Tax in the C-suite?

New international tax rules change everything and here the OECD outlines the best way to comply with them.

Perhaps you’ve heard of a four-letter word – BEPS – that’s been making its way around tax circles and is now trickling up to the C–suites?  BEPS stands for base erosion and profit shifting, and it’s not just another alphabet soup acronym for your tax team to worry about.   It’s actually a major multilateral initiative for revising international tax rules being led by the Organisation for Economic Co-operation and Development. Come November, it will be on the agenda when G20 leaders meet for their annual summit meeting in Antalya, Turkey.  After that, it will have major implications for your business. So, what the BEPS are we talking about?

It starts with the global financial crisis, which forced governments to pare back public services, hike taxes and implement a wide range of austerity measures, while a number of companies received taxpayer-funded bail-outs. The public backlash was brutal, with headlines emphasising the low global tax rates paid by some multi-national enterprises. Tax suddenly became a hot political topic. With companies’ tax strategies on the front page, the reputational impact of tax policy brought the issue to the boardroom. 

The story went global and multilateral in July 2013, when the G20, called on the OECD to reform the international tax system – together the OECD and G20 represent 90% of the global economy. The principal objective of the BEPS Project: closing the loopholes in current tax rules that allow companies to shift their profits to low or no-tax jurisdictions, where they have little or no economic activity or value creation, rather than paying tax in the location of the activities generating those profits. The G20 asked the OECD to deliver on a15-point BEPS Action Plan by year-end 2015.  The first BEPS deliverables were published in September 2014, and the full package of measures will be delivered, as planned, to the G20 Finance Ministers in October.

“The impact from the OECD’s on-going work is already being felt in the private sector.”

 Pascal Saint-Aman is Director of the Centre for Tax Policy and Administration at the Paris-based OECD

Initially, business was sceptical that the BEPS measures would ever be enacted by national governments. However, those perceptions are now shifting, as countries begin adopting the measures which have already been agreed. In a 2015 Deloitte survey, over 90% of respondents agreed that tax structures are under greater scrutiny by tax administrations than a year ago, and over 50% of respondents are anticipating significant legislative and treaty changes in their country as a result of the BEPS Project. In October 2014, Ireland announced changes that will put an end to the well-known Double Irish with a Dutch sandwich (See CEO Insights, March 2014), and countries have now committed to sharing information on relevant private rulings given to taxpayers. Despite this progress, it is more important than ever that countries continue moving forward on an agreed basis, to avoid widely divergent international tax rules, with the associated costs for governments and business, as well as the risk of increasing the mismatches between systems.

The impact from the OECD’s ongoing work is already being felt in the private sector. The theoretical is becoming reality. An important driver of the BEPS Project was the need to minimise the risk of countries implementing unilateral, uncoordinated measures. It’s important to note that we are working diligently to ensure that compliance burdens are minimised and clarity is maximised.

As the foundation of OECD’s work on tax for more than 50 years, we remain strongly committed to removing tax barriers to cross-border trade and investment. While much of the media focus has been on instances of double non-taxation, the BEPS Project is also addressing double non-taxation, as well as providing more certainty and consistency for business.  Countries have committed to improving the mechanism by which governments resolve cross-border tax disputes arising from tax treaties. These measures will aim to more effectively address instances where taxpayers are subject to double taxation as a result of overlaps in national tax systems. Standardising the documentation requirements for Country-by-Country Reporting in the context of transfer pricing will keep compliance costs to a minimum, while ensuring that tax administrations have access to the information they need.  The BEPS work also takes into account the perspective of small and medium sized enterprises, by limiting those reporting requirements to only the largest multinational firms.

The private sector has been actively engaged in the BEPS Project, both in developing solutions to address BEPS, and ensuring that measures developed do not create unnecessary compliance obligations. More than 4 000 pages of comments have been received on the discussion drafts released to the public. The OECD has held 9 public consultations and hosted 7 live webcasts, watched by 30 000 people. By working closely with key stakeholders, the 62 countries involved in the BEPS Project (all OECD and G20 members, as well as more than a dozen developing countries) are working to  establish a strong foundation for the international tax system, built on transparency and promoting coherence and certainty. 

It is clear that for CEOs, the reputational risks of ill-considered tax policy remain.  In this new environment, corporate governance increasingly needs to take tax matters into account. The recently updated OECD principles of Corporate Governance emphasise the role that the board has to play in managing risks, including compliance with tax law requirements.  Many jurisdictions are increasingly demanding that boards oversee tax planning strategies put in place by senior management, a requirement which is intended to discourage as the pursuit of aggressive tax avoidance, which doesn’t contribute to the long-term interests of the company and its shareholders, and which could incur legal and reputational risks. The internal audit function also increasingly includes a tax element, to ensure not only that tax strategies are in line with corporate policy, but that the tools are in place to allow those strategies to be effectively monitored on an ongoing basis. 

Clearly, BEPS is much more than a four-letter word. We know that the outcomes of the OECD/G20 BEPS Project will be finalised and published in October, and countries will move forward with implementation.  This means tax matters are going to be an important topic for the most senior business executives for a while to come. 

Pascal Saint-Amans is Director of the Centre for Tax Policy and Administration at the Paris-based OECD. For more information on the BEPS Project, visit www.oecd.org/tax/beps.htm.