OECD BEPS guidance, outlining new standards for tax transparency and transfer pricing documentation, and the new union customs code, containing important changes to customs valuations, call for immediate action.
At the doorstep of a new era of tax transparency driven by the OECD BEPS project, the new Union Customs Code ("UCC") will enter into force on May 1, 2016, calling for immediate action. Companies will need to evaluate the impact of important changes to customs valuations, tax reporting and transfer pricing documentation standards on their operating model structures.
Impact of new BEPS guidance on operating model structures
On October 5, 2015, the OECD published its final reports on Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation and Action 13: Transfer Pricing Documentation and Country-by-Country Reporting. The key elements of the new guidance in Actions 8-10 include:
- the reinforcement of accurately delineating the actual transaction;
- the role of contractual arrangements;
- the analysis and allocation of risk between members of multinational groups;
- the identification of intangibles, important functions, legal ownership and unanticipated returns; and
- guidance on hard-to-value intangibles and cost contribution arrangements.
Action 13 introduces a new three-tiered approach to transfer pricing documentation standards and country-by-country reporting ("CbCR") for qualifying multinational groups, which includes the preparation of (i) a master file, (ii) a local file and (iii) CbCR.
The new BEPS guidance will have a significant impact on operating model structures of multinational companies. Companies should assess whether their existing supply chains and IP ownership models are compliant with the new BEPS guidance on tax transparency and substance. The BEPS impact reassessment may also influence the identification of "last sale" transactions and customs valuation, following the new UCC regulations. Further, companies may want to consider reassessing the transfer pricing method selection and the permanent establishment exposure for sales organizations, in light of the new guidance in Action 7: Preventing the artificial avoidance of PE status. Aligning the contractual arrangements with the actual functional and risk profile of the group entities involved will become a more important part of transfer pricing analyses. In addition, more extensive transfer pricing documentation will need to be prepared, including a more detailed functional and risk analysis of the value chain. Lastly, new documentation and CbCR standards will require qualifying companies to disclose additional information on their global supply chains, increasing tax transparency between companies and tax authorities.
What changes will the UCC bring?
The European Parliament and European Council jointly adopted the UCC in October 2013. The final versions of the Delegated and Implementing Acts relating to the UCC were published on December 29, 2015. Most of the provisions of the UCC will enter into force on May 1, 2016. The following important changes introduced by this legislation will impact multinational groups of companies importing goods into the European Union:
- a new definition of transaction value;
- removal of the earlier sale concept; and
- changes to the rules on dutiability of royalties and license fees.
The UCC contains a new definition of transaction value, as follows:
"The transaction value of the goods sold for export to the customs territory of the Union shall be determined at the time of acceptance of the customs declaration on the basis of the sale occurring immediately before the goods were brought into that customs territory."
The new definition of transaction value will result in the elimination of the use of the earlier sale concept. The earlier sale concept allowed importers that meet certain criteria to use the price of an earlier sale in a chain of transactions as the import value into the EU. The new UCC definition of transaction value will result in a higher customs value for the EU importer currently applying the earlier sale concept, thus resulting in a higher customs duty to be paid by the EU importer.
The UCC contains a new and broader definition of the condition of sale requirement, under which royalties and license fees are considered to be dutiable. Under the UCC, the condition of sale is met if goods cannot be sold to, or purchased by, the buyer without payment of the royalties or license fees to the licensor. The broader definition of condition of sale will bring more license agreements into the duty calculations, particulary in situations where the royalty and/or license fee payment is made to a third party licensor.
Actions to consider
Companies should assess the impact of the new OECD BEPS guidance and the UCC on their operating models. The following is a list of recommended actions that can be used as guidance for this assessment:
- Supply chains and IP ownership model: Assess whether the existing supply chain structure and IP ownership model is compliant with the new BEPS guidance on tax transparency and substance. To the extent necessary, consider implementing changes to the operating model, organizational structure or allocation of roles/responsibilities within the group.
- TP method selection and PE exposure: Reassess the transfer pricing method selection and the permanent establishment exposure for sales organizations, in light of the new guidance issued in Action 7.
- Review contractual arrangements: We want to emphasize the importance of legal documentation as a critical starting point for risk attribution in the value chain and as a first defense opportunity in case of tax audits. BEPS is a warning to get your facts straight.
- Transfer pricing documentation: Assess the new requirements for transfer pricing documentation outlined in Action 13. Consider local country-specific requirements based on local legislation.
- Customs valuations:
- Consider whether the BEPS impact reassessment also influences the identification of "last sale" transactions and customs valuation, following the new UCC regulations.
- Estimate the economic impact on customs duties payable within the group as a result of the UCC changes to be implemented as of May 1, 2016.
- Consider alternatives to the current operating model for importing goods into the EU to mitigate the potential financial impact of the new UCC regulations.
- VAT impact:
Changes in supply chains and customs set-ups have an impact on the VAT set-up of your company. It is important to ensure that the VAT impact is taken into consideration.