How BEPS Action Plans are changing transfer pricing

SUITS THE C-SUITE By Deonah Marco-Go

Business World (04/03/2017 – p.S1/4)

Ernst & Young (EY) recently conducted a Transfer Pricing Survey to determine how companies are addressing the Action Plans issued by the Organisation for Economic Co-operation and Development (OECD) under the Base Erosion and Profit Shifting (BEPS) project. The survey involved respondents in 36 jurisdictions and across 17 industries.

As a background, the BEPS project was initiated at the request of G20 countries to address issues arising from the use of old tax frameworks that do not match current practice of doing business across borders.

As a result, the OECD issued 15 Action Plans, which are distinct but complementary actions that are focused on the following key areas: coherence, substance, transparency, the digital economy and multilateral treaties. With respect to transparency, additional information is now required to be submitted to tax authorities for purposes of conducting better audits, with the end goal of determining whether a “fair share” of global revenue is being reported in the appropriate tax jurisdictions.

Anxiety was the initial reaction of companies on the BEPS project. In today’s challenging business environment, many companies are plagued with uncertainty, primarily due to the different approaches taken by the governments in relation to the Action Plans. Governments are moving at different speeds and are applying different interpretations and enforcements.

This particular survey was focused on transfer pricing. The results of the survey show the uncertainty and sluggish approach among transfer pricing professionals in terms of complying with the new requirements brought about by the BEPS project.

ACTION: COMPANIES MUST CATCH UP IN CREATING BEPS-MANDATED DOCUMENTATION

BEPS Action 13 [Transfer Pricing Documentation and Country-by-Country Reporting (CbCR)] introduced a new approach to complying with the Transfer Pricing Documentation requirements. Multinational enterprises are required to use a three-tier framework (CbCR, Master File and Local File) for providing information on their global operations. The format is quite different and requires greater depth in certain areas compared to the previous OECD requirements.

The survey shows that only one in five companies or 21% is fully compliant in all jurisdictions in terms of the BEPS-mandated documentation, 44% say that they are fully compliant only in situations where transfer pricing is viewed as high-risk.

Another 22% say their approach is to adapt their existing master file or local reports as necessary or on demand. One out of 10 companies say they create documentation only in response to a specific audit (with 2% citing “other” but still non-compliant practices). In sum, the survey shows that 79% of respondents are non-compliant.

Such approaches may be hazardous in a post-BEPS world. Tax authorities will now be focused on the quality of the data submitted to them, given that one of the main purposes of the BEPS Action Plans is to promote transparency. When transactions are not well documented, there is a greater risk that these transactions will be audited by the tax authorities, which may result in material adjustments.

ACTION: DO MORE TO EMBRACE BEPS PRINCIPLES

According to the survey, 17% of executives claim that their documentation is BEPS-aligned. The remaining 83% say their record-keeping is either not at all BEPS-aligned (16%) or is BEPS-aligned only in the case of key transactions or key territories (67%).

The survey also shows that, in terms of industry variance, financial services currently lead the way in terms of documentation readiness. Nonetheless, this industry still has a long way to go since only 29% are reporting full alignment. Other industries such as life sciences and insurance are even further behind, with a result of only 14% and 11%, respectively, declaring that their documentation is BEPS-aligned.

As to the extent that the companies are planning to implement a global documentation process aligned with the BEPS master file format, 49% say that they have already implemented or are in the process of implementing such processes. Of the other respondents, 35% say that they will work on it in 2017, while 16% say that they are not taking any steps at all.

While it is promising that many companies are already taking steps to ensure compliance, the survey clearly shows that companies still have a great deal of work to do. This is despite the fact that various 2017 deadlines in different jurisdictions are fast approaching.

ACTION: BE PREPARED FOR FULL IMPLEMENTATION OF COUNTRY-BY-COUNTRY REPORTING

In terms of complying with the CbCR requirement, two-thirds or 45% are still in the initial modeling phase while 22% have made no progress at all. Only one-third of companies say they are performing key transition actions. This is an alarming number considering that the data required by the CbCR requirements are different from the data needed in the pre-BEPS documentation requirements. Companies need sufficient time to prepare these data in order to identify possible weakness in their current structure.

THE PHILIPPINE LANDSCAPE

In the Philippines, the government has not yet adopted the BEPS Action Plans. However, this does not mean that Filipino companies are automatically shielded from the changes brought about by the BEPS project, especially with respect to BEPS Action 13. This may have potential effects on Filipino companies that do business and invest or have outbound transactions in countries which have already adopted the Action Plan. Filipino companies with outbound transactions may be required to comply with the new Transfer Pricing Documentation and CbCR requirements in countries where they are doing business, and failure to comply may result in significant penalties. In such critical matters involving taxation and regulatory compliance, it may be advisable for Filipino companies to err on the side of caution.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Deonah L. Marco-Go is a Tax Partner of SGV & Co.

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