The Organisation for Economic Co-operation and Development (“OECD”) issued its final base erosion and profit shifting (“BEPS”) measures for all 15 Action Plan items on October 5, 2015. The 2015 final reports detail the proposed solutions developed over the last two years by the OECD and G20 countries. The solutions intend to counter tax avoidance and better align taxation with businesses’ economic activities.
The final BEPS report includes various recommendations which, according to the OECD’s Secretary-General Angel Gurría, “represent the most fundamental changes to international tax rules in almost a century.”1 Among many others, the proposed measures include the following:
Introduction of new minimum standards
Improvement of international standards
- Country-by-country reporting;
- Treaty shopping;
- Curbing harmful tax practices; and
- Effective mutual agreement procedures.
- OECD Transfer Pricing Guidelines for Multinational Enterprises (the “OECD Guidelines”), primarily regarding intangibles; and
- OECD Model Tax Convention, including proposed definition of permanent establishments.
Recommendations for domestic tax law enhancements
- Hybrid mismatch arrangements;
- Controlled foreign company rules;
- Interest deductions and financial payments; and
- Mandatory disclosure rules.
OECD and G20 member countries, as well as the developing countries that have participated in the BEPS project, are now expected to start implementing the recommended changes into their own domestic legislation and tax treaties.
What to watch out for
Canadian businesses operating internationally should be prepared for the introduction of new measures and reporting requirements by tax administrations as these may affect their current and future business operations and tax arrangements.
In particular, the transfer pricing documentation recommendations which require a two-tier approach to documentation, including a master file and local file, as well as country-by-country reporting, may require action. Typically, Canada follows the OECD Guidelines. Therefore, even though the Canadian government has not yet made any official statements, it is likely only a matter of time before these recommendations are adopted in some manner. Other countries, such as the U.K., Australia and the Netherlands have already indicated they will adopt the OECD proposals for transfer pricing documentation for the years ending after January 1, 2016.
Help your business by taking these steps:
- Become familiar with the new reporting requirements, and information required for compliance.
- Ensure information technology and related reporting systems are capable of producing the necessary information in an appropriate form for the country-by-country reporting.
- Analyze whether current transfer pricing documentation meets the demands of the new two-tier structure.
- Evaluate whether or not current transfer pricing policies are relevant and reflect the operational and economic realities of your business today – given that the enhanced transfer pricing reporting requirements associated with the OECD’s proposals will likely give individual tax administrations more information about a company’s international structure and profit allocation.
As different countries decide not only which proposals to implement, but also how to tailor them to their individual needs and objectives, uncertainty will increase. To add further complexity, it is unclear how the U.S., Canada’s biggest trading partner, and a country that has expressed less than optimistic feelings about the BEPS project and its proposals, will react to the recommendations. Furthermore, it is unclear what impact this will have on the coherence and consistency of the international tax landscape.
Small and medium enterprises with international operations, specifically, must be aware of the effects that the inevitable changes and related uncertainty the OECD BEPS recommendations will have on their current operations, and above all, ensure they are informed appropriately of on-going up-dates.
How we can help
Richter can assist by:
- Assessing your business’ current compliance with international tax standards and with identifying gaps between current practices and new requirements;
- Analyzing possible opportunities for tax and operational efficiencies related to the MNE’s global corporate organizational structure and operations;
- Preparing required documentation and advising on international tax matters that may arise as a result of the new changes.
1- OECD Press Release: OECD presents outputs of OECD/G20 BEPS Project for discussion at G20 Finance Ministers meeting. October 5, 2015.