Tax Transparency: Why You Need to Know About BEPS

Corporate taxation is being forced out of the shadows as boards face growing public scrutiny over company tax in fallout from the “Paradise Papers”. Base Erosion Profit Shifting (BEPS) has emerged as a prime offender. Ben Scull from Thomson Reuters Australia and New Zealand and Christopher Niesche explain what BEPS is all about.

The issue

The need for comprehensive tax reform and international competitiveness are two of the biggest concerns for company directors, according to the latest AICD Director Sentiment Index (DSI).

Michael Coleman FAICD, a member of the AICD national board, says, “Over the past decade, the global activities of the tax authorities have made a significant impact in raising the risk profile of tax for company directors and their boards.”

February 15 is the deadline for companies with a calendar-year reporting schedule to file their first BEPS reports on transfer pricing for the 2016 tax year.

What is BEPS?

BEPS is an initiative of the Organisation for Economic Co-operation and Development (OECD). More than 100 countries are collaborating to close tax gaps for companies who use tax-planning strategies to exploit differences between tax rules of different jurisdictions to artificially shift profits to low or no-tax jurisdictions with little economic activity. It estimates the resulting global loss of annual revenue at up to US$240b.

The BEPS framework addresses the main areas where companies have been most aggressively shifting profit — the digital economy, treaty abuse and transfer-pricing documentation — putting pressure on multinational corporations to reconsider how these details are reported to local tax authorities through country-by-country (CbC) reporting.

Risk vs reputation

Corporates and multinationals are now under unprecedented pressure to be compliant through BEPS and related local legislative measures. Also unprecedented is the access ATO will have to tax data through BEPS, and the ability to match this with data from global sources.

It is critical for companies to deliver to avoid penalties, and also fallout from shareholders and the community. Coleman notes, “Over the past decade, there has been a reduced level of acceptance by boards of complex transactions that might give rise to tax benefits. The biggest challenge facing those boards in relation to this issue is reputational risk. Companies do not want to have a public profile that suggests they are trying to avoid tax.”

Unsurprisingly, shareholders are pressing for more clarity in Australian corporate reporting on long-term strategy and environmental, social and governance issues. Tax strategies should be part of the broader corporate governance picture says AICD chief economist Stephen Walters GAICD.

“Relocating revenue into a lower tax jurisdiction is perfectly legitimate within the existing global tax regime — but there are moral imperatives for boards and management. We have a greater responsibility than just delivering a financial return to shareholders.”

Who does BEPS apply to?

The BEPS reporting requirements affect companies that are a global parent entity with annual global income of $1b or more, or a member of a group of entities consolidated (for accounting purposes), where the global parent entity has an annual global income of $1b or more. This includes Australian-headquartered entities and the local operations of foreign-headquartered multinationals.

How to get BEPS-ready?

Companies are required to electronically lodge three CbC statements containing details of international related party dealings, revenues, profits, and taxes paid by jurisdiction. The report must cover each national entity list — functions, assets, personnel, revenue, profits, taxes paid, capital structure and retained earnings. This level of detailed data detail has never been required before and non-compliance fines are up to $525,000.

The Federal Government and ATO have been among the quickest globally to enact the new system of laws. Implementing BEPS measures correctly and on time is an imperative for CFOs and tax managers. Companies that have stayed ahead of the curve are pro-tax technology, according to the Thomson Reuters’ 2017 Global BEPS Survey. People, roles, processes and structure are equally important. Compliance involves everyone in an organisation. Boards will benefit from a clear understanding of the risks and BEPS-proofing their tax profiles and reputations. Some steps can be taken immediately:

1. Gap Analysism — Assess current position. Investigate potential areas of exposure and deficiencies in control framework. Know who you’re doing business with; have documentation to support this and to manage from ultimate beneficial owners (UBOs) to customers.
2. Prioritise/build an action plan — Include whole tax framework, people — their roles and responsibilities not just technology, processes and the underlying data. Bring in a consultant if in-house resources insufficient. Look at technological solutions.