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BEPS project rewrites the book on transfer pricing

Companies must develop globally consistent tax strategies that can endure unprecedented scrutiny by authorities in almost every country.

The second report in our 2016 Transfer Pricing Series makes clear that companies must be certain their tax strategies and transfer pricing policies are well-documented, globally consistent and ready for unprecedented scrutiny by tax authorities in almost every country of both significant and insignificant operation.

“For global businesses, the time to respond to BEPS — to evaluate, address, align and adjust — is now.“

Peter Griffin, EY Global Transfer Pricing Leader

Navigating a riskier environment

The Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Co-operation and Development (OECD) is a transformational wave that is only now breaking across the community of global corporate taxpayers.

The 2016 survey offers an early glimpse into the reactions and relative preparedness of the global taxpaying community.

Governments worldwide are moving at different speeds to implement the recommendations, often with different legislative interpretations.

They are also striking different enforcement postures, contributing to a riskier environment for tax in general and for transfer pricing in particular.

“There was a lot of anxiety about what a post-BEPS world would look like a couple of years ago,” says Peter Griffin, EY Global Transfer Pricing Leader.

“Now that anxiety has been replaced by uncertainty about what to do next. The survey shows that transfer pricing professionals are scrambling to meet new standards and bracing for more conflict, particularly in areas like permanent establishments and the transfer pricing around intangibles.”

Meeting transparency demands

BEPS Action 13 requires that companies stand ready to provide host governments with contemporaneous documentation of their transfer pricing policies in a different format and with greater depth in certain areas compared with prior OECD and local country guidance.

This includes details of their global operations and taxation.

A substantial majority of companies not only fail to maintain contemporaneous documentation for all transactions but also have yet to align most documentation with BEPS principles.

Specifically, only 17% of executives say their documentation is BEPS-aligned.

The rest (83%) say such record-keeping is either not at all BEPS-aligned (16%) or is BEPS-aligned only in the case of key transactions or key territories (67%).

As for Action 13’s mandated country-by-country reporting (CbCR), again, most companies appear to have made far less progress than might be prudent.

Two-thirds either are still in the initial modeling phase or, worse, have taken no steps at all.

Only one-third of companies say they have key transition actions underway.

This could have negative consequences.

Dealing with new stressors

BEPS-driven consequences and pressures are also winding their way through the tax controversy landscape.

Indeed, amid so much change and with so much more information in the hands of tax authorities, survey respondents are poised for an era of heightened controversy across multiple defined areas, especially in emerging markets where they haven’t encountered it previously.

The largest increase in transfer pricing controversy is expected to center on issues of permanent establishment (PE), the key focus of BEPS Action 7.

Essentially, Action 7 substantially lowers the threshold under which a host nation can declare a corporate presence a PE that’s subject to income tax.

Three years prior, only 27% cited PE as a significant driver of controversy.

But going forward over the next two years, the figure climbs to 44%.

A key focus of BEPS Action 8 is to require greater substance behind the cross-border charges of royalties and for other intangibles.

In this area, while 32% of executives said that transfer pricing of intangible property had been a source of significant concern over the past three years, the percentage surges to 49% going forward.

Feeling the urgency to act

Under BEPS, transfer pricing professionals are already facing:

  • Heightened transparency
  • Updated or altered definitions and characterizations
  • Imminent mandates and deadlines

Companies must take action to shore up their designs.

“It may take several years or more before the full impact of BEPS becomes clear,” Griffin says. “This will no doubt drive profound change in practices amid not only the G20 but also developing market tax authorities — and in fact already is.”

Nonetheless, he says, companies cannot afford to wait much longer.

“For global businesses, the time to respond to BEPS — to evaluate, address, align and adjust — is now,” Griffin says.

How to respond: key action items for companies

  • Catch up on creating BEPS-mandated documentation
  • Do more to embrace BEPS principles
  • Brace for full implementation of country-by-country reporting
  • Increase awareness of PE-related impacts
  • Prepare for more BEPS-related controversy, particularly with PEs and intangibles
  • Focus more intently on intangibles

Read more: How anti-BEPS policies are changing Transfer Pricing

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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