Today it is Apple’s turn in the tax spotlight with the European Commission’s €13-billion tax bill on the US electronics giant’s operations in Ireland. Expect more companies to come under the magnifying glass.
That’s because the Base Erosion and Profit Shifting (BEPS) plan of action of the Organisation for Economic Co-operation and Development (OECD) has been finalized and some of its recommendations have been adopted by a number of countries. Among others, BEPS imposes new country-by-country reporting on large companies.
In 2014, according to European Commission, Apple’s effective tax came to just 0.005% of sales – compared with the already low 12.5% Irish corporate tax rate for companies without any tax deal with the Irish government
Taxes Versus Jobs
The European Commission launched its investigation of Apple in 2014 in the context of the tax laws of the European Union, which every member country is required to uphold. It ruled that Ireland’s 1991 deal with Apple granting it a low tax rate was not consistent with the EU tax framework.
The European Commission now expects Apple, which employs 6,000 people in Ireland, to pay €13 billion (US$14.5 billion) in back taxes to the Irish government dating back to 1991. The Irish government had provided Apple with a “comfort letter” assuring the company it would pay very low rates of tax if it based its European operations in Ireland.
In 2014, according to European Commission, Apple’s effective tax came to just 0.005% of sales – compared with the already low 12.5% Irish corporate tax rate for companies without any tax deal with the Irish government. Apple disputes this, saying it paid US$400 million in taxes in Ireland in 2014, “considerably more than the Commission’s figure suggests.”
From Ireland’s perspective, the creation of 6,000 jobs is an acceptable trade-off for the tax foregone. That was Apple’s understanding as well. The company issued a statement that was seen as a thinly veiled threat: “It [the European Commission] is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been… It will have a profound and harmful effect on investment and job creation in Europe.”
The Irish government is expected to appeal, as will Apple, which means the case could drag on for years. The story is far from over. The European Union also concluded last October that Luxembourg and the Netherlands granted undue tax benefits to Fiat and Starbucks. Meanwhile IKEA, Amazon and McDonald’s are currently under investigation for their tax structures.
What’s the BEPS?
In these and future probes, BEPS provides the European Commission with a more potent toolkit than ever before. Ireland, for example, implemented in January this year the BEPS recommendation to require country-by-country reporting by companies of their revenues, profits, taxes paid and other information. It has also signed an agreement for the automatic exchange of these Country-by-Country Reports (CbCRs).
One of the key aims of the OECD’s action plan is to promote greater tax transparency by ensuring that international companies provide timely tax information to tax authorities in every jurisdiction where they operate. In addition to the CbCRs, BEPS has also crafted standards and procedures for disclosure of aggressive tax planning, misuse of transfer pricing, and treaty abuse.
The BEPS final reports issued in October last year are meant to create a cohesive international approach to a broad range of tax issues. This requires adoption and implementation by countries across the world. That is happening. The 15 OECD countries, which include the US, UK, Japan, France and Germany, have adopted or are in the process of adopting the action plans.
The G20 nations (among them China, India, Indonesia and Korea), which contributed inputs to the BEPS project, are also implementing BEPS. Neither Singapore nor Hong Kong, two Asian financial centers that host the regional headquarters of many multinationals, is a member of the OECD or G20. But authorities in both jurisdictions have said they will adopt most, if not all, of the BEPS action plan.
Singapore intends to implement country-by-country reporting for multinational enterprises for financial years beginning on or after January 1, 2017
Singapore: Start of 2017
In June, the Inland Revenue Authority of Singapore (IRAS) said in a statement that Singapore supports the key principle underlying the BEPS project, namely, that profits should be taxed where the real economic activities generating profit are performed and where value is created.
Singapore is committed to implementing the four minimum standards under the BEPS project: on countering harmful tax practices, preventing treaty abuse, transfer pricing documentation, and enhancing dispute resolution. It intends to implement country-by-country reporting for multinational enterprises for financial years beginning on or after January 1, 2017.
The companies covered are those ultimate parent entities are in Singapore and whose group turnover exceeds S$1,125 million (US$825 million). They will be required to file the CbCR 12 months after the end of their financial year.
IRAS promises to “consult Singapore-headquartered multinational enterprises further on the implementation details of CbCR, and release these details by September 2016.” The CbCRs will be shared with jurisdictions that have entered into bilateral agreements with Singapore on automatic exchange of information.
Singapore’s transfer pricing guidelines were updated in January last year to be broadly consistent with the BEPS recommendation on transfer pricing documentation. It has also joined a group working together under the aegis of the OECD and G20 “to develop a multilateral instrument for incorporating BEPS measures into existing bilateral treaties to counter treaty abuse.”
Singapore will “consider whether to join the instrument after it is finalized and ready for jurisdictions to sign.” It has not yet disclosed its intentions on the BEPS recommendation around disclosure of aggressive tax planning, which would entail automatic exchange of financial account information on tax matters across borders.
Hong Kong: End of 2018
In contrast, Hong Kong has pledged to begin the first automatic information exchanges with other jurisdictions by the end of 2018. But unlike Singapore, Hong Kong has yet to commit on a date for CbCRs. And its Inland Revenue Department has yet to decide whether current practices around transfer pricing need to be updated to be consistent with the BEPS common approach.
Inland Revenue has said that priority would be given to four BEPS action points where there are agreed minimum standards. These are Action 5 (review of harmful tax practices and exchange of information on certain tax rulings); Action 6 (model anti-treaty abuse provisions in tax treaties; Action 13 (Country-by-Country Reporting) and Action 14 (improvements in cross-border tax dispute resolution).
The Hong Kong legislature gazetted a bill last December that would clarify the tax treatment of certain regulatory capital securities. The new law aims to neutralize the effect of mismatched cross-border hybrid arrangements, especially in financial instruments that produce multiple deductions for a single expense or a deduction in one jurisdiction with no corresponding taxation in the other jurisdictions, under BEPS Action 2.
Implementation of BEPS standards and practices “is subject to the timely passage of the necessary legislative amendments,” Professor K C Chan, Secretary for Financial Services and the Treasury, said in June, when Hong Kong accepted the invitation to join BEPS.
“It is crucial for Hong Kong to commit to the BEPS Package,” he stressed, “in order to maintain our reputation and full our obligations as an international financial and business center.”
“The localization and implementation of BEPS Action 13 in China is a milestone in the internationalization of China’s transfer pricing practice”
The Asia-Pacific Context
Christopher Xing, Asia Pacific Leader of International Tax at KPMG, says that China and India have already made big steps towards the BEPS project. In 2009 and 2010, they began to challenge the disposal of Chinese and Indian companies at an “offshore level” based on anti-tax avoidance rules.
Deloitte, another Big Four accounting firm, notes that China has issued new regulations on June 29 this year that require certain resident enterprises to file CbCRs by May 31 of the following year after the end of their financial year – meaning the first CbCR need to be submitted by May 31, 2017.
The companies covered are China-resident enterprises that are the ultimate parents of a multinational group that has consolidated revenue greater than RMB5.5 billion (US$823 million) or that are nominated by the multinational group as the filing entity. But Chinese enterprises whose information relates to “national security” are exempted from filing CbCRs.
Bulletin 42, which contains the new regulations, also introduces a three-tiered documentation framework set out in the OECD’s final report on BEPS Action 13, which deals with transfer pricing. “The localization and implementation of BEPS Action 13 in China is a milestone in the internationalization of China’s transfer pricing practice,” Deloitte reckons.
India’s Finance Bill 2016, passed on May 5 this year, requires country-by-country reporting starting from the 2017 tax year. The Central Board of Direct Taxation will issue regulations on the form and manner of filing of the CbCR. The law is silent on which companies are covered, but a senior Ministry of Finance official has said the threshold would be the rupee equivalent of €750 million, as of the February 2105 conversion rate.
Elsewhere in Asia, Bangladesh, Brunei, Pakistan and Sri Lanka have become BEPS members after attending the first BEPS implementation meeting in Japan in June. Representatives from Cambodia, Macau, Malaysia, Myanmar, Thailand and Vietnam also came. These countries are “likely to join the inclusive framework in the coming months,” according to the OECD.
A Difficult Journey
What all this means is that large global companies with group revenues circa US$820 million, including those in Asia, will soon have to prepare CbCRs whether they are ready or not. In so doing, they run the risk of legal problems should some tax authorities decide, based on the CbCRs and other information, that their tax planning is too aggressive, their transfer pricing practices violate tax rules, they are practicing treaty abuse, or they are claiming illegal tax deductions.
Apple’s tax case and upcoming ones involving Amazon, Fiat, IKEA, McDonald’s and Starbucks are surely concentrating corporate minds. Already, in Deloitte’s BEPS Survey 2016 released in May, 93% of the 667 respondents expect the corporate tax compliance burden to substantially increase, while 92% believe tax structures are now under greater scrutiny.
In another survey, this time by Thomson Reuters, two-thirds of 207 corporate tax executives polled in 24 countries said they are taking steps to comply with anticipated BEPS-compliant regulations, up from 54% last year. But only 40% of companies in Asia Pacific are doing the same – a worrying finding given the looming CbCR deadlines in China, India, Singapore and other Asian jurisdictions.
Some consultants advise even enterprises with total revenues of US$500 million to think about BEPS, too, because they may reach the threshold of US$820,000 in a few years’ time
Complying with the CbCR requirement alone requires lengthy preparation. Companies will need new policies, systems, people and technology to collect comparable cross-border and transfer-pricing information in all the jurisdictions where they operate, and then compile them in one master report and local reports for each market that require the CbCR.
And there are other adjustments to be made. In Hong Kong, for example, KPMG notes that everything from the roles and responsibilities of Hong Kong-based personnel, control of R&D and Intellectual Property risks, whether the IP owner resides in a low-tax or no-tax jurisdiction, any split in legal and economic IP ownership structure and the structure of licensing agreements will need to be revisited.
Wake Up Call
BEPS may force changes in business structures and how businesses operate, touching not only taxes but every aspect of the organization. And just because your company is below the threshold today does not mean you will not be covered tomorrow. Some consultants advise even enterprises with total revenues of US$500 million to think about BEPS, too, because they may reach the threshold in a few years’ time.
The Apple saga should be a wake-up call for big companies in Asia and elsewhere. When BEPS becomes the norm across the OECD, G20 and other BEPS members, including Hong Kong and Singapore, those that are taking pro-active steps today will face fewer challenges tomorrow.
About the Author
May May Ho is a Contributing Reporter at CFO Innovation based in Singapore.