There has been a lot of commentary regarding the Organisation for Economic Co-ordination and Developments (“OECD”) base erosion and profit shifting (“BEPS”) report. We have all read enough to understand that the proposed amendments to the OECD’s transfer pricing guidelines for multinational enterprises and tax administrations (“the guidelines”) are going to change the face of international tax planning, strategy and compliance.
Many commentators have mentioned that BEPS isn’t a real issue until governments accept the proposals and write them into local law. The fact of the matter is that most tax law around the world, in particular New Zealand’s largest trading partners, have written or referenced acceptance of the guidelines into their tax legislation.
The recent approval by the OECD’s Council of BEPS action points 8-10 “aligning transfer pricing outcomes with value creation” and BEPS action point 13 “transfer pricing documentation and country-by-country reporting” into the transfer pricing guidelines has the impact of an effective law change for all jurisdictions which incorporate the guidelines into their tax legislation. What does this mean for international business? It is no longer possible to delay reviewing international tax strategy, transfer prices and documentation of related party transactions. Furthermore the OECD recently published the following statement on their website to ensure there was no confusion in interpreting the guidelines and the proposed updates contained in the BEPS report;
It is stipulated that the provisions of the Transfer Pricing Guidelines should be interpreted to be consistent with those provisions of the Transfer Pricing Guidelines which have been amended by the 2015 BEPS Report on Actions 8-10 and 2015 BEPS Report on Action 13 and, in case of perceived inconsistencies, the modified provisions prevail. (Organisation for Economic Co-Operation and Development, 2016)
BEPS action points 8-10 tighten existing transfer pricing rules to broaden the tax net for tax authorities. BEPS action point 8 relates to the treatment of intangible assets where previously, it was a well-known strategy to park ownership of intangible property in a low tax jurisdiction. BEPS action point 8 now states that profits from intangible assets must flow through to the entity that controls, develops and maintains the intangible and therefore there must be business substance in the jurisdiction that holds the intangible assets. This could lead to a number of multinationals needing to restructure this part of their supply chain.
BEPS action point 9 looks at the allocation of risks and the allocation of profit to those risks. The OECD found that multinationals were easily justifying risk had been reallocated between jurisdictions and with it, the allocation of profit. The guidelines will now look closer at the corresponding level of activity or substance in each jurisdiction and therefore it is important a business’s functional analysis is accurate and kept up-to-date moving forward.
BEPS action point 10 looks at high risk areas of BEPS. Among others, these have been identified as management fees and head office charges, more commonly referred to as “low value-adding services”. The OECD has proposed a flat mark-up of 5% for low value-adding services. This reduces the opportunity for multinationals to justify higher margins on inter-company services. Having a fixed mark-up on low value-adding services reduces the compliance burden for business, a positive for all multinationals, however particularly positive for small to medium sized multinationals.
BEPS action point 13 looks at transfer pricing documentation and country-by-country reporting. The changes in the documentation requirements are now more burdensome on the tax payer, primarily because these will be shared between tax jurisdictions. The new reporting regime is made up of three reports. The local file will contain, information about the local entity, including the transfer pricing positions taken, related party transactions and the functions performed and risks borne by that entity on behalf of the group. The master file details group level information including strategy, financing arrangements and the treatment of intangible assets. The master file is to be filed with the local tax authority of the group’s parent company. Lastly, the country-by-country report itemises sales, profit, and tax paid by the multinational on a jurisdiction by jurisdiction basis. This also needs to be filed with the local tax authority of the group’s parent company.
Tax authorities, through the new documentation regime, will receive a lot of detailed information about multinationals. This will considerably increase the ability of tax authorities to risk profile multinationals transfer pricing positions and international tax strategy.
With the adoption of the BEPS action points 8-10 and BEPS action point 13 into the guidelines, and further changes to come as other BEPS action points are approved, a review of your businesses international tax strategy, supply chain and transfer pricing positions can no longer be delayed.
For further information on all the BEPS actions points please see our previous article by following the below link. Should you have any questions about how these changes affect your business please contact your local RSM advisor.