Final BEPS package for reform of the international tax system to tackle tax avoidance. The final reports include recommendations for substantial tax change.
Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.
- Action 1: Addressing the Tax Challenges of the Digital Economy
- Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
- Action 3: Designing Effective Controlled Foreign Company Rules
- Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
- Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
- Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
- Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
- Actions 8-10: Guidance on Transfer Pricing Aspects of Intangibles
- Action 11: Measuring and Monitoring BEPS
- Action 12: Mandatory Disclosure Rules
- Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
- Action 14: Making Dispute Resolution Mechanisms More Effective
- Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties
See also chapter EU - Public consultation on further corporate tax transparency
What is new? New transfer pricing documentation requirements; demands to publicly account for their tax and business activities on a country-by-country basis; and consultancy proposal in the UK to disclose more information about their overall tax strategy.
Businesses have to disclose not only tax and financial data but also overall approaches to tax strategy, tax planning and tax risk, the relationship the company wishes to have with the taxing authority, and whether the company has an effective tax rate (ETR) target (and if so, what it is, and what measures the business is taking to reach or sustain this target ETR).
The European Parliament proposed on July 2015 changes to the EU accounting directive and transparency directive. Large groups and public interest entities have to include country-by-country information in financial statements, including turnover, number of employees, value of assets, sales and purchases, profit or loss before tax, and tax on profit or loss.
Data analytics will allow tax authorities to in an efficient and effective way identify compliance breaches (no more guessing the numbers). See chapter OECD's standard audit file for tax purposes.
It will be challenging for the in-house tax function to keep up date on new local requirements (announced) and how to adapt systems, processes and controls to meet legal requirements and analyze the required data prior to submission on tax risks. Systems readiness will be a challenge as many companies have still multiple ERP systems or manipulate data outside the system (Excel).
BEPS and Indirect Tax
Let's highlight action 7 and 13:
- Prevent the artificial avoidance of PE status'
- Country-by country reporting (CbC)
Action 7 – prevent the artificial avoidance of PE status
The final BEPS report includes changes to the definition of PE for income taxes of Article 5 of the OECD Model Tax Convention. Action 7 broadens the threshold to determine when such PE status exists. Currently such a PE status does not exist for commissionaire arrangements and the specific activity exemptions in treaties, such as warehousing, purchasing and preparatory and auxiliary activities.
The indirect tax definition of a fixed establishment (FE) is different from a PE and has its foundation in EU VAT law and should therefore not be affected by the BEPS initiative or OECD definition. Some countries however do (still) not accept the absence of a FE once a PE has been established. Note that the amount of PEs will increase when "Action 7" is in force (e.g., commissionaire, overseas warehouses, toll manufacturing, marketing agents, consignment stock). For example this risk of PE increases when an agent is actively involved in generating sales locally and that activity directly results in a binding contract.
As businesses are facing global challenges it makes sense that the existing business model is reevaluated and amended when necessary to meet the new PE environment. That most likely means moving away from a commissionaire structure.
Adapt to change in time
Determine VAT impact of such changes of the company's supply chain and/or location of its tax functions. This could result in new VAT registrations, VAT reporting, setup of ERP system and invoicing, new contracts, pricing procedures, processes and controls.
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Action 13 – country-by country reporting (CbC)
Action 13 provides a template for multinationals to report on an annual basis and for each tax jurisdiction in which they operate revenue figures and other key figures should be reported. The data of these reports give direct tax authorities the possibility to audit the amount of direct tax paid.
However for indirect tax authorities it is useful data as well. From a custom perspective it could be supportive during auditing the valuation of the transactions when customs duties are due and for VAT cross border intercompany transactions have always qualified as a high risk area.
The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format for bot corporate income tax as VAT. This leads to much more efficient and effective tax inspections. Data analytics will become the most efficient and effective way of future tax auditing.
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.