Multinationals await implementation of global tax realignment

The piling on Google has received from the world’s tax authorities is enough to make one almost feel sorry for the US conglomerate. It has or has had in recent months tax disputes with Indonesia, Australia, France, Italy and Spain, to name just a select few examples.

But then again, this is a company that created a corporate structure in which payments between related entities shift income from a high-tax country to a low-tax country. Specifically, Google has been called out for moving much of the profits it has earned in Ireland and Singapore, where it collects its international advertising revenues, through a subsidiary in the Netherlands and then on to a Bermuda shell company.  

Google and the EU have different ideas of whether this is a legal manoeuvre. As for the OECD, it would no doubt be quick to dub this structure a prime example of 'profit shifting'.

A mighty tool

Indeed, the OECD has been bemoaning profit shifting for years. It estimates that revenue losses from profit-shifting tax structures are between $100bn to $240bn annually, or anywhere from 4% and 10% of global corporate income tax revenues. For developing countries, which have a heavy reliance on corporate income tax revenues, profit shifting can erode overall prosperity.  

Then, in 2015 the OECD gave the world’s revenue collectors a powerful new tool. That was the year the OECD/G20 Base Erosion and Profit Shifting (BEPS) project was unveiled. As the name suggests, it is meant to prevent multinational companies from shifting profits out of higher tax countries to lower tax ones, especially if the bulk of their revenues have been earned in the former.

It contains 15 action items, which countries that have signed on to this project – and almost all member countries have – are to take in order to stop this activity.

The start of the realignment  

Fast-forward two years, and in 2017 the first action item is going into effect around the world – a requirement for country-by-country (CbC) reporting. It essentially breaks out a multinational’s financial statements by jurisdiction and is filed in each country in which the company does business. The report gives local tax authorities visibility into all aspects of a company’s financial activities including, but not limited to, global revenue, income, tax paid and accrued and tangible assets.

It applies to companies that have worldwide revenues of €750m or more. But perhaps not for long – the OECD is expected to review this threshold in three years and there are many that believe it will be lowered.

Not surprisingly, CbC has proved to be a very popular measure among OECD members. “Many countries around the world are incorporating the CbC reporting requirements into their domestic legislation to varying degrees,” says Douglas Stransky, an international tax attorney at law firm Sullivan & Worcester.

Of course, multinationals well know about this requirement and the other measures under BEPS that will eventually be made into law. "What they don’t know is how stringently tax authorities will apply the rules", says Ryan Dudley, partner at consultancy Friedman LLP and leader of its international tax and international services practices.

These new rules have the potential to usher in more audits and litigation, according to Mark Schuette, the transfer pricing leader for global accounting network BDO USA. “Over the past five years, tax authorities have been very focused on getting their share of the pie. There is the perception that there is a lot of manoeuvring going on – and many of these authorities believe they are not getting their fair share,” he says.

And that is the ultimate ramification of BEPS for multinational companies: going forward, countries will have a lot more data as they argue they should get a larger share of a company’s profits, according to Mr Schuette.

A game changer?

That is why Mr Schuette calls the CbC requirements a "game changer" for multinationals. Prior to this, companies were not required to share transfer pricing information with all tax authorities. “If you were audited for transfer pricing in the UK, you would provide the UK tax authority the documents that would only speak to those transactions that touched the UK,” he says. Now, tax authorities will see them all.

He reports that many companies have already done some restructuring around this area and have enhanced their documentation to explain why their transactions are arm’s length and reasonable from a business perspective.

But for some companies, depending on where they operate, the process has not been easy. One of the weaknesses with the BEPS programme – or any OECD measure for that matter – is that these action items are only guidelines. It is up to the countries to put the necessary regulations in place and each will do so somewhat differently.

The timelines also vary. While a number of countries have set the end of 2017 for the CbC reporting to be filed, others, including the US, have picked the end of 2018. Fortunately for US multinationals, the US has allowed for a mechanism for voluntary filing this year.

Getting a reaction

Most, if not all, multinationals have undertaken some kind of analysis of their global operations and foreign locations by this point, according to Mr Dudley. “They are re-accessing their structures and determining whether they are still comfortable with what they have established,” he says.

But that is about all multinational firms have in common at this point. Because BEPS will require, on the ground at least, a market-by-market strategy – aside from the transfer pricing issue – a lot of companies are still waiting to see how final legislation shakes out.

“There’s nothing to be done until something happens that requires a company to respond based on the specific change,” says Mr Stransky.