Companies prepare for BEPS with mock runs to fix potential tax problems

MUMBAI: Several multinationals, including Indian companies with a global presence, have initiated impact assessments to identify and fix potential problems in their tax reporting when countries start implementing a new international standards to check tax avoidance by multinationals.

The Organisation for Economic Co-operation and Development (OECD) last week released the Base Erosion and Profit Shifting (BEPS) proposals — which include new standards of country-by-country reporting — to check the various tactics multinationals play to avoid and reduce taxes they pay. So, companies are doing mock runs whereby they collect all the data and present it to their tax planners who in turn would point out problem areas in the reporting, experts said.

“Many multinationals including Indian companies with presence outside India are doing impact assessments and mock country-by-country (CbC) reporting runs under BEPS to see how, if at all, they would be impacted,” said Anis Chakravarty, senior director, Deloitte Touche Tomatsu.

“The CbC template introduced in BEPS is intended for risk assessment purposes by tax authorities to gauge where an MNC earns income or pays taxes and the relation of people and assets in various locations to the income earned and taxes paid,” he said.

The impact analysis mainly involves evaluating the extra information that companies are required to submit under the BEPS’ CbC template beforehand, Chakravarty said. While Indian companies are not required to follow BEPS standards anytime soon, the concern is that they would have to disclose this information in other countries that go ahead with its implementation, experts said.

India too is set to come out with its own version of BEPS guidelines with some changes by April next year. Going ahead, every company would be required to disclose profits they make from each and every country and the number of people they hire in these locations amongst other things. And there lies the trouble.

“Many companies have certain intermediary companies that have only about one or two employees but profits run in millions. Now this information has to be shared with every country in the world where the company operates under the BEPS project,” said the chief financial officer of an Indian company who requested not to be named.

Industry trackers said there are some major concern areas. “Going ahead every company will have to disclose even their tax planning in advance. Now if companies were to do this, they have to really plan what they would disclose well in advance,” said Uday Ved, a senior tax consultant.

Experts said besides information on revenues, companies are also collecting and scrutinising other data to analyse whether they could face more tax going ahead.

“As per the CbC, MNCs are collating data about where services are taking place, revenue, stated capital, cash tax paid and accrued, earnings and number of employees amongst others,” said Chakravarty of Deloitte Touche.

India has still not come out with its own version of the OECD guidelines that has proposed a 15 point action plan. It is expected that the country would adapt most of the points with some minor tweaks. Some industry trackers said implementation of BEPS could lead to more
litigations between the companies and the revenue authorities.

“I am concerned about more aggression on transfer pricing and potentially unleashing a new wave of tax terrorism,” said a senior tax expert who requested anonymity.

OECD has estimated that national exchequers are suffering revenue losses of $240 billion a year, or 10% of global corporate incometax receipts, due to tax avoidance practices of multinationals.

Taxmen must play by the rules of the game

It makes eminent sense for MNCs to gear up for a new global tax regime that seeks to end aggressive tax planning. These companies have been in the loop as the OECD has held intensive consultations before finalising the new rules.

The country-by-country reporting requirement will enable tax authorities to get a global picture of the operations of MNCs, and prevent these companies from shifting profits to shell companies in tax havens. Naturally, the compliance burden of MNCs will rise.

India’s tax office must ensure that the information is kept confidential and used only to make proper risk assessments. Arbitrary use of the information to harass tax payers is unacceptable.