Corporate Tax Impact on a Country-by-Country Basis

  • Posted by admin
  • 16 October 2015
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BEPS (Action Plan on Base Erosion and Profit Shifting) will have a major corporate tax impact. Article 13, the final version of the country-by-country template created by OECD (Organization for Economic Co-operation and Development), will require multinational countries to report the template annually in each tax jurisdiction that they currently operate under.

The template will include:

  • Company revenue.
  • Company profits before taxation.
  • Income taxes paid and accrued.
  • Total number of employees.
  • Company capital.
  • Retained earnings.
  • List of tangible assets.

Multinational companies will further be required to identify and describe which activity is taking place within a respective tax jurisdiction. All tax jurisdictions will receive their own Action 13 report. Templates will be filed on or after January 1, 2016.

The goal of BEPS is to provide a clear and accurate report that demonstrates to tax authorities (in each jurisdiction) how much companies earn in a jurisdiction and how a company pays taxes, improving the risk-assessment capabilities of authorities. Companies that earn €750 million or more in revenue in a fiscal year will need to file the Action 13 report.

Reporting Concerns among 44 Countries Included in BEPS

Multinational companies will be required to report annually. There are 44 countries that have agreed with BEPS accounting for 90% of the global economy. Country-by-country, BEPS has been adopted or considered by:

  • Argentina
  • Brazil
  • China
  • Colombia
  • European Countries
  • India
  • Indonesia
  • Latvia
  • South Africa
  • Russia
  • Saudi Arabia

Corporate tax departments will need to manage financial data and enhance reporting to meet new requirements.

As a result of the new filing requirement, all of the countries that agree to BEPS will need to meet stringent safeguard measures. These measures will include:

  • Preserving the confidentiality of the report.
  • Enforcing template filing by the multinational group’s parent company in the jurisdiction.
  • Utilizing the template for strictly accessing BEPS-related risks, such as high-level transfer-pricing.

No enforcement recommendations has been provided for the new international tax filing. It is up to each jurisdiction to safeguard measures in place.

BEPS provides an interesting landscape for businesses. BEPS does not have the legislative authority to enforce the recommendations that are proposed in Action 13. As such, it is up to each country that adopts the Action Plan to provide their own legal ramifications for not adhering to the plan.

Companies Already Preemptively Taking Action

Amazon is one of the companies that is taking preemptive action in regards to the company’s tax structure. The company made a public announcement that states they will now account for revenue from all retail sales in each respective country where a sale is made.

Traditionally, Amazon had used Luxembourg’s low tax rate for routing profits due to having the lowest corporate tax in the EU.

Many companies are expected to take measures to prepare for BEPS. Failing to report properly under new adoption of Article 13 may result in tax avoidance damages that can severely tarnish a company’s image.

Tax transparency will be at unprecedented levels for multinationals.

Analysts predict that companies will struggle to meet the demands of Article 13 initially.

Concerns of Action 13

Multinationals have clear and real concerns when it comes to these new tax requirements. One of the biggest concerns comes from double taxation that can hypothetically occur under the new recommendations.

If a company has taken out a loan in the United States for a subsidiary in Australia and Australia saw this loan as equity (which would be non-deductible), the company’s tax would increase in Australia as a result. In the event that interest tax was imposed by the parent company in the United States, double taxation could occur.

These are the fine details of Article 13 that must be addressed.

The “international tax system” brings further implications. Compliance level increases are all but certain, and the cost of conducting business offshore will rise. Foreign activities that were once optimal for business may prove to be more costly. Companies may start relocating their main entity to foreign locations as a result of stricter rules, or companies may cease foreign operations in certain jurisdictions.

Legal exposure is a major issue in the event that an audit does occur.

Corporate tax departments may need to be expanded to help combat foreign auditing. Reconciling financial states and tax returns will also be an issue. It is further believed that certain jurisdictions may require the report to be public, or reports may end up being leaked to the public. In either case, this is not optimal for businesses.

OECD has reduced the financial information requirements in the final draft of the template, but the changes may not provide enough security to companies.

Changes include:

  • 8 financial items reported, instead of 14.
  • Information can be submitted for all entities in a country rather than each entity in a country.
  • Adjustments to the differences in accounting principles for respective tax jurisdictions no longer need to be made.

These are the most notable changes in the final version of the template. The question remains if the reduced financial information and other changes will provide relief for in-house tax departments.

Experts believe that while the financial information required has been reduced, the template will either be expanded or modified to meet the requirements of taxing authorities. Countries, such as Brazil, China, India and South Africa, have all indicated that expanding the information required within their jurisdiction is a possibility. This expansion would add much of the 6 items removed by OECD, specifically:

  • Service fees
  • Interest income
  • Royalty income

Templates may also need to be prepared and converted into a country’s local currency and follow the country’s tax standards. For multinationals with offices and operations around the globe, this would mean tax departments in each country may be a realistic but costly approach.

Corporate tax departments will face an ever-growing complexity.

Companies face the threat of losing credibility, especially in the first few years of implementation. Many documents are prepared outside of a tax department wherein two reports may conflict and cause legal repercussions for a company.

Reporting is set to commence as early as 2017. Companies will need plenty of lead time to institute the necessary changes that Article 13 will require internally. Additional staff may be required as well as internal changes to meet new compliance and tax audit requirements.

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