In response to a number of highly publicized governmental hearings regarding how certain multinationals (including Apple, Hewlett-Packard, and Starbucks) achieve low effective tax rates on their foreign earnings, in 2013 the Organisation for Economic Co-operation and Development (OECD), an international economic organization of 34 countries, undertook a major review of international tax policy and best practices via the Base Erosion and Profit Shifting (BEPS) project. Some results of the BEPS project include the following:
- Implementation of controlled foreign corporation rules by Chile, effective Oct. 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 Jan. 1, 2015
- Implementation of a General Anti-Avoidance Rule in India, now proposed to be effective from April 1, 2017
These results, among others, give insight into the BEPS principles and action plan adopted by the OECD and G20 countries in 2013 to combat perceived abuses in international corporate taxation.
BEPS – What Is It?
Not every tax holiday, tax incentive, or reduced tax rate should be immediately suspect in the evolving BEPS world. BEPS is not intended to address tax avoidance or evasion by individuals – legislation such as the U.S. Foreign Account Tax Compliance Act (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.1
Rather, at its heart, BEPS addresses “instances where the interaction of different tax rules leads to double nontaxation 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.”2
It attacks aggressive or artificial planning by corporate multinationals that takes advantage of the interaction of different taxing systems and allows profits to go untaxed.
Country-by-Country Transfer Pricing under Action 13
A full explanation and discussion of all 15 BEPS work streams is beyond the scope of this article. There is, however, one key work stream that has picked up speed much faster than first anticipated and is indicative of BEPS goals: the country-by-country transfer pricing reporting required under Action 13.
On Feb. 16, 2015, the OECD released much anticipated guidance on the implementation of country-by-country transfer pricing documentation.3
Under this proposed reform to current transfer pricing policies, large-scale multinational corporate groups (annual group revenue greater or equal to €750 million) 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, and tangible assets. The 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 Jan. 1, 2016, and to be filed within 12 months of the end of that year. This timetable may be tighter than it first seems, as the reporting requirements go beyond what is currently mandated under international transfer pricing rules and may require internal IT systems changes or enhancements to be able to understand, collate, and analyze the data to be reported. Starting to address these rules sooner rather than later is recommended.
What Should U.S. Multinationals Do?
Going forward, one should expect global tax planning to become more linked to a company’s business activities and 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 a low foreign effective tax rate on their foreign earnings. The United States may enact certain reforms in line with BEPS, but the majority of the legislative effort is expected to occur in foreign 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, U.S. multinational groups will need to do the following:
- 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 with respect to 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.
BEPS Action 11: Improving the Analysis of BEPS, Public Discussion Draft, OECD (2015). www.oecd.org/ctp/tax-policy/discussion-draft-action-11-data-analysis.pdf
Action Plan on Base Erosion and Profit Shifting, OECD Publishing (2013). http://dx.doi.org/10.1787/ 9789264202719-en
Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting, OECD (2015). www/oecd.org/ctp/beps-action-13-guidance-implementation-tp-documentation-cbc-reporting.pdf
Andrew M. Bernard Jr., CPA, is managing director for Andersen Tax in Philadelphia and a member of the
Pennsylvania CPA Journal Editorial Board. He can be reached at firstname.lastname@example.org.
Marc Lim, JD, is managing director for Andersen Tax in San Francisco. He can be reached at email@example.com.