Making BEPS a reality: An assessment of business implementation

THE BASE EROSION PROFIT SHIFTING REGIME IS HERE

The reality

• Many finance and tax executives are facing challenges in implementing their BEPS responses.

• Some Australian multinationals are still uncertain as to the rules that overseas jurisdictions will impose upon them.

• Some are reluctant to implement the IT work necessary to deal with BEPS in-house. Few want to be the “first mover” in implementing new solutions.

• Most Australian multinationals will utilise accounting firms to conduct their first BEPS response, but the data collection and aggregation burden will remain something that needs to remain in-house.

• Business concerns over their implementation of BEPS measures are now less focused on transfer pricing alone.

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SUMMARY

In the two years since the release of the OECD’s Base Erosion and Profit Shifting (BEPS) plan, much has been written about how governments will implement it. Thomson Reuters looks to provide answers for the following: how are businesses progressing in their response to the worldwide BEPS initiatives in 2017?

After all, the core BEPS proposition is that multinational businesses must show the probity of their arrangements. They must implement new systems and new processes to meet their obligations under BEPS.

Businesses must work quickly, too. The OECD’s BEPS package, made up of reports on 15 Action Items, was agreed in November 2015. In September 2017, the OECD issued its handbooks on country-by-country reporting, a key requirement of BEPS Action Item 13. The deadline for filing of the first BEPS reports is February 2018.

As the source of trusted answers in tax and a specialist in BEPS reporting and lodgment software, Thomson Reuters is uniquely placed to assess the progress of BEPS implementation by businesses.

Corporate executives and tax team leaders are naturally cautious about offering up reports on their own progress towards meeting the BEPS challenges. But as a trusted advisor, Thomson Reuters has been able to use the results of its third annual Global BEPS Survey, which received responses from 135 corporate executives and tax and transfer pricing executives across dozens of countries and industries.

This whitepaper aims to capture the best picture available globally and help determine the progress of the progress Australian businesses are making in transforming BEPS measures into reality, highlighting the gaps in readiness.

Those gaps will soon become major pitfalls, with Australian multinationals with December balance dates due to file their first reports by 15 February 2018, or face a late lodgement fine of up to $525,000.

About the Global BEPS SurveyIn 2017, for the third consecutive

year, Thomson Reuters sought to determine the response to the OECD’s BEPS measures by multinationals around the world.

We surveyed 135 corporate executives and tax and transfer pricing executives, across dozens of countries and industries. The survey was sent via email and was available in English, Spanish, Japanese, Korean and Portuguese.

The 2016 survey focused primarily on BEPS preparedness. Now that many jurisdictions have begun to implement BEPS recommendations and the first BEPS country-by-country reports due to the ATO imminently, we consider this our first survey in a post-BEPS environment. Companies are making BEPS-related operational changes and preparing to meet reporting requirements; those who aren’t are facing hefty fines and reputational damage.

Our 2017 survey responses are reflective of an evolving post-BEPS world.

See more at tax.thomsonreuters.com.au/transparency/

After to a late decision by the ATO, Australian firms with December balance dates no longer have to file their first BEPS reports by the end of 2017. The new deadline is 15 February 2018.

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THE FINDINGS: BUSINESS CONCERNS

In the Thomson Reuters 2017 Global BEPS Survey, two-thirds of respondents appear to be facing challenges in implementing their BEPS response.

The survey found that 63 per cent of global respondents were still in the process of making changes or updates to their operations based on the BEPS initiative.

Most strikingly, 69 per cent were either not confident or only slightly confident in their abilities to respond to country-by-country reporting requirements and deadlines, as well as master and local filings – the most significant challenges for the typical corporation’s BEPS response.

Executives were typically reluctant to expand on their responses, as might be expected. However, those that did expand on their responses raised concerns around limited resources, unclear expectations and regulatory environments, and the need for more time.

“It’s a very, very complex series of issues,” says Francesca Lagerberg, London-based global leader for tax services at accounting group Grant Thornton. “Multinationals are really making sure that they’ve got all the information before they leap.”

However, with the ATO requiring its first BEPS disclosures from firms with December balance dates by the end of this year, time is rapidly running out for multinationals to be ready.

Source: Thomson Reuters 2017 Global BEPS Survey Report

LESS THAN 2/3OF EXECUTIVES HAVE HIGH CONFIDENCE IN THEIR FIRM’S ABILITY TO PROPERLY RESPOND TO BEPS REQUIREMENTS.

CONFIDENCE IN RESPONSE TO KEY BEPS ISSUESIs your company confident in responding to country-by-country reporting requirements and deadlines, as well as master and local filings?

Extremely confident

Not confident

Slightly confident

Not applicable

Confidence in

response to key

BEPS issues

27%

58%

11%4%

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WHICH BEPS ACTION ITEM(S) ARE MOST RELEVANT OR CONCERNING FOR YOUR BUSINESS? (Respondents were able to make multiple selections)

Action 1: Digital economy

Action 2: Hybrid mismatch arrangements

Action 3: CFC rules

Action 4: Interest deductions and other financial payments

Action 5: Harmful tax practices*

Action 6: Treaty abuse

Action 7: Permanent Establishment (PE) status

Action 8: Transfer pricing (intangibles)

Action 9: Transfer pricing (risk and capital, recharacterization

and special measures)

Action 13: Transfer pricing documentation and country-

by-country reporting

Action 14: Dispute resolution*

Action 15: Multilateral instrument*

Action 10: Transfer pricing (high risk transactions)*

Action 11: BEPS data analysis*

Action 12: Disclosure of aggressive tax planning*

4%

5%

5%

9%

2%

3%

12%

12%

7%

4%

6%

1%

27%

2%

3%

THE BEPS GLOBAL WORRIES

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THE AUSTRALIAN UNCERTAINTIES

Uncertainty One: The final rules

The first of these sources of uncertainty is that many organisations are still uncertain as to the rules that will be imposed on them. This is a major factor in countries which have still not finalised the shape of their BEPS regimes.

The OECD’s BEPS agreement gives individual nations choice as to how they implement the measures. The BEPS measures by their nature cover many nations, so multinational companies must first wait for and then absorb and understand different rules in every country.

The Australian Taxation Office has published most of its key rules and guidelines on BEPS – for instance, how to make your master and local files compliant, and how to lodge them. Says Ben Scull: “Australia was very good at getting on the front foot and putting their guidelines out, and their requirements.”

But as he points out, authorities in many other countries have been slower to put their rules and processes in place. As an example, he notes: “Countries like the US, Japan, France, Germany and so on, that all want to comply, have been relatively slow in determining how companies need to lodge. The format and the ability for our large multinationals to be compliant in other countries is still uncertain at this stage.

Ben Scull, Managing Director for Tax & Accounting ANZ at Thomson Reuters, says there are two primary factors driving uncertainty on Australian shores.

“And I get emails daily on this topic, asking me how can we help them in Mexico? And, my comment is, ‘We’re still waiting for the Mexican Tax Authority to determine how to lodge, and we will help you once we know, but at this stage it’s still very unclear.’

“You can understand a corporation that is going to invest a lot of money in solving this problem wanting some certainty around the requirements in the jurisdictions they work in.”

Ben Scull, Thomson Reuters Managing Director for Tax & Accounting ANZ

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Uncertainty Two: IT changes

Grant Thornton’s Francesca Lagerberg confirms that this is a global pattern. “The massive challenge has been that different jurisdictions, different governments, are implementing it at different paces,” she says. “So you’ve got some things happening really fast, like the BEPS multilateral instrument – there you’ve now got a situation where bilateral tax treaties can be changed with some rapidity. But other things are taking a lot longer.”

As Lagerberg points out, the current round of tax reform proposals in the US have further complicated the picture. And many Australian multinationals have foreign operations there.

The end result is that many multinationals around the world, she says, are asking the same questions: “Where do you take action, and what do you wait for, and what do you start working on first? ... When you have an absence of certainty, the tendency is to just hold fire.”

The second factor driving uncertainty within businesses is that the BEPS measures require substantial changes to IT systems. “If you look at the uptake of businesses in Australia who are prepared for BEPS and the filing requirements using technology, it’s very minimal,” says Scull.

BEPS requires multinationals to collect and arrange information in a very systematic way. Notes Scull: “A lot of this is coming down to actual collation of data, and then taking that data and looking at how to put it into your master file or your local file as part of the BEPS guidelines.”

For businesses which must change their systems to deal with this data, the gaps in the rulemaking make coding changes

difficulty. “The challenge is ensuring that you have the business’s IT team on side and willing to commit to a project like this,” says Scull. “It becomes quite a cost factor to focus your IT guys on systems and changes when things could change dramatically again over the next 12 to 18 months.”

As Lagerberg puts it: “You wouldn’t want to implement a large-scale IT project if you weren’t sure what you were trying to achieve.”

Thomson Reuters’ surveys and discussions over the past two years suggests that many tax executives around the world and in Australia have been reluctant to lead adoption of new systems to deal with BEPS measures.

HOW BEPS CHANGES BUSINESS OPERATIONS

SURVEY QUESTION: What changes, prompted by BEPS implementation, have been made, or will likely be made, to your company’s business operations?

Implement changes to your transfer pricing policy

Others

Implement changes to your intercompany

agreements

Implement a restructure

Transfer any tangible or

intangible assets

Recommend that your company hire or relocate employees in

certain jurisdictions

Conduct review of your business’s value chain and

key profit drivers

Conduct review of historical business

structures

27% 22% 19%

14% 8% 7%

4% 3%

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“CORPORATIONS IN AUSTRALIA ARE ALMOST 100 PERCENT RELYING ON ACCOUNTING FIRMS TO HELP MANAGE THEM THROUGH THE BEPS PROCESS THIS YEAR.” – BEN SCULL, MANAGING DIRECTOR FOR TAX AND ACCOUNTING ANZ, THOMSON REUTERS

THE SCALE OF THE CHALLENGE: “A PERFECT STORM”

Thomson Reuters understands the scale of these challenges: it has to prepare its own country-by-country report and master file worldwide, and a local file for Australia. Simon Haddad, Thomson Reuters’ Australian tax director, found the amount of data needed for the local file overwhelming – “large volumes of data, highly detailed, very specific”. For multinationals in Australia, he says, the new rules constitute “a perfect storm”.

For instance, all intercompany transactions within the global group need to be listed, in a prescribed form, with the consideration and method of payment, and with each counterparty named and their country of residence listed. On top of that, the company must provide a copy of the written agreement governing the transaction.

The fines levied on multinationals increase the stakes. Fines for late lodgement of BEPS documentation start at $105,000 and range up to $525,000.

Thomson Reuters’ Australian work has confirmed that Australian multinationals share the concerns of their overseas counterparts. Instead of building their own systems to deal with the BEPS regime, many Australian multinationals – even some of the largest – have turned to accounting firms to show them the way.

Some of these firms plan to educate themselves with the help of outside accounting firms and then reassess for 2018, says Scull.

“Corporations in Australia are almost 100 percent relying on accounting firms to help manage them through the BEPS

process this year,” says Scull. “If you have a look at the uptake in technology across the accounting firms, it’s huge.” Given Australian multinationals’ uncertainties over BEPS, it’s no surprise that they should want to outsource in their first year of BEPS disclosures. “Companies are concerned,” says Scull. “But they also know that there are a lot of accounting firms out there who are willing to help or take on the burden for them.” Many large accounting firms have built up substantial expertise in transfer pricing, he notes.

However, even those firms that do call upon outsourced assistance still face heavy data collection and aggregation burdens. In the event of an audit, a corporation will need to demonstrate to the ATO the source and accuracy of their data points, making their gathering and consolidation a task that must remain in-house.

1 Australian Taxation Office, Significant global entities – penalties, accessed 1/11/2017

at https://www.ato.gov.au/Business/Public-business-and-international/Significant-

global-entities/Significant-global-entities---penalties/

The popular solution: Outside help

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Taking control: In-house BEPS management

Outsourcing BEPS work is a high-cost option. In-house systems offer a lower-cost alternative.

Thomson Reuters uses its own ONESOURCE BEPS Action Manager to handle its own BEPS needs, giving Thomson Reuters a clear picture of multinational tax managers’ needs and the effectiveness of dealing with BEPS in-house. Simon Haddad explains how tax staff across the world use the software to work through data issues step by step, applying the correct definitions of data. The company then circulates a draft country-by-country report to check the consistency and accuracy of disclosures.

Says Haddad of the BEPS Action Manager: “With the volume of information, and dealing with so many companies across so many jurisdictions when taking the role on internally, it’s indispensable.”

Thomson Reuters’ BEPS solutions are designed to provide efficient and effective resolution of BEPS issues. Scull

says the challenge for companies is to create a system that can ensure the right data inputs and create a durable system. “We help companies from cradle to grave with this solution,” he says.

Simon Haddad, Thomson Reuters Australia Tax Director

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Transfer pricing worries fall

The ATO on business’s BEPS response

Transfer pricing remains the most challenging issue for many global corporate executives involved in responding to BEPS measures.

In the global survey, 26 per cent of respondents said they would need to act to change their transfer pricing policy in response to the new rules, more than the number of respondents who were expecting to act on any other issue. And 27 per cent named “Action 13 items” – transfer pricing documentation and country-by-country reporting – as their most “relevant or concerning” BEPS issue.

The good news? That 27 per cent was down sharply from 2016’s 83 per cent.

Bring your BEPS obligations into focus

Solutions from Thomson Reuters enable your global business to meet BEPS

compliance needs and deadlines.

Find out more at tax.thomsonreuters.com.au/beps

How has the Australian Taxation Office (ATO) assessed the business response to BEPS? An early signal came from Tax Commissioner Chris Jordan.

“We are also working to help control tax avoidance by supporting clients to voluntarily get it right,” he told the Tax Institute National Convention in March 2017.

“We have done this through releasing a series of guidance products to provide early warning of areas of concern about higher risk tax arrangements and behaviours. Through this work we are noticing an encouraging change in approach with clients reaching out to us to make changes to be more compliant. We have also worked with them to develop new transfer pricing safe harbours ...

“Pleasingly, we are seeing positive changes in behaviour from taxpayers and their advisors. They are abandoning their contrived structures and restructuring to models whereby the sales are booked in Australia. They are changing transfer pricing methodology and amounts to better reflect the value creation within Australia, recognising a taxable presence here, and removing shell entities and long-term foreign agency arrangements.”

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BEPS ACTION MANAGERONE SYSTEM. ONE STORY. GLOBAL COMPLIANCE.

ONESOURCE BEPS Action Manager is integrated with up-to-date global BEPS research and content, which provides a live matrix of compliance answers configured to the taxpayer’s global footprint. This dynamic update of local legislative rules, timings and data requirements for CbC, Master File and Local File is specifically based on the profile of each taxpayer. Since BEPS legislation is not normalised in its rules or global rollout, this matrix provides a user the ability to assess jurisdictions that may require certain aspects of attention to maintain compliance. THE OUTCOME: Users can take action in real-time by having all the BEPS research and related information they need in one solution.

Managing risk begins with predicting how data will be interpreted by the end reader and how that data relates to other tiers of reporting. ONESOURCE BEPS Action Manager allows taxpayers to see their data visually and numerically before submitting required BEPS documentation. Ensuring the transfer pricing story corresponds throughout the CbC, Master File and Local File requires an assessment of data which may be outside of the CbC table requirements. ONESOURCE BEPS Action Manager can produce analytics that predict risk areas, support value creation and validate all three tiers of reporting. THE OUTCOME: Tax becomes a centre of excellence that makes a positive impact on the entire organisation, from the C-Suite on down.

Each data point can be tracked back to source documents, also allowing for subsequent year automation. The software responds to data inputs by allocating the necessary rules of the fact pattern specific to relevant tax structures and jurisdictional rules, while providing quality control and override mechanisms to ensure CbC report development is precise. It also interfaces directly with the ATO. THE OUTCOME: Users focus their time on data integrity and tax strategy while the software responds to the current rules of the business’ environment.

PREPARATION: RISK MANAGEMENT:

EXECUTION: Integrating platforms that offer robust features for tax teams, predictable implementation for IT departments, and scalable workflow management for outside parties, such as consultants and advisors, is the most effective way to handle BEPS requirements.

Thomson Reuters ONESOURCE™ BEPS Action Manager was developed to provide unparalleled value across three areas in response to the OECD’s BEPS framework: preparation, execution, and risk management.

© 2017 Thomson Reuters

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