ACCOUNTANTS will play a key role in ensuring the implementation of the new BEPS (base erosion and profit shifting) system released on Monday (5 October) by the Organisation for Economic Cooperation & Development (OECD).
That is the view of Raffaele Russo, head of the OECD/G20 group of nations project, who stressed that financial reporting is at the heart of the BEPS project’s “primary objective” – that is “to ensure that profits are reported for tax purposes where economic activities are carried out and where value is created.”
“Accountants have an important role to play in ensuring that this is always the case, for example when advising clients regarding the way cross-border investments can be structured,” he tells Accountancy Age.
BEPS would generate additional work for accounting firms and in-house accountants working with multi-national corporations, predicts Russo, especially the measurement and generation of data for tax authorities of financial transfers between different country-wings of MNC groups.
He says the most important new accounting task is “probably the compliance with the new documentation to be filed for transfer pricing purposes. This includes the ‘master file’, providing an overview of the group activities, the local file, providing details regarding the in-country operations, and the country-by-country reporting template…”
This would provide a “break-down on a country-by-country basis of group data such as revenue, profits, taxes paid and accrued, employees, and assets,” he stresses. However, while this will undoubtedly raise MNC accounting compliance costs, it is much less than would be the case if the OECD/G20 had left the job of deciding how such information is generated to individual countries.
“Having global agreement on this also means one single reporting framework rather than dozens of different and uncoordinated ones,” he adds.
List of actions
Speaking at the launch of the package at an online press conference at the OECD headquarters in Paris, Pascal Saint-Amans, director of the OECD centre for tax policy and administration, welcomed the launch of the BEPS guidance. It includes 14 actions for governments and through them, tax administrations and corporations.
These include: special actions to deal the BEPS challenges of digital business; tacking hybrid mis-match arrangements exploiting asymmetries in tax arrangements; new tax rules for foreign subsidiaries within MNC groups (controlled foreign company rules); limiting tax losses to governments of interest deductions and other financial payments; countering harmful tax practices; firming up tax treaties to ensure they are less vulnerable to enabling tax avoidance; rules preventing companies from claiming they have no permanent establishment in countries where they do business; aligning transfer pricing with value creation regarding intangibles, to ensure these are properly taxed; measuring and monitoring BEPS; mandatory disclosure of aggressive tax planning schemes; country-by country reporting of business activities by MNCs; helping resolve disagreements based on tax treaties through better dispute resolution; and developing a multilateral regulation to modify bilateral tax treaties in line with the new BEPS guidance.
Stressing how the 34 OECD member countries, the G20 and associated countries backed the new system, Saint-Amans says: “We have agreement from all these countries for a comprehensive package. All the measures are consensual.”
In this regard, he also welcomes the depth of the guidance: “We have a very strong agreement. It’s easy to get an agreement when you empty the content. This is not the case here.”
As for implementation, Saint-Amans stresses that many parts of the package were already being introduced by member jurisdictions, and he highlighted the imminent agreement within the European Union (EU) of compulsory information sharing regarding tax rulings as one example – a vote at the EU Council of Ministers for finance (Ecofin) which took place yesterday. Saint-Amans stressed that the package was sufficiently flexible to allow member jurisdictions to take action and protect their tax revenue unilaterally, even if a partner country decided not to follow certain guidance.
That said, OECD speakers at the press conference stressed how the package includes minimum standards, which would be subject to tracking and review by the OECD. Marlies de Ruiter, head of the OECD’s tax treaty, transfer pricing and financial transactions division, stressed that the OECD would be quickly establishing a peer review system to assess BEPS guidance implementation, with more details to be released in the first quarter of 2016.
Russo noted that some BEPS measures may become immediately applicable, such as on transfer pricing, through amendments to OECD and UN model tax conventions and transfer pricing guidelines, which will feed into tax treaties linked to these international instruments.
Other changes would be slower, but work is under way – Russo cited recommended changes to bilateral tax treaties to prevent treaty shopping by MNCs or the strengthening of rules on permanent establishment. These changes could be achieved by a new multilateral instrument whose drafting is currently under discussion among about 90 countries, he says.
Other measures will require domestic law changes, such as in interest deductibility and hybrid mis-match arrangements – and here, says Russo, “we expect to see convergence, not harmonisation, of countries tax systems.”
Such progress would prevent MNCs from taking “the highway to tax heaven,” as in the past, stresses de Ruiter.
Russo tells Accountancy Age: “The BEPS Project marks the start of a new era in international tax matters. The fact that so many countries have all agreed to these measures shows the strong political will for change. The near future will reflect this paradigm change and accountants will have to advise their clients in light of that and of the related cost-benefit analysis.”
No change on the IFRS front
As for whether the changes would feed into international financial reporting standards (IFRS), Russo notes that while there are no plans for specific modifications to IFRS because of the BEPS project, some of the measures will impact how IFRS are applied, for example in relation to uncertain tax positions, deferred tax assets and liabilities.
Ultimately, BEPS would be “a pain” only for CFOs and MNCs who “take aggressive positions and walk on the thin line between what is legal and what is not. They will find many bumps on the road, be subject to constant scrutiny and face significant financial risks,” he says.
On the other hand, “it will be a boon for those that report profits in a way that aligns with economic activities and value creation. Those that do not take aggressive positions will have more certainty and predictability, and a truly cooperative relationship with revenue agencies.”
The ATT had previously expressed concern that the legislation was overly complex and created unnecessary complications within the practical working of the new allowances
Introduced in 2013 to encourage R&D investment, the scheme allows UK businesses to pay only 10% corporation tax on profits derived from any UK or certain EU patents
Yet, KPMG’s annual survey shows that the UK is still an attractive place to do business, despite falling in rankings in tax competitiveness and FDI appeal
MTD cost estimates are not based on 'facts', and are 'disbelieved' by most small businesses and sole traders, says Lords committee chairman