BEPS, country-by-country reporting requirements, and EU and domestic tax transparency measures all mean greater global scrutiny of business information. Providing a clear explanation of genuine commercial objectives, as well as the operational purposes of transactions, is now more important than ever in light of the exchanges of information and rulings between taxing authorities.
Implications for businesses operating globally
Businesses increasingly operate globally. The connected world has altered business models and value chains. The application of antiquated tax rules becomes particularly complicated when applied to numerous and complex cross-border transactions. International discussions on the gaps in tax rules that allow multinational entities to engage in tax planning have led to multinational corporations being singled out for intense scrutiny, not just by taxing authorities but also by politicians and the media. The OECD and EC have recommended minimum standards to address base erosion and profit shifting. Many countries have, in this respect, already implemented their own measures as they deem appropriate. If there is no consensus on the implementation of the recommended minimum standards, more disputes with taxing authorities are to be expected as businesses seek to explain their business and commercial rationale to justify transactions and structures that they have adopted.
What the rules say
Transparency! The OECD has recommended expanded reporting obligations for multinationals to enhance transparency for tax administrations by providing them with adequate information in relation to businesses' global operations. This will allow taxing authorities to compare the approach that businesses take in multiple jurisdictions, e.g., by carefully analyzing transfer pricing documentation. In addition, the EU has implemented the automatic exchange of tax rulings – including advance pricing agreements provided by EU Member States to companies. This means that jurisdictions will be able to see how certain specific taxation issues are being addressed in a particular jurisdiction, rather than taking it for granted that the headline rate of tax applies.
Actions to consider
Companies need to develop sound policies and processes that can help to safeguard their organisation against audits and disputes, including:
- developing global tax dispute resolution strategies;
- developing policies for establishing consistent tax positions and methods worldwide, and across a variety of tax areas;
- analyzing tax positions that may require financial statement disclosures and developing practices – including appropriate documentation and disclosure approaches – which provide a defensible approach and rationale; and
- developing policies and practices for documentation to support commercial objectives and operational purposes of business arrangements, and the pricing of intra-group or related party transactions.
It is now more important than ever to develop and/or improve strategies and policies and to ensure that proper documentation is in place in order to build up a solid defense against the ongoing turmoil in the global tax environment.