Global tax concerns – not just for the big end of town

The Organisation for Economic Co-operation and Development (OECD) is leading the charge for a multilateral approach to BEPS, but numerous countries, including Australia, have already moved to establish their own response.

While much of the public scrutiny has focused on major technology companies like Apple and Facebook operating in Australia, the changes will affect many different enterprises. While smaller multinationals will not have the disclosure requirements, they will still have to deal with the same issues and international tax changes as larger multinationals. The proposed country by country reporting – transparency law – has been set to cover groups with global turnover of A$1 billion. At the time of writing, this converts to approximately €690 million (which is lower than the OECD recommended threshold of €750 million) so there is already ‘bracket creep’ due to the weakening Australian dollar.

Importantly, these rules can apply even where the local Australian subsidiaries are relatively insignificant, as the test is global turnover and not merely local turnover.

The ATO initially may focus on larger multinationals, but it is reviewing companies of all sizes. We are already seeing the ATO take a BEPS-focused approach to audits regardless of the size of the company.

While smaller and medium sized groups will not have a formal requirement to comply with the new BEPS documentation requirements, the ATO is likely to raise similar detailed questions relating to profit shifting in the event of a risk review or audit. If small and medium businesses ignore the impact of BEPS on their transfer pricing structures, particularly with regard to evidencing substance, it could mean they face the risk of an audit adjustment including interest and penalties extending for many prior years.

The current challenge for multinationals operating in Australia is to consider what steps they can take now to consider the impact of the key changes and the potential impact this could have on their global effective tax rate and audit risk both in Australia and overseas. The introduction of a formal requirement to account for tax uncertainties, and how such a requirement applies to transfer pricing positions, will also need to be considered.

As a first step, we recommend assessing what systems and resources a multinational has in place to prepare for country-by-country reporting. Consider undertaking a dry run of the country-by-country reporting, whether it be for a full year or part of a year. The purpose of this exercise is to look at the structure from a tax authority perspective in all jurisdictions and to identify possible mismatches between economic substance and the profit outcomes of an entity.

Consider engaging an independent team to conduct the review rather than the team that was originally responsible for implementation. Review what was intended and what may have deviated over time – businesses change continuously. The findings of this review should be elevated to board level and appropriate action taken.

Undertaking this exercise now enables multinationals to get their house in order in advance of full transparency – effectively 31 December 2017 when country-by-country reports for FY16 must be filed with relevant tax authorities including the ATO. For many, such an exercise may extend to a review of current supply chains, transfer pricing policies and the safeguards which may need to be built in to ‘BEPS proof’ the group going forward.

Brass plate companies, fly-in fly-out arrangements, dual roles and the use of hired company directors from company secretarial firms are all likely to be challenged in the new world.

Careful consideration needs to be given in each country in which the group operates as to precisely which BEPS actions are likely to be implemented. This could impact disclosure requirements from a transfer pricing perspective. For example, it could fundamentally impact deductibility of interest on intercompany loans that could still be taxable in the source country. A plan of action needs to be developed for local country rules with appropriate responses for each location, both short term and longer term.

Most importantly, if the impact of BEPS is not carefully considered and managed, groups risk reputational damage. Reputational risk and tax adjustments by tax authorities can impact future earnings.

Boards need to understand the implications of BEPS in terms of potential risk, reputation and reporting obligations. Tax risk should be high on the board's agenda and there should be active involvement/oversight by the board in gaining comfort that management are reviewing risks and appropriate action plans have been developed to respond in our new BEPS world.

Companies that assume that BEPS is an issue that only the ‘big end of town’ needs to worry about may end up with a nasty surprise.

Zara Ritchie, global and national leader – transfer pricing, BDO