Can corporations move as fast as governments and tax authorities to prepare for the global Base Erosion and Profit Shifting (BEPS) regime?
That’s a looming question as we near the first of the BEPS tax deadlines, 15th February 2018.
The Federal Government and Australian Tax Office have been among the quickest globally to implement the new system of laws:
- In March 2017, Australia’s parliament passed new laws for a diverted profits tax. The new laws apply to significant global entities – that is where the parent has an annual global income of more than A$1 billion. The effect of the laws is to strengthen Australia’s transfer pricing rules, in line with BEPS Action 13.
- On 7 June 2017, Australia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. Once the convention becomes law and the OECD is notified, Australia’s network of double tax treaties will be automatically amended to give effect to any BEPS recommendations that need treaty changes. Penalties for multinationals that breach tax reporting obligations will rise as well.
- The ATO has also been moving to implement BEPS measures, with a senior official confirming earlier this year that the tax agency was on track to commence country-by-country reporting by December this year.
February 2018 is when BEPS’ first deadline arrives: complying entities with December year-ends are required to file their 2016 tax year information by 15 February 2018. The deadline for entities with June year-ends arrives four months later, on 30 June 2018.
Thomson Reuters global research has for some time suggested that many companies in the Asia-Pacific region have hung back from fully implementing new systems. Executives in charge of BEPS initiatives want to prepare for the task. Many are waiting for more nations to clarify their BEPS rules. However, a significant number do not want to be the first to adopt solutions.
But the deadlines are now fast approaching. And accurate implementation will be vital.
Community interest spurs the ATO
The Tax Commissioner, Chris Jordan, has made it clear that he believes the community wants the ATO to take on companies that do not pay tax on all the profits from their Australian operations. In a speech in March, for instance, he said:
“The sentiment in Australia is very strong in this regard. The stories and coverage of BEPS-related issues over the past couple of years have led to unprecedented levels of interest in the tax behaviour of large corporates, especially multinationals.”
In April, the ATO won a landmark transfer pricing case against Chevron.
The ATO continues to push ahead with its stress on compliance. In fact, the ATO has specifically highlighted community concern over “the income tax compliance of large corporate groups”.
In such an environment, implementing BEPS measures correctly is an imperative for CFOs and tax managers.
While lawmakers are moving, many Australian-based multinationals continue to hang back from full implementation of BEPS measures.
The 6 crucial questions
- To assess their BEPS readiness, tax teams – and particularly their leaders – should ask six crucial questions:
Entity mapping: Can we thoroughly map out all legal entities included in our company (including permanent establishments [PEs] and branches), as well as their tax residence?
- Personnel: How many full-time employees (FTEs) work in each jurisdiction, and what is the management structure for each legal entity in our group?
- Financial data mapping: Can we quickly gather and map entity-level financial data for each country we operate in? And how do we report the financials?
- Master file: Can we adequately describe our group’s global business operations and transfer pricing policies in a master file available to all relevant country tax administrations?
- Local file: Can we capture narrative and graphical information for each element of the local file contents, and can we easily and quickly upload content and attach relevant documents?
- Resources for transfer pricing analysis: Do we have the resources or data needed to support the transfer pricing analysis for each type of related-party transaction?
These questions come from Thomson Reuter’s publicly available 2016 Global BEPS Readiness Survey Report .
The clock is ticking
Being able to satisfy these six conditions matters now because the clock is ticking on putting the right processes in place.
The 2016 Global BEPS Readiness Survey Report contains more detail on how companies are preparing for the new regime. In particular, the 207 corporate executives and tax directors surveyed report that more resources will be required for BEPS compliance. They are also concerned about audit exposure.
Centralising transfer pricing data will have a profound effect on tax departments. It will enable tax departments to become centres of knowledge that benefit the whole organisation. Senior management will be able to monitor transfer pricing shifts and make strategic decisions accordingly. BEPS Action 13 forces transfer pricing operations to be better organised so they can be used more efficiently.
But make no mistake: the pressure is on from tax authorities to ensure that global corporations do what is needed to play by the new rules.
Click here to download the report.