Efforts to prevent tax avoidance gained momentum early in October when the Group of 20 finance ministers approved the OECD’s Base Erosion and Profit Shifting plans. With that in mind, companies should be planning accordingly, says Melissa Cameron, head of Treasury Practice at Deloitte, and perhaps reverse centralization plans to a decentralized structure.
“Not only is BEPS a global tax reset, it’s a global business reset as well,” Ms. Cameron said. “Because the way in which BEPS has looked at how international companies organized their affairs means it will have a dramatic impact on things like how they bill to customers and their internal supply chains.”
For the past several years, the Organization for Economic Cooperation and Development, following a mandate from the G-20, has been working on a 15-step action plan aimed at addressing many of the perceived issues with current international taxation rules. Since the financial crisis, world governments have been seeking new revenues, and, combined with the increased public and media focus on tax practices of US multinationals (i.e., Starbucks, Amazon, et al), agitating for change. The OECD estimates that as much as $240 billion annually, or around 10 percent of global corporate income tax revenues, is not paid. That’s because current gaps in tax law allow corporations to “shift” profits to low tax or no tax environments, where they have little or no presence or no economic activity takes place.
The rules, “are well developed,” said Ms. Cameron. “The final 15 articles will be published in November around multilateral agreements, and suffice to say we’re now at a point where there is such momentum that there are up to 100 countries involved. And the next step is for each of these countries to legislate locally for the [OECD’s] recommendations.”
“And when you’re thinking about global liquidity and associated tax issues, you can’t just look at BEPS and say, ‘Well this will be legislated and I can just wait until these rules are finalized in my local market.’” Ms. Cameron said. “The reality is that some of these changes have already been made. So it’s going to be a very dynamic situation over the next year or so.”
So far a host of countries, including France, Germany, Italy and the UK, have made changes ranging from disallowance of deductions on hybrid instruments to disallowed dividend exemptions to a “DigitalTax” and a “Diverted Profit Tax.”
Ultimately this could mean a heavy lift for treasuries and their tax departments. Companies will have to think about how variations in the rules between one country and another will impact global treasury teams and tax leads trying to now interpret not only BEPS but each country’s interpretations, Ms Cameron said. “It’s certainly going to be a significant change.”
It could also change how companies are organized, Ms. Cameron said. This means changes that relate to treasury activities like financing, inter-company loans, and the use of in-house banks. According to a recent Deloitte BEPS survey, business executives are concerned: 37.7 percent of respondents in the survey pointed to an increase in their tax compliance burden “as their main concern with the BEPS package.” Other concerns, according to Deloitte include double taxation of income (17 percent) and an increased effective tax rate in income from cross-border transactions (14.9 percent).
Those last two concerns may move to the top of the concern list. That’s because the OECD estimates that companies will be paying an additional 4 to 10 percent in taxes. “This isn’t an insignificant amount of cash,” said Ms. Cameron. “From a pure liquidity perspective, a company paying more in taxes is going have an impact on the liquidity and leverage of the company and even possibly its credit ratings.”
And on a more functional level, Ms. Cameron suggests, BEPS will have “a heavy data, reporting and technology requirement as companies report global activity.” This could mean a lot more work for most treasuries following the current trend of lean, “do more with less,” structure.