The final reports of the BEPS Action Plan, announced by the Organization for Economic Cooperation and Development (OECD) in October 2015, is causing treasurers to fundamentally assess how they will modify their cross-border operations amid a new dawn for country-by-country tax reporting rules.
Although in the early stages, some regulators and companies are starting work on assessing their liability to the BEPS project.
Ronald van den Brekel, partner, transfer pricing and operating model effectiveness, at EY, says: “BEPS will impact companies, and in the extreme cases this is already being seen. It is also impacting the tax authorities and the attitude of the companies’ auditors as well. The new guidance is in practice, and it is not going to go away.
“There has already been movement for some companies, specifically with regard to country-by-country reporting and transfer-pricing documentation. Some will have to file master files and local files if they are operating in countries that have already introduced the requirement. Many multinational corporations (MNCs) will be performing gap analysis to establish the gap between their current documentation and the new files that will be required for the fiscal year of 2016.”
The rules are not yet in practice in all jurisdictions. US-headquartered companies will not have to file a country-by-country report until January 1, 2017. However, they will have to report in other jurisdictions in which they operate. To mitigate some of the workload for now, Van den Brekel suggests these companies should consider using a surrogate parent company to file reports in the meantime.
In-house banks are particularly useful for the largest MNCs, for cash-management, intercompany loans and FX purposes. In-house banks allow for cash pooling and money transfers between jurisdictions, without the use of external banks.
In addition to reports, corporate treasurers will also be required to take into account their internal operations through the use of in-house banking and transfer pricing. They need to keep a close eye on all of the documentation that is being produced to support pricing structures amid regulators' concern that in-house banks might help facilitate the sweeping of cash to low-tax locations to avoid payments in some jurisdictions.
Christian Kaeser, chair of the International Chamber of Commerce's (ICC) commission on taxation, says: “Companies will certainly consider requirements for greater substance, real economic activity and key risks in treasury company location, as well as potential additional tax cost if existing arrangements are maintained.”
'No longer workable'
Melissa Cameron, global treasury leader and advisory principal, Deloitte & Touche, says there will be greater issues for companies that are considering setting up in-house banks now. The way such banks had been structured might no longer be workable under the new rules.
“Companies that are looking to set up [an in-house bank] now are having to reassess old norms and specifically make decisions on scope, structures and location of operations without the rules being legislated globally," she says.
"They also need to be more considerate of substance and sufficiency of documentation, and to ensure they have a complete set to reinforce their decision-making and their transfer prices.”
Todd Izzo, international tax partner, Deloitte Tax, says: “If there is already an in-house bank arrangement, the rule changes around interest expense have not yet been fully adopted, so there is still some time.
"The UK has proposed Action 2 hybrid rules effective at the beginning of next year, and other European countries are sure to follow. Treasurers should absolutely be looking at their in-house bank to see how the new requirements and their existing structures interact.”
|Christian Kaeser, ICC|
The agreement between HM Treasury and Google for £130 million in tax payments is likely to be down in part to the requirements of Action 2, relating to arrangements to capitalize on asymmetries in tax jurisdictions through a hybrid instrument.
Article 13, relating to transfer-pricing documentation, is also relevant to treasurers as this process comes under greater scrutiny under BEPS.
EY's Van den Brekel says: “What will greatly impact treasurers are the recommendations over splitting synergies in an MNC group. The effect of this will be tax authorities placing greater scrutiny on the transfer pricing of loans and cash pools, and who should receive the synergy effects,” referring to the financial benefits of any effort to pool cash into low-tax jurisdictions.
A possible benefit of this rule is that it will form consensus on global norms.
Izzo at Deloitte Tax says: “Transfer pricing was a local country requirement, but now it is essentially a global standard. We are seeing a greater centralization of compliance, rather than the one-off country-by-country approach.”
Van den Brekel says companies should try to use this new information to their benefit, adding: “Companies are likely to become stricter on the transfer-pricing documentation and see it more as a strategic tool, helping to defend their structures and transfer-pricing policy, and not just a compliance burden.”