Treasury Today Country Profiles in association with Citi

BEPS: driving treasury and tax collaboration

Planning notepad with coffee and muffin

The Base Erosion and Profit Shifting initiative requires treasuries to work much more closely with the tax department, and with a number of action points being implemented later this year, there is no time for corporates to lose in making sure they are prepared.

As we saw in July, a harmonious working relationship between a business’s tax and treasury departments can be crucial to the overall effectiveness of the finance function. And one area where this is especially true is with the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.

BEPS was adopted by the OECD in May 2013, driven partly by the claim by some NGOs that many large corporates were not paying their fair share of tax. One of the key objectives of the scheme is the development of rules on the tax treatment of intra-group financial transactions.

“This presents tax authorities with more tools to examine an area over which many of them have been suspicious for some time – corporate treasuries,” said Leon Cane, Director – Corporate Tax at Deloitte, speaking at a seminar at the EuroFinance Cash and Treasury Management conference in Budapest earlier this month. “It also highlights the growing need for close treasury and tax collaboration, which in certain markets has been the case for some time. What is for sure is that BEPS is going to require that collaboration to get closer.”

He added that the tendency of many Fortune 50 companies to have a Head of Treasury that also heads up tax is increasingly being adopted in Europe, and this can help in dealing with BEPS.

OECD’s BEPS Action Plan sets out 15 specific actions that governments are required to address. The timeline for implementing these actions is broken down into phases, with the first outputs in September 2014 and the completion of the project set for the end of 2015.

BEPS Action Plan

  1. Address the tax challenges of the digital economy.

  2. Neutralise the effects of hybrid mismatch arrangements.

  3. Strengthen controlled foreign company (CFC) rules.

  4. Limit base erosive via interest deductions and other financial payments.

  5. Counter harmful tax practices more effectively taking into account transparency and substance.

  6. Prevent treaty abuse.

  7. Prevent the artificial avoidance of PE status.

  8. Transfer pricing: intangibles.

  9. Transfer pricing: risk and capital.

  10. Transfer pricing: other high-risk transactions.

  11. Establish methodologies to collect and analyse data on BEPS and the actions to address it.

  12. Require taxpayers to disclose their aggressive tax planning arrangements.

  13. Re-examine transfer pricing documentation.

  14. Make dispute resolution mechanisms more effective.

  15. Develop a multilateral instrument.

Source: Deloitte

Cane highlighted Actions 2, 4, 9, 10, and 13 as those with obvious relevance to treasurers, and of those Actions 2 (Neutralising the effects of hybrid mismatch arrangements; hybrids are entities that are taxed in different ways depending on the jurisdiction) and 13 (on transfer pricing documentation) are of the most immediate concern, in that they are due for implementation later in 2014. “Action 13 significantly expands the depth and the scope of the information that needs to be provided to tax authorities, and this is subtlety going to influence to a large extent the interaction and the operation of tax and treasury within multinational organisations,” he explained.

The UK has already formally committed to implementing some of these measures, and according to Cane the main tax authorities impacted have either expressed a desire to do the same as the UK and implement some of these BEPS proposals into their domestic legislation, or they have commented on why their tax systems currently accommodate the BEPS initiative.

The OECD proposals are significant for treasurers as the treasury function is likely to come under increased scrutiny as a result. “There’s going to be an expectation of thorough documentation which details assumptions of risk, reward and the responsibility of individuals within the treasury function,” commented Cane, who added that there will effectively be an ‘open door’ for a review of treasury practice which follows the procedure outlined in the OECD documentation. “There is also going to be an analysis of how activities are rewarded – an analytical review – looking at who is actually generating the profit from a particular transaction.”

Knowing where value is created

The initiative has caused some controversy. “A more worrying feature of this is that many tax authorities have indicated how they believe their current legislation already complies with the BEPS requirements, and we are seeing in a number of tax cases coming through the courts in different jurisdictions, reference to OECD principles where the judges have made their minds up as to how something should be taxed or not taxed,” said Cane. “The whole OECD model treaty is very much upon us and shaping the way both governments and tax authorities think, and this is inevitably going to filter down into the way that treasury-based transactions are viewed.”

The implementation of the 15 action points is leading to what Cane calls a ‘BEPSification’ within local tax authorities, which will in turn impact treasurers. “Tax authorities are getting much more diligent in the examination of treasury-type functions. It is necessary for tax and treasuries to have a dialogue. Treasurers know where the value is created – the tax people generally won’t have nearly as good an understanding of where the risk is and who really creates the value.”

BEPS looks set to have a considerable impact on corporates. A Deloitte survey published in September found that almost 90% of respondents were anticipating that their income tax compliance burden would substantially increase as a result of the additional reporting from the BEPS recommendations.

Cane suggests that corporates address the BEPS issue as soon as possible, arranging joint treasury and tax meetings to determine between themselves how documentation needs to be structured, as well as discussing the allocation of risk and reward. Then a function analysis as to where the value is created by the treasury can be carried out.