Successful adaptation to BEPS-led changes essential
I recently spent four days with colleagues from other BDO member international firms in Vancouver. Representatives from China, India, the United Kingdom, Germany and Canada, among others, participated in the meetings.
Our meeting was to discuss the developments in international tax. The global economy has changed the way businesses operate and how businesses are taxed. There has been much discussion recently concerning tax rate competition and how the United States has emerged as one of the highest tax rate jurisdictions, while most of its major trading partners have tax rates significantly below U.S. corporate tax rates.
At this time last year, the headlines were full of transactions (announced or rumored to be in the queue) that were generally described as corporate inversions. The use of the “inversion” term has come a long way since I learned about inversions in math or science class. I guess the use of the term today in taxation has some relation to math, as a corporate inversion can change the math of taxation. As many of us recall, there was immediate reaction from many political figures condemning the use of the inversion planning techniques in merger and acquisition transactions. The Treasury Department heard the outcry and, last September, announced changes in future regulations.
International tax is still in the news, but now it is the discussion around Base Erosion and Profit Shifting initiatives that has gathered the attention. The BEPS initiatives are led by the G20 and the Organization for Economic Cooperation and Development. These two groups include most of the significant countries dealing in international business and trade.
The impetus of BEPS initiatives was funneled in part because of the U.K. parliamentary inquiries of many U.S. companies conducting business in the U.K. and having rather low corporate tax expense (in the eyes of the members of parliament) in the U.K.
At the same time in the United States, our own U.S. Senator Carl Levin had several public hearings and issued several reports on the tax planning being used by several high-profile U.S. companies.
The media attached catchy phrases to some of the planning such as “Double Irish” or “Dutch Sandwich” with respect to some of the structures. Many publications started to file reports on the planning undertaken by companies as revealed in corporate securities filings and filings in countries that require companies file statutory audit reports (such as the U.K. or Ireland) in their jurisdiction of organization.
The BEPS initiative has 15 action plans in process to bring forward recommendations to its members with respect to tax policy, with the hope that member countries will undertake legislative or regulatory action to implement these BEPS action plans. Working groups have released different drafts on the action plans.
It is interesting to watch the process unfold. In many respects the U.S. already has implemented many similar items over a number of years that the BEPS initiative will recommend in some form to its participating members.
For example, for many years, the use of a tax treaty or “treaty shopping” was a common planning technique to take advantage of beneficial tax treatment or low rates of withholding taxes. The U.S. began negotiating the inclusion of specific provisions in tax treaties more than 20 years ago to limit the ability for individuals or companies to treaty shop. These provisions are referred to as limitation on benefits provisions that require a number of tests (including tests that indicate substance) be met in order for a company or an individual to claim the benefits of a tax treaty.
The U.S. was also one of the first countries to have specific transfer pricing guidelines and documentation requirements to govern intercompany transactions between members of a corporate group operating in different taxing jurisdictions. Many of the large tax cases currently in the U.S. courts involve transfer pricing situations as the definition of an arm’s length price can have differing pints of view.
The consideration for international companies based in the U.S. is what impact the BEPS initiatives will have on their tax liabilities around the world and what changes may be required to avoid being adversely impacted by the upcoming changes in tax rules. Some countries are not waiting for the BEPS process to be completed. The U.K. recently enacted a Diverted Profits Tax to tax income that is not otherwise being subject to U.K. corporate tax. The DPT is assessed at a rate (25 percent) higher than the current U.K. corporate tax rate (20 percent). The DPT became effective April 1, 2015. The DPT tax base is different than the typical tax base for the U.K. corporate tax.
Other countries are likely to follow the U.K.’s lead. Australia recently announced its own version of the DPT, which it will accomplish by amending its general anti-avoidance rules. Additionally, Ireland announced late last year its phase-out of rules that permit “Double Irish” tax structures by the end of 2020. It is likely we will see other countries also adopt new tax rules for international business activities in the near future.
The challenge for U.S. companies doing business around the world is identifying how the 15 BEPS action plans may impact their business and the taxes paid by the business. Each OECD or G20 member country may enact provisions that are not identical in their implementation of the BEPS action plans. Therefore, there may not be a “one size fits all” solution in making changes to a specific business’s structure and business transactions that may be impacted by BEPS. This may require changes in legal structure, supply chain and activities within a business.
Additionally, company infrastructure and information systems may need to change to assist in the accounting and reporting for the business. Successful adaptation to the BEPS-led changes will determine what businesses thrive and which businesses lag.
Bill Roth is a tax partner with the local office of BDO USA LLP. The views expressed are those of the author and not necessarily of BDO. The comments are general in nature and not to be considered specific tax or accounting advice and cannot be relied upon for the purposes of avoiding penalties. Readers are advised to consult with their professional advisers before acting on any items discussed herein.