Treasurers should provide transaction documentation according to BEPS

Corporate treasury departments will have to start complying with International tax rules and provide documentation for transactions according to recent reports.

G20 leaders attempted to reform the international tax system in July 2012 by setting up the Base Erosion and Profit Shifting (BEPS) project. This task was given to the Committee on Fiscal Affairs part of the Organisation for Economic Cooperation and Development (OECD) who produced a 15 step action plan for this cause.

The OECD changed the system so that international tax rules could address the gaps between different countries’ tax systems, while still respecting the legal system of each country. Alongside this, the existing international tax rules are examined under the BEPS regulation to ensure that profits are taxed where economic activities occur.

Treasurers will be expected to provide a more transparent outlook on what the company’s profits are by providing effective documentation.

François Masquelier, head of corporate finance and treasury, RTL Group and Honorary Chairman of the European Association of Corporate Treasurers wrote a report called “Treasurers, Do You Have Any BEPS?” which explores how treasurers should also be a corporation’s official documentation professional.

Masquelier explains that the “central idea of BEPS is to tax a group in the place in which the economic substance and its operational activity are located.”

He also states that “one of the measures recommended by the OECD is to document all intragroup transactions” which is already a concern for many multinational corporations (MNCs) because at the moment there is no written documentation. Although having evidence of financial data is beneficial for a company, if the law states that this must be done, it could prove to be a considerable amount of work for treasurers.

“Transposition into international law will happen, and countries not adopting BEPS will be accused of being soft on tax avoidance. Be sure that if the USA adopts BEPS, the whole world will have to fall into line,” Masquelier says.

Transfer pricing, when two companies that are part of the same multinational group trade with each other, is done when these intercompany transactions are poorly documented. However, even when there is documentation, there is no substantial proof that the prices used are consistent because businesses are not equipped with a proper model containing comparative data to set margins that are specific to each transaction.

Masquelier summarises that a treasurer, as a true documentation professional, must provide evidence of services rendered, fees, royalties and other margin calculations, alongside providing the methods for evaluating and setting margins and following the rules recommended and worked out by the OECD.

The location of the lender could also become problematic because when dealing with different countries, a corporation would have to hope that the country operates under BEPS. According to Pamela F. Olson, former Treasury assistant secretary for tax policy at the Finance Committee hearing, countries such as Germany, Russia, Japan and India have already started working towards the adoption of BEPS.

Masquelier states that transfer pricing will be the main challenge for treasurers in 2015, as an increase in documentation and recurring evaluation would result in additional costs and resources.

According to Eric Kroh for Law360, “the OECD said it wants multinational companies to start filing country-by-country reports of their global income and taxes starting in January 2016. Next month, the OECD plans to release discussion drafts on transfer-pricing guidelines, controlled foreign corporations and methodologies to collect and analyse BEPS data.”