Not only huge multinationals affected by base erosion and profit shifting: RSM survey

Seventy two per cent of middle market businesses that operate internationally expect to pay more taxes as a result of the OECD’s BEPS Action Plan due to uncertainties over how the rules will be implemented, according to an RSM survey.

  • Middle market businesses report that BEPS rules create uncertainty
  • Businesses divided on whether to bear additional costs arising from BEPS rules or pass them on to shareholders and customers

Seventy two per cent of middle market businesses (defined as businesses with revenues ranging from US$50 million to US$1 billion) that operate internationally expect to pay more taxes as a result of the OECD’s BEPS Action Plan due to uncertainties over how the rules will be implemented. This was among the findings of an independent survey conducted in early 2016 of middle market businesses worldwide commissioned by RSM International, the world’s sixth largest accounting and consulting network. The survey also showed that these organisations are willing to bear the brunt of the additional costs, but will pass on some of these to shareholders and customers.

A total of 41.2% of middle market businesses expect their tax burden to grow by up to 10%, while 31% expect their effective tax rate to increase by more than 10%. The pattern continues for compliance costs, with 65% of middle market businesses expecting these to grow by more than 10%. The majority (53%) intend to absorb some of the costs, of which 35% expect customers and 30% expect shareholders to also shoulder some of the burden.

Cindy Lim, International Tax Partner of RSM in Singapore, remarked: “To date, the general perception in the market is that BEPS will only affect the large multinationals and smaller businesses do not need to know what BEPS measures are and their potential impact. This perception must change.”

She added that many current tax structures and strategies will no longer be effective when various BEPS actions take effect. For example, overseas warehousing arrangements or even sending staff overseas to negotiate contracts may potentially trigger BEPS implications and result in a higher effective tax rate for the group and a corresponding increase in the group’s compliance costs.

The increase in compliance costs can come in the form of transfer pricing documentation preparation, filing of tax returns overseas (where there was no such requirement previously), an increase in tax audits and additional reporting measures required by various tax authorities.

“Middle market businesses need to relook at their current operating structures in order to ensure that there is proper profit attribution and to minimise potential additional compliance costs as far as possible,” Cindy added.

Despite the potential impact on their bottom line, only 18% of middle market businesses have undertaken planning to bring themselves in line with the new permanent establishment rules and 20% are fully aligned with the revised transfer pricing rules. More than three quarters (78%) of middle market businesses say that the BEPS rules are creating uncertainty.

Even with these cost increases, businesses of all sizes broadly support BEPS, with 69% admitting a global taxation standard is necessary. Indeed, when asked to rank the guiding principles of BEPS legislation, simplicity and business practicality ranked the highest, while cost of implementation ranked as the lowest consideration.

However, most businesses surveyed see BEPS as a work in progress rather than the final solution, with more work needed by governments globally to ensure that the original objectives of the proposals are met. A total of 61% of those surveyed felt that the BEPS action plan only slightly or moderately satisfies the primary objective of ensuring tax is paid where profits are created or not at all. Only a third (35%) felt it would largely or completely satisfy the objective of levelling the international playing field.

Koh Puay Hoon, International Tax Partner of RSM in Singapore, said: “Singapore’s middle market is now actively venturing overseas. These companies must be conscious of the challenges of BEPS and balance their overall business objectives, while taking into consideration the possibility of increased tax-related costs.”

“Clearly, taking stock of their current business model should be at the top of their priority list. Planning is key in order to stay ahead of the competition in the current BEPS world,” she added. “Singapore will require country-by-country reporting for Singapore-headquartered multinational enterprises with global revenues exceeding S$1,125 million (approximately €750 million or US$840 million) for financial years commencing on or after 1 January 2017.”

If you would like to know more about BEPS and its implications, please contact one of our tax specialists below:

Cindy Lim, International Tax Partner
T +65 6594 7852 
[email protected]

William Chua, International Tax Partner
T +65 6594 7860
[email protected]

Koh Puay Hoon, International Tax Partner
T +65 6594 7820
[email protected]

Chua Hwee Theng, Director, Tax
T +65 6594 7301 
[email protected]

Wang Chai Hong, Director, Tax
T +65 6594 7306 
[email protected]

Elis Tan, Director, Transfer Pricing
T +65 6594 7819 
[email protected]

Cheah Paik An, Director, Tax
T +65 6594 7859  
[email protected]

Ivy Chiong, Associate Director, Tax
T +65 6594 7381  
[email protected]