OECD BEPS Action Plan to hit middle market business

  • Middle market businesses report uncertainty with Base Erosion and Profit Shifting (BEPS) rules
  • Businesses split on who will bear the cost of BEPS rules between shareholders, customers and business
  • Business community supports the creation of a global tax standard, despite the costs

72% of internationally operating middle market businesses (defined as having revenues from $50m to $1bn) expect to pay more tax as a result of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan as uncertainty around how the rules will be implemented hits the boardroom. An independent survey of middle market businesses worldwide commissioned by RSM, the world’s sixth largest audit, tax and consultancy network, shows that these organisations plan to bear the brunt of the costs, but will pass on some costs to shareholders and customers.

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

South Africa has agreed to participate in the Joint BEPS Action Plan.

As with most countries around the world, taxpayers will be impacted by the BEPS Action Plan as the recommendations flowing therefrom are accepted and introduced into our local domestic tax law or start to form part of the general body of International Law.

We have already seen the introduction into our domestic tax law of Section 23M which sets out specific circumstances around the deductibility of interest incurred in cross border transactions.

On 27 January 2016, South Africa signed the Multilateral Competent Authority Agreement on the Exchange of Country-By-Country Reports (CbC).

In this regard legislative amendments were introduced into the Tax Administration Act No.28 of 2011 to facilitate CbC and Reporting and Draft Regulations specifying the CbC Reporting Standard for Multinational Enterprises have been presented. The first CbC Reports will need to be filed by 31 December 2017.

Rob Mander, Head of the RSM Global Tax Leadership Group commented, “With smaller regulatory teams and less experience dealing with cross-border taxation, complying with the rules is a significant challenge for the middle market, it is no surprise that three quarters expect that they will need to alter their corporate structure to conform to changes in the law. While smaller businesses will not need to comply with all of the disclosure requirements resulting from the BEPS Project, they will still have to deal with the same substance and international tax changes that affect other companies.”

Despite the potential impact to their bottom line, just 18% of middle market businesses have undertaken planning to bring them into 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 companies say that the rules are creating uncertainty.

Even with these cost increases, businesses of all sizes are broadly in support of 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 with 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 the original objectives of the proposals are met. 61% of those surveyed felt the BEPS action plan only moderately, slightly or did not at all satisfy the primary objective of ensuring tax is paid where profits are created and only a third (35%) felt it would largely or completely satisfy the objective of levelling the international playing field.

John Jones, Tax Partner at RSM in South Africa said, “Here in South Africa we have found very few middle market businesses who are currently specifically considering the BEPS Action Plan recommendations and the impacts on their business operations and structures. We would anticipate this will begin to change rapidly as legislation is introduced but would consider it an imperative for such businesses to be more proactive than reactive. It is important for all businesses to realise that the BEPS Action Plans will impact on multinational enterprises even across jurisdictions who have elected not to participate.


Note to Editors

For further information, please contact:

Gillian Hawkes                                                             Ben Robinson

RSM                                                                             Hill+Knowlton

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About the survey

The survey of senior executives was conducted in early 2016 by Euromoney Institutional Investor. From an initial 762 respondents, the data pool was reduced to 494 to allow the report and findings to be based only on the responses of those who reported familiarity with BEPS. This helped to ensure the conclusions drawn were from a survey pool educated on BEPS and its potential impact on their organisation. The respondent pool contained 47% based in Europe, 28% in North America, and 12% in Asia, and 7% in other parts of the world. Respondents came from a large variety of industries, with financial services (22%), professional services (20%) and consumer products (14%) the most represented. Those surveyed also worked for firms with a wide range of sizes, including 39% with annual revenues of less than $500m, 35% with revenues of $500m to $5bn, and 26% with over $5bn. Tax executives made up nearly half (44%) of respondents, and those from the finance function just over a quarter (27%).

The full report can be downloaded at www.rsm.global/BEPS