect in the developing world of BEPS.  BEPS is not intended to address tax avoidance or evasion by individuals (legislation such as the US FATCA or the OECD Common Reporting Standard tackle these issues). Nor is BEPS intended to castigate international tax competition that provides fair incentives to attract businesses to a particular country or locale, such as a reduced taxation in return for building local infrastructure or factories.

Rather, at its heart, BEPS addresses instances where the interaction of different tax rules leads to double non-taxation or less than single taxation. It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place.  It attacks aggressive and/or artificial planning by corporate multinationals that takes advantage of the interaction of different taxing systems and allows profits to go untaxed. 

This graphic illustrates the BEPS action plan, including timeline and 15 focus areas.

The final recommendations would then be implemented on a country-by-country basis. 

BEPS – Country by Country transfer pricing reporting under Action 13

While a full explanation and discussion of all 15 BEPS work streams is beyond the scope of this article, one key work stream that has picked up speed much faster than first anticipated and is indicative of BEPS goals is the country-by-country transfer pricing reporting required under Action 13.

On February 16, 2015, the OECD released much anticipated guidance on the implementation of country-by-country transfer pricing documentation.  Under this proposed reform to current transfer pricing policies, large scale multinational corporate groups (annual group revenue ≥ €750M) would be required to file and maintain a single master file with their home jurisdiction tax authority that describes the group’s structure, business, intangibles, financial activities and certain financial and tax positions. With respect to the latter, the template published by the OECD would include a wide list of metrics, such as revenues, earnings before tax, income taxes paid, number of employees, tangible assets, etc. Such master files would be available to other tax authorities upon request via exchange of information provisions. Locally, multinationals would be required to maintain smaller local files that document the arm’s length nature of transactions with the local affiliate.

The guidance proposes such reporting to be required for a multinational group’s first fiscal year beginning on or after January 1, 2016 and to be filed within 12 months of the end of such year. This timetable may be tighter than it first seems, as the reporting requirements go beyond what is currently required under international transfer pricing rules and may require internal IT systems changes and/or enhancements to be able to understand, collate and analyze the required data to be reported. As a result, starting to address these rules sooner rather than later is recommended.

BEPS – How should U.S. Multinationals react?

Going forward, one should expect global tax planning to become more linked to a company’s business activities and accordingly more difficult to execute independently of business strategy.  In addition, global tax reporting and documentation will increase and many multinationals may find it difficult to maintain an effective tax rate on foreign earnings as low as in previous years. While the United States may itself enact certain reforms in line with BEPS, the majority of the legislative effort is expected to occur in non-U.S. countries and will affect many traditional international tax planning strategies used by U.S. multinationals, including hybrid financing arrangements, use of tax treaties, and transfer pricing. Accordingly, going forward U.S. multinational groups will need to:

  • Monitor BEPS legislative developments over the short to medium term
  • Analyze the impact of BEPS legislation on existing tax planning and plan accordingly
  • Consider go-forward global tax profile and strategy in respect of BEPS
  • Understand and plan for increased tax reporting and tax examination of cross-border activity
  • Create more flexibility and exit options with global tax planning strategies

Andersen Tax is well equipped to assist companies to address the above questions and consider and implement their global tax strategies on a go-forward basis.