The OECD’s BEPS (base erosion and profit-shifting) Project has transitioned from talking point to legal consequence, making its impact felt in corporate boardrooms across the developed (and developing) world. As key decision makers, corporate directors need to understand what BEPS means for their business and have a strategy in place for meeting the compliance requirements that will result from BEPS implementation.
Announced in June 2012, the fundamental goal of the BEPS Project is to harmonise company tax policy across industrial nations. The project is part of a larger reformation of a global tax landscape that has evolved largely in response to “bricks and mortar”, manufacturing economies in which corporate residence and source of income were seen as fixed and easily identifiable. However, as these concepts become ever more flexible in our globalised, digital world, the principle underlying most corporate tax regimes (taxing active business income primarily in the source country and passive business income primarily in the taxpayer’s country of residence) is now seen as outdated and open to exploitation.
BEPS seeks to ensure that tax is paid where the economic activity takes place and where profits are earned. Under the plan, the OECD has recommended 15 proposed actions that governments can take to close the gaps in international tax systems that allow multinational corporations to decrease taxable income or to move profits to low-tax jurisdictions in which little or no economic activity is carried out. The key recommendations look at preventing double tax treaty abuse, updating transfer pricing concepts, expanding substance requirements for tax incentives, neutralising tax advantages generated by certain hybrid structures, new minimum standards for country by country reporting (CbC) and introducing controlled foreign company measures.
The BEPS Action Plan has been endorsed by the G20 leaders and phased implementation is already occurring in a number of countries, including Ireland where CbC was introduced in the 2015 Finance Bill.
Corporate directors need to review and adjust their business operations accordingly. At a minimum, directors should:
- Carry out a tax NCT test to ensure that their company can comply with any implemented BEPS recommendations
- Examine their company’s relationships with the tax authorities in the jurisdictions in which it operates
- Ensure their company’s internal systems can meet increasing reporting requirements
- Include reputational risk as a factor in all future company risk mitigation plans
- Prepare all relevant employees so that they can comment on the company’s tax activity, if necessary
- Be comfortable confirming that their company has adequate controls and processes as part of the directors’ compliance statement in annual financial statements
Put simply, directors’ actions now will determine their companies’ future ability to succeed in an increasingly transparent and cooperative tax environment. It’s time to take action.