The Base Erosion and Profit Shifting (BEPS) Project is a global initiative designed to create a set of international tax rules to end the erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax.
The Project is being driven by the G20/OECD countries and is widely regarded as one of the most significant overhauls in the international tax system ever to be witnessed. The recommendations of the Project are due to be incorporated into domestic legislation over the coming years.
What is the impact for transfer pricing?
The OECD released the first recommendations under the BEPS Project on 16 September 2014. One of the key recommendations is to introduce a new international standard for transfer pricing documentation and country-by-country reporting. Taxpayers will be required to disclose on an annual basis a previously unprecedented level of detail regarding their business operations in the form of a Master File, a Local File and a Country-By-Country report.
These will include details of the legal and ownership structure, the geographical location of all operating entities, a functional analysis describing the principal contributions to value creation and revenues/profits/taxes paid/accumulated earnings and employees across every jurisdiction.
What are the implications for business?
Multinational businesses will be obliged to invest in additional resources in order to become compliant under the new regime. As a result of the increased level of transparency tax authorities will be far better positioned to undertake risk assessments and quickly identify aggressive pricing policies. Enquiries are likely to be more focused and for some more frequent. Tax authorities are likely to use their findings as a reason to look into the historic position where they consider a significant amount of potential tax receipts have gone uncollected.
Businesses will need to review their current pricing policies and consider how these are likely to be viewed in the new BEPS environment. The cost of compliance is expected to increase significantly and finance teams will need to consider resourcing to meet the new requirements.
What should businesses be doing now?
Taxpayers should take the following steps:
- Review existing operational structures and determine their reporting requirements;
- Consider sustainability of existing transfer pricing policies and what if any amendments are required;
- Assign responsibility for ensuring the business is BEPS compliant at local and international levels;
- Monitor jurisdictional adoption of the BEPS recommendations;
- Plan to dedicate sufficient time and resource to meeting the increased compliance burden; and
- Identify how the reporting requirements will fit within pre-existing reporting timelines.
Combined with the proliferation of FATCA and automatic exchange agreements, the BEPS Project demonstrates that there is a global political will to ensure that there is no stone unturned when it comes to international tax.