How to get ready for BEPS tax reporting rule changes
Multinational companies are making strides in preparing for radically changed cross-border tax and transfer-pricing reporting rules as compliance deadlines near, research by Thomson Reuters suggests, but uneasiness remains amongst tax executives about their readiness.
The new rules will require multinational enterprises with annual revenues of €750 million ($830 million) or more to report income and taxes paid on a country-by-country basis for each constituent entity. All member states of the Organisation for Economic Co-operation and Development (OECD) and the G20 countries have agreed to require country-by-country reporting and to automatically exchange the information generated in the reports.
Two-thirds of the 207 corporate tax executives Thomson Reuters polled in more than two dozen countries said they are taking steps to comply with the new tax regulations, up from 54% in 2015.
Companies in Europe are most intensely focused on planning for the new regulations, the survey found. Seventy-five per cent of companies in Europe have begun preparations, 71% in Latin America, 64% in the US, and 40% in Asia Pacific.
Upcoming deadlines drive the increase in activity, said Brian Peccarelli, CPA, president of Thomson Reuters’ tax and accounting business. Companies should take steps to ensure that they have controls and processes in place to comply. “Now’s the time to double down and get things done,” he said.
The new reporting regulations resulted from the base erosion and profit shifting (BEPS) action plan the OECD recommended to help nations align their corporate anti-tax-avoidance policies. Tax authorities will accept submissions that comply with the new rules starting January 1st 2017 and begin exchanging information as early as 2018.
“This is a major game changer,” said Jim Alajbegu, CPA, firm leader for international tax at Baker Tilly Virchow Krause in New York City. “There will be more transparency in reporting.”
For example, a US-based multinational will have to have the policies, procedures, people, and technology in place to be able to collect comparable cross-border tax and transfer-pricing information across its operations and submit a master report in the US and local reports in each country where it has operations, Alajbegu said. “That’s not easy to do.”
In the US, the compliance threshold is $850 million in annual revenue. But Alajbegu’s firm is advising clients with annual revenue of $250 million or greater to make BEPS compliance part of their global tax strategy and get prepared as their sales increase.
The radical changes in the rules have many tax executives uneasy about compliance, the Thomson Reuters survey found. Especially concerning to respondents were increased risks of tax audits resulting from the increased transparency of transfer-pricing information. Tax authorities that caused the most concerns amongst respondents were in the UK (33%), the US (31%), India (29%), Germany (28%), and France and Italy (23% each).
Steps to get ready
Regardless of where they’re based or what industry they are in, multinationals should take these five key steps, according to a 2016 KPMG International report:
- Stay informed about BEPS developments.
- Review existing tax transactions and structures to identify potential weaknesses, and take measures to rectify these areas.
- Determine whether board members, executives, and the core tax team are aware of potential questions and challenges that could come from any number of stakeholders, such as regulators, investors, or the media.
- Take into account reputational risks when you make task decisions, not just whether the company has complied with the tax laws in various jurisdictions.
- Assess whether relationships with local tax authorities are open and respectful in all countries in which the company operates.
Preparing for the new rules
Six questions tax teams should ask themselves to test their readiness, according to Thomson Reuters:
- Can we thoroughly map out all legal entities included in our company and their tax residences?
- How many full-time employees work in each jurisdiction, and what is the management structure for each legal entity in our group?
- Can we quickly gather and map entity-level financial data for each country in which we operate?
- Can we adequately describe our group’s global business operations and transfer-pricing policies in a master file available to all relevant country tax administrations?
- Can we capture narrative and graphical information for each element of the local file contents, and can we easily and quickly upload content and attach relevant documents?
- Do we have the resources or data needed to support the transfer-pricing analysis for each type of related-party transaction?
