As the Base Erosion and Profit Shifting project comes into effect over the next few years, we examine how its transfer pricing rules will affect treasurers.
The OECD’s Base Erosion and Profit Shifting (BEPS) project will not only have a significant impact on the tax departments of multinational companies, it will also affect treasurers, who will be required to review current processes and create an action plan to tackle any changes.
BEPS aims to address cases of base erosion and profit shifting, where the business activity of multinationals is undertaken in one country but the profits are allocated to a country with a lower tax rate. The project incorporates 15 Action points which were finalised in October 2015.
“The actions are however guidance only and we are currently waiting to see how they are implemented by each country, with some countries taking a more proactive and aggressive approach than others,” says Thembani Mtetwa, tax and accounting solutions consultant at Thomson Reuters. “This also means we are likely to see significant variation in interpretations and implementations globally, adding additional complexity to an already complex environment.”
Why it matters for treasury
The BEPS regulations were designed to reduce the potential negative tax practices of companies by increasing the exchange of information between multinationals and tax authorities, which is covered in more detail under Action 13 of the BEPS regulations. “This requirement for more information has led the compliance and reporting burden to be spread from the tax team to the entire organisation, including corporate treasurers,” said Mtetwa.
Of the 15 Action points there a number that will specifically impact corporate treasurers. “For treasurers, BEPS essentially boils down to Action numbers 4, 8, 10 and 13,” says François Masquelier, head of corporate finance and treasury at RTL Group, vice-chairman of the European Association of Corporate Treasurers and Chairman of Association of Corporate Treasurers of Luxembourg. “It imposes a sort of tax health check, which is always salutary, even in the treasury function.”
However, despite the impact that the BEPS project is expected to have on the day-to-day work of corporate treasurers, many still do not understand what they will have to do with BEPS regulation and in particular the requirement for businesses, under Action 13, to review their transfer pricing (TP) documentation.
“Unfortunately, in my opinion, corporate treasurers aren’t really aware of the TP issue. A lot of our members in Europe aren’t yet prepared. They have heard of BEPS without having started to implement measures or to review current processes,” says Masquelier.
TP is used by related companies to determine the amounts by which intercompany transactions are recognised for accounting and tax purposes. BEPS and TP will involve much more documentation and a review of prices charged between subsidiaries. Under BEPS, TP must be “fair” and each transaction with affiliates must be justified.
“Treasurers must analyse and asses the credit risk of each subsidiary in order to define what spread/margin should be applied specifically for funding, including the risk on the subsidiary, its specific sector and the country risk,” says Masquelier. “There aren’t any more free lunches under BEPS TP rules.”
One of the biggest concerns for treasurers is whether the structures that they set in place in the past are still fit for purpose in the new post-BEPS environment. “Structures commonly constructed by treasury departments including intercompany loans and in-house banking facilities have to be reviewed in lieu of the new requirements, and where they are not fit for purpose they would have to be reorganised to adhere to the new rules,” says Mtetwa. “And this potential reorganisation of resources and policies can be a great administrative burden for treasurers. If not completed in a proper manner, policy changes could leave the entire organisation at risk not only from a tax perspective but also from a public relations perspective.”
According to Masquelier, treasurers need to make sure they have systems in place to assess the credit risk of each affiliate case by case, on a yearly basis, to determine the type of margin to be applied to the intercompany loan. “Because banks will not offer this type of services for free (or even paid), treasurers will need to get support from a third party supplier...in order to assess the credit risk and the margin range for the risk based on the tenor of the loan.”
In addition, organisations may find it difficult to go through the reporting process repeatedly without errors and audit each step taken. “Technology which automates some of the necessary steps which would need to be taken can also help with such challenges,” adds Mtetwa.
Corporate treasurers that are not aware of the transfer pricing issues under BEPS, should start reviewing current processes.
“In order to be prepared, corporates need to first review current processes and try to make a gap analysis. If documentation is in place and effective, it is a good start. The credit risk assessment tool will be then the second step. The recording of evidences will be the final one,” says Masquelier. “In some cases it can be a huge project. However, it is key, given size of amounts involved and potential impact(s) on the bottom line,” he adds.
Treasurers that have already started responding to the BEPS regulations have been working more closely with their tax, finance and boardroom executive colleagues to ensure that the processes that they put in place are coherent with the strategic goals of the company and more importantly that they are compliant from a tax reporting perspective, says Mtetwa.
In addition to TP rules, treasurers should also be aware of Action point 4 and 6 of BEPS, which are expected to be implemented in the UK in 2017. Action point 4 outlines a best practice approach for multinationals to avoid base erosion through the use of interest expenses and other financial payments, whilst Action point 6 provides recommendations regarding the design of local rules to prevent treaty abuse. “Placing certain intra group finance structures in certain jurisdictions could be perceived as an abuse of treaty rules,” says Mtetwa.
In order to be ready for BEPS treasurers should firstly thoroughly review all existing structures; secondly, they should strive to work as closely as possible with all potential stakeholders within their organisation to ensure that the policies which will be put in place will follow the new BEPS regulations; and thirdly treasurers should maintain that that all the processes that are put in place are supported by robust TP documentation and that the outcome of this documentation process will closely align with their financial policies, he adds.
TP will impose a huge amount of work on every treasurer in terms of documentation and recurring, evaluation, resulting in additional costs and requiring additional resources, says Masquelier. However, despite the burdens and complexities of BEPS, the rules could be seen as an opportunity to revise the transfer pricing strategy from top to bottom, he adds. “It may be the spur to improving consistency of approach, to being closer to substance in some cases, and undoubtedly to improving transparency.”
While the thought of improving transparency might not be enough to make treasurers sleep any easier, there is no doubt that the BEPS transfer pricing rules will be a huge challenge for treasurers and is why those that have not started preparing for the new rules should start now.
By Nicole Miskelly