If applied consistently, the Organization for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action Plan would give multinational businesses clarity as to how much tax should be paid in the countries in which they operate, according to a report from Grant Thornton.
“But with the timing and the level of implementation set to vary from country to country, the recommendations set out by the OECD could actually create even more uncertainty in the short term. With increasing compliance obligations and risks expected as a result of the Action Plan, tax is set to become more integral to the decision making process of many businesses,” says the report.
Most large corporations are equipped to deal with the upheaval. It’s the small and mid-sized multinationals, the bulk of which have straightforward tax affairs, that are facing an uphill battle. Their concerns stem from the need to devote more resource to managing their tax position which may prove costly and time-consuming. The compliance hurdles are higher and the constantly moving goalposts are hindering forward momentum and growth.
How your business can respond
So how can organizations steer through the upheaval ahead?
Although the precise outcome of BEPS in individual countries is still unclear, many of the broad principles are now largely apparent.
The report advises businesses to therefore consider whether profits from one jurisdiction to another are aligned with substantial activities where economic value for the business is generated. Unwinding hybrid financing structures and modeling the impact of potential interest restrictions may also be necessary.
The report also notes that a review of group structures may be needed to identify companies which may not have enough substance to benefit from double tax treaties.
The tightening up of the concept of a permanent establishment will mean many business will now be required to file tax returns in countries where they did not previously have a taxable presence and start paying tax there. For example, increasing mobility of workforces and frequency of foreign business trips or the presence of a warehouse may now also trigger permanent establishment risks.
“As a business you should also be reviewing transfer pricing policies and confirming the right processes are in place to comply with CbC reporting. Close monitoring of the implementation of BEPS in individual countries where you have business operations is also needed to help make sure issues are correctly identified and new deadlines met.”