The news headlines that many multinational companies (MNCs) have been reducing their income tax burden through shifting of income to no- or low-tax countries have resulted in the OEC’s Action Plan on addressing Base Erosion and Profit Shifting (BEPS). The BEPS action plan is very aggressive and comprehensive.

Major countries including China, India and the US are actively involved in the BEPS project.

MNCs are challenged with getting ready for potential regulatory changes that may happen soon to impact their existing tax planning structures that they put in place a few years ago.

Major Goals of BEPS

Major goals that the BEPS project aims to achieve are as follows:

• Address the tax challenges of the digital economy.
• Neutralize effects of hybrid entities (which are treated as corporations in one jurisdiction and flow-through entities in another jurisdiction) which have been used to achieve double-dip tax deductions or no-tax income.
• Strengthen controlled foreign company rules.
• Limit tax base erosion via interest deductions or other financial payments.
• Increase transparency and substance of business practices through stricter transfer pricing document requirements.
• Prevent tax treaty abuse.
• Prevent avoidance of PE status.
• Enhance transfer pricing valuation of intangibles
• Increase transparency of taxpayer’ tax planning arrangements.
• Make dispute resolution mechanisms more effective

Country by Country Transfer Pricing Documentation

The latest BEPS discussion covers Country by Country (“CbC”) transfer pricing documentation.

The OECD discussion draft requires reporting for each entity in MNC group arranged by country of organization, with branches treated as entities for this purpose. The required transfer pricing documentation includes a master file and local files for an MNC.

The master file would cover the following:

• Organizational structure
• Description of each major business line
• A list and description of intangible property used in the business
• Intercompany financial activities
• Financial and tax positions.

The local file would cover the following:

• Local organization chart and description of management structure, location of individuals to whom local management reports.
• Indication whether the local entity has been involved or affected by business restructurings or IP transfers in the current or past year.
• Description of controlled transactions including intercompany charges, identification of related parties, functional analyses of controlled transactions, selection of appropriate TP method.
• Annual local entity financial information and how such information relates to the transfer pricing analysis.

Focus on Intangibles

The BEPS effort has focused on issues relating to transfer pricing for intangibles such as definition of IP, treatment of location savings, group synergies, marketing intangibles, value creation and functional substance.

Global Tax Trend

The issues covered by the BEPS initiative have challenged tax authorities in many countries for a number of years and therefore these issues are not unfamiliar to MNC’s tax advisors.

Due to the economic downturn or slow growth of the world economies many countries are trying to increase tax revenues through proactive coordinated measures in the BEPS initiative.

Many countries such as China, Australia, the US, and countries in the EU, already have regulations in their tax codes to address these issues.

The BEPS project is culmination of a worldwide trend of increased cross-border scrutiny of tax planning structures and practices employed by MNCs.

In accordance with Circular 230 Disclosure