Businesses with higher-risk business models will have more expensive and complex compliance. They should consider a range of actions, such as assuming full value chain transparency over system profits, undertaking a multi-sided transfer pricing analysis of the global value chain, and making greater use of advance pricing agreements.
Out of the dark: How efforts to stop BEPS are driving tax risk
Welcome to EY’s 2017-18 Tax Risk and Controversy Survey Series, where we collect and analyze input from taxpayers on what they are seeing in practice in a variety of aspects across the tax lifecycle of planning, provision, compliance and reporting. EY surveyed 901 tax and finance executives representing more than 17 industries in 69 jurisdictions. In part 2 of the series, Out of the dark, we take a deeper look at the risks businesses reported in responding to the base erosion and profit shifting (BEPS) initiative of the G20 and the Organisation for Economic Co-operation and Development (OECD).
BEPS challenges for businesses
The lingering uncertainty around BEPS implementation is reflected in the results of the EY 2017-18 Tax Risk and Controversy Survey. According to our survey respondents, businesses are, in general, still in the early stages of weighing how the BEPS reforms will affect their business operations and tax strategy.
The global efforts of the G20 and the OECD to combat perceived BEPS have fundamentally changed the international tax landscape and created a host of new risks for businesses.
The changes to long-standing definitions, rules and practices, along with the explosion of transparency and disclosure measures, have had profound implications for businesses’ tax compliance and reporting functions, audits and controversies, and reputational risk.
While the OECD’s October 2015 release of the final BEPS reports may have moved the project from the theoretical stage to the real world, for many businesses the BEPS era doesn’t quite feel like reality yet. There has been some clarity in certain areas — notably with the new country-by-country reporting (CbCR) obligations introduced under Action 13 of the BEPS Action Plan — but many businesses still have a sense of uncertainty around how the implementation phase will unfold.
In view of the depth and breadth of the BEPS recommendations and their disparate impact on different industries, there is no one-size-fits-all approach to dealing with BEPS. However, having protocols in place to continuously monitor tax law changes in the countries of operation is essential no matter the size, scope or scale of your business. Having clear and consistently applied tax and transfer pricing policies will also be helpful in reducing risk and controversy.
If controversy cannot be avoided, having a solid dispute management system in place is critical so that questions from tax authorities are answered in a manner consistent with global company tax policy.
What follows are more concrete steps that may be appropriate for businesses to take.
1 | Develop a strong controversy management approach that aligns with the level of your business model risk
The 21st century tax function of a global business will have to be very flexible in order to address a host of technical, commercial, technological, political and social considerations. Businesses should analyze their global tax footprint by, for example, reviewing their draft three-tier transfer pricing reporting (CbC report, master and local file) to find any red flags and consider potential remedial action, such as re-examining their underlying operating models, revisiting transfer pricing policies and/or strengthening transfer pricing documentation.
While mutual agreement procedures and arbitration continue to remain largely government-to-government procedures, taxpayers and their advisers can help and support the competent authorities in navigating the dispute and successfully resolving the case. Such assistance can include engaging early before positions become polarized, and providing the clearest, highest quality information and confirming that the same information is provided to each country.
Businesses should closely monitor PE developments in the countries where they do business. They should also make sure they don’t simply rely on the contractual setup; they must confirm their staff are “living” the business’s tax model.
Navigating the BEPS journey
Having risen to the top of the political agenda of the world’s largest economies, the goal of the BEPS project was not just to change the international corporate tax framework but to change the behavior of businesses themselves.
The BEPS reforms that are being carried out by governments around the world are reshaping business models, industries and key companies within different sectors, as well as prompting businesses to rethink how tax decisions will affect their reputation, brand and communications with internal and external stakeholders.
For businesses, the October 2015 release of the final BEPS recommendations didn’t just mark the start of the implementation phase but the beginning of a challenging, unpredictable journey.
The varying speeds at which countries have acted to implement the BEPS Action items — and their different, sometimes inconsistent interpretations of what the recommendations mean — have created new risks for businesses and shone a spotlight on corporate taxation like never before.
With proper controls in place to monitor and implement BEPS developments, and careful planning so that business models and structures are aligned with the new global tax mindset, businesses can successfully navigate the BEPS journey and dim the glare of that spotlight.
Our next report will use the survey results to explore more deeply the emerging trends in tax controversy. Next, we’ll examine the best practices leading businesses are following to manage tax risk and thrive, and finally, we will publish a report on the findings of a separate survey EY conducted of tax authorities’ views of tax risk and controversy.
We hope you will find the series insightful and illuminating.