BEPS Country-by-Country Reporting: Update and Recommendations for MENA-Based Businesses

REUTERS/Fadi Al-Assaad

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BEPS COUNTRY-BY-COUNTRY REPORTING: UPDATE AND RECOMMENDATIONS FOR MENA-BASED BUSINESSES

International tax legislation has not always kept pace with the globalisation of commerce. Strategic corporate tax planning has enabled many Multinational Enterprises (MNEs) to legally exploit mismatching tax rules or shift their profits to jurisdictions with lower effective tax rates. The amount of tax revenue that governments lose out on is eye-watering; while MNEs are able to augment their profits in ways that firms operating in only one country cannot.

In an effort to address these imbalances and update global tax regulations, the OECD published the Base Erosion and Profit Shifting (BEPS) Action Plan in 2013, with the support of G20 leaders and finance ministers.1 The Plan, which comprises of 15 action points, is arguably the most ambitious effort in history to co-ordinate corporate tax laws across borders.

The overarching goal of the BEPS initiative is to bridge divides in tax rules that allow MNEs to engage in “legal but artificial” profit shifting. Under the new rules, MNEs are required to report profits: – where they are generated and where the economic value is created.

Country-by-Country Reporting In September 2014, the OECD introduced guidelines for a universal approach to transfer pricing documentation, with the aim of enabling tax authorities to better “assess high-level transfer pricing and other BEPS-related risks”.2

The Country-by-Country (CbC) Reporting proposal, which falls under BEPS Action 13, provides a template for businesses that operate cross-border to report annually on their global allocation of income and taxes; and provide specific financial information for each tax jurisdiction in which they do business.

MNEs are required to provide three tiers of documentation: 1. A Master File providing a global overview of business operations and transfer pricing policies, to be shared directly with the relevant local

tax authorities.

2. A Local File containing specific transfer pricing information for each country of operation, identifying relevant related party transactions, the amounts involved in these transactions, and an analysis of how transfer pricing has been determined for each transaction. This must also be submitted directly with the relevant local tax authorities.

3. An annual CbC Report that discloses the number of employees, stated capital, retained earnings and tangible assets in each jurisdiction where business is conducted. It must also identify all entities within the group and the nature of their business activities, on a country-by-country basis. This report is to be filed where the ultimate parent company has its tax residence and shared between jurisdictions via the relevant government-to-government mechanisms in place.3

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BEPS COUNTRY-BY-COUNTRY REPORTING: UPDATE AND RECOMMENDATIONS FOR MENA-BASED BUSINESSES

• Angola• Argentina• Aruba• Australia• Austria• Bangladesh• Belgium • Benin• Brazil• Brunei Darussalam• Bulgaria• Burkina Faso• Cameroon• Canada• Chile• China (People’s Republic of)• Colombia• Congo• Costa Rica• Croatia• Curaçao• Czech Republic

• Denmark• Democratic Republic

of the Congo• Egypt • Eritrea• Estonia• Finland• France• Gabon • Georgia• Germany• Greece• Guernsey• Haiti• Hong Kong (China) • Hungary• Iceland• India• Indonesia• Ireland• Isle of Man• Israel

• Italy• Jamaica• Japan • Jersey• Kenya • Korea• Latvia• Liberia• Liechtenstein• Lithuania• Luxembourg• Malta• Mexico• Monaco • Netherlands• New Zealand• Nigeria• Norway• Pakistan • Papua New Guinea• Paraguay• Poland

• Portugal• Romania• Russia• San Marino• Saudi Arabia• Senegal• Seychelles• Sierra Leone• Singapore• Slovak Republic• Slovenia• South Africa• Spain• Sri Lanka• Sweden• Switzerland• Turkey • United Kingdom • United States • Uruguay

*As at 15 July 20164

COUNTRIES ADOPTING BEPS MEASURES 2016 is the first year of implementation and a number of countries have already adopted legislative changes in line with certain BEPS standards. The inaugural meeting of the OECD BEPS inclusive framework was held in Kyoto from 30 June to 1 July 2016, gathering representatives from over 80 countries.

At the summit, many countries joined the framework and more have signed since, bringing the total number of BEPS Members to 85*. The following jurisdictions have committed to implementing the minimum standards of the BEPS package, including CbC Reporting:

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BEPS COUNTRY-BY-COUNTRY REPORTING: UPDATE AND RECOMMENDATIONS FOR MENA-BASED BUSINESSES

MCAA Signatories as at 30 June 2016:5

• Argentina• Australia• Austria• Belgium • Bermuda • Canada • Chile • Costa Rica• Curaçao• Czech Republic• Denmark

• Estonia• Finland• France• Georgia• Germany• Greece• Iceland• India• Ireland• Israel• Italy

• Japan• Korea• Liechtenstein• Luxembourg• Malaysia• Mexico• Netherlands• New Zealand• Nigeria• Norway • People’s Republic of China

• Poland• Portugal• Senegal• Slovak Republic• Slovenia• South Africa• Spain• Sweden• Switzerland• United Kingdom • Uruguay

In the initial stages, there may be inconsistency in the way different countries conduct their BEPS-related reforms; leading to additional tax uncertainty for the companies involved.6 Constant discourse between governments and business therefore plays a crucial role in this transition.

Furthermore, 44 countries have signed the Multilateral Competent Authority Agreement (MCAA) for the bilateral and automatic exchange of CbC reports.

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BEPS COUNTRY-BY-COUNTRY REPORTING: UPDATE AND RECOMMENDATIONS FOR MENA-BASED BUSINESSES

2016 BEPS Readiness Survey Thomson Reuters conducted the 2016 BEPS Readiness Survey7 in association with Euromoney from March to April 2016. According to the research, multinational companies have amplified their BEPS compliance work by 22% this year. Two-thirds (66%) of corporate tax executives surveyed in 2016 say their companies are proactively preparing for BEPS, compared to 54% in 2015.

Respondents also stated that they were repositioning their business operations accordingly. Over half have updated their transfer pricing policies, and reviewed their value chain and key profit drivers.

While it is encouraging to see that more organizations are preparing for BEPS, many firms still have their work cut out for them.

How BEPS impacts businesses in the MENA region In the Middle East and North Africa (MENA), BEPS will place an increased compliance burden on businesses that have overseas operations as well as MNEs with a footprint in the region.

The CbC initiative will impact regional business with annual consolidated revenue above the threshold of EUR 750 million in the immediately preceding fiscal year. This includes a significant number of firms based in the Middle East.

In a keynote speech on BEPS to the Tax Authorities of Islamic Countries in Doha, International Tax Partner at PwC Sajid Khan noted that most MNEs are likely to be affected in some way.

“Companies will need to review the way their operations and investments are structured and financed. Any misalignment between the operating, management and tax structures is likely to result in adverse tax consequences e.g. denial of access to tax treaties, transfer pricing and tax audits, unintended taxable presence resulting in financial and reputational risk.

“It will not be and cannot be ‘business as usual’,” Mr Khan added.8

If they haven’t done so already, MENA firms are advised to review their tax strategies, risk management frameworks and information technology capabilities to ensure that they are well-equipped to tackle relevant BEPS-related reforms.

Additionally, there is a need for the relevant tax authorities in the region to keep taxpayers sufficiently informed on BEPS interpretations going forward.

The challenges aheadOne major pain point under BEPS compliance is the significantly increased volume of data that organizations are required to disclose.

MNEs in the region that have a history of world-class tax documentation should have few difficulties in disclosing their transfer pricing policies and decisions to the relevant authorities. The next step for these groups is to focus on streamlining their data management and reporting processes.

For other organizations, BEPS provides the framework and impetus to bring their tax strategies, processes and systems in line with global best practice. These firms may need to take a long-term view when addressing information technology gaps in this context.

More than a quick fix is required to guard against the financial and reputational risks associated with BEPS non-compliance. This requires time, planning and resources – as well as a close collaboration between tax departments and the C-Suite.

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BEPS COUNTRY-BY-COUNTRY REPORTING: UPDATE AND RECOMMENDATIONS FOR MENA-BASED BUSINESSES

How technology can help? To handle the complex reporting challenges that BEPS standards demand, it may be necessary for some MNEs to upgrade their tax technologies. Software platforms that are aligned with BEPS and CbC reporting requirements – such as those that integrate with their transfer pricing documentation – can help to ease the transition and minimise their risk of audit.

The OECD released a CbC XML Schema and User Guide in March 2016. This is chiefly intended for the automatic exchange of CbC Reports between countries but may also be used by taxpayers to submit information to domestic authorities, depending on local regulations. The OECD User Guide clarifies the information required for each CbC data element. MNEs are advised to go through this and gauge whether they have the tools available to collect and aggregate the necessary data effectively.

Many corporate tax departments do not have access to all the data they require at the appropriate level of detail in order to implement CbC Reporting. For instance, there may be gaps in the information supplied by local controllers. The solution is a technology platform that can gather information from multiple data sources – pulling GAAP, IFRS, and local statutory information into one system. CbC reports can then easily be populated and circulated for validation and sign-off.

MNEs will need to navigate multiple reporting formats, languages and electronic submission portals. Some technologies alleviate this burden by producing multiple country-compliant CbC reports in the OECD XML Schema. These platforms also make it possible to file CbC reports in multiple jurisdictions electronically.

There are also currently tax technologies available that enable the organization of entities and transaction flows to highlight various supply chains and interparty transactions, as well as to categorize this information by country. This streamlines the process of putting master and local files together – while at the same time ensuring that the data in these files reconciles with the CbC Reports (including related party revenues).

Furthermore, some technology platforms provide regular updates on all bilateral and multilateral agreements worldwide, including tax treaties, EU directives and competent authority agreements.

In closing CbC reporting is no easy task, but technology can significantly ease the additional burden and risk that this reform places on tax departments. The right technology can help to simplify reporting challenges by combining research, data management, entity charting, document storage, reporting and analytics in a single solution.

Without technology, companies that continue to rely upon manual processes may struggle to comply with the new requirements and their risk of reporting the wrong information is thus elevated. MNES and other entities that could feel the impact of BEPS in the near future are advised to carefully evaluate these risks and introduce technology that will keep them one step ahead.

About the author

Pierre Arman is the Market Development Lead for Tax & Accounting at Thomson Reuters, and is responsible for the strategy and product management of all Tax & Accounting and Global Trade Management solutions in the MENA region.

Visit tax.thomsonreuters.com/onesource/beps-action-manager/

Thomson Reuters spans the globe and provides trusted answers as a dedicated partner serving tax and accounting firms, corporations and governments. Blending intelligence, technology and human experience, we craft tax and accounting solutions to catapult you to success in a fast-paced and evolving world.

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1 http://pwc.com/gx/en/services/tax/tax-policy-administration/beps.html 2 http://oecd.org/tax/automatic-exchange/about-automatic-exchange/country-by-country-reporting.html 3 https://tax.thomsonreuters.com/media-resources/news-media-resources/checkpoint-news/daily-newsstand/31-countries-sign-international-agreement-on-country-by-country-

reporting-but-not-u-s/4 http://oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf 5 http://ey.com/GL/en/Services/Tax/International-Tax/Alert--BEPS-associates-increased-to-82-countries 6 http://pwc.com/gx/en/tax/pdf/pwc-10minutes-oecd-beps-global-tax-reform.pdf 7 https://tax.thomsonreuters.com/BEPS/survey-report-2016/ 8 http://pwc.com/m1/en/media-centre/2015/OECD-publishes-Base-Erosion-Profit-Shifting-recommendations.html