OECD publishes ‘Base Erosion Profit Shifting’ (BEPS) recommendations BEPS will have a broad impact on the region’s businesses, says PwC
PwC welcomes this effort to update international tax system and boost transparency. The tax landscape has been transformed by the globalisation of business and the advent of the digital age. We believe the existing international tax rules need to be modernised to reflect how business is done today, and it is right that the OECD is leading this work; change needs to happen on an international basis.
The BEPS project is an important step in the need to restore confidence in the international tax system. The OECD has been looking at every aspect of the international rules to see if they are appropriate for today’s business world both in developed and developing countries.
The proposed BEPS package announced today reflects more consensus and progress on the issues than many expected. The multilateral instrument means there is the prospect of a rapid update of many double tax treaties to start the process of implementing some of the recommendations outlined in the BEPS package sooner rather than later.
But, there is still much left to be done, for example, delivering improvements in dispute resolution in practice and ensuring consistent and balanced application of the new standards.
“The OECD’s achievement should not be underestimated,” said Dean Kern, Tax and Legal Services Leader. “Today marks a milestone in what remains a long and challenging journey. Change will not happen overnight; success will depend on continued efforts and commitment by Governments and businesses.”
There are concerns that some parts of the reform package will work better than others. Much hinges on whether, and how, governments worldwide decide to implement the recommendations. There’s likely to be a period of uncertainty with mismatches in timing and approach. For areas where the OECD has found it harder to reach consensus there is the risk that countries introduce their own measures which could well result in a real risk of double taxation for businesses.
“There needs to be ongoing momentum to review whether the OECD’s recommendations are working well and enhancing, not constraining, the growth of global commerce, in line with the OECD’s mission to do just this,” says Dean Kern.
Impact on Middle East business
“The BEPS proposals will inevitably have an impact on the businesses based in the region that have overseas operations as well as local and multinational companies operating in the region,’ says Sajid Khan, International Tax Partner at PwC, who recently gave a keynote speech on BEPS to the Tax Authorities of Islamic Countries during their annual meeting in Doha. “Many companies are likely to be surprised in how many different ways the scope of BEPS will impact them. The manifestation of BEPS effects are expected to accelerate as the project now moves into implementation stage.”
“Most multinationals 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’”, says Sajid Khan.
Some of key outcomes of BEPS that we think will impact the region’s business community:
- Adoption of BEPS in the region – While the Kingdom of Saudi Arabia (KSA) is a G20 member (hence committed to the implementation of BEPS project), many other countries in the region, particularly GCC countries, have also participated in OECD proceedings as observers. The ongoing BEPS developments have been closely monitored and therefore we expect that the recommendations are likely to be adopted.
- Country-by-Country (CbC) reporting requirements – This is one of the key compliance requirement emerging from the BEPS project and is likely to catch many regional/GCC businesses ‘off guard’. Any business with consolidated revenues above the threshold (proposed at 750 million euros – this will capture a number of Middle East based companies), starting 2016, will be required to collect the information and prepare a CbC report. This will need to be filed either with their own tax authorities for automatic exchange or with an overseas country (which has adopted CbC reporting – the list is already growing quickly) in which it has a legal presence. It is expected that all OECD and G20 member countries (which includes KSA) will have an early adoption. This means ME businesses that are likely to be affected need to start reviewing and assessing their internal system/process capability now to meet this requirement.
- Tax environment in the GCC – Against the backdrop of sustained lower oil prices and economic diversification, many GCC governments have been considering tax reform as a way to raise revenues. We expect this trend to accelerate. Not only have we seen GCC countries considering proposals to introduce VAT, but also note a shift in the behaviour of tax authorities in their position on various tax matters such as virtual/digital tax presence as a direct outcome of the BEPS project. This is evidenced recently by the increase in tax and transfer pricing audits.
- Tax governance – Companies should review their tax strategies and risk management frameworks as well as their internal tax functions in readiness for BEPS. Senior management and boards of GCC businesses should be closely involved in approving and monitoring such tax strategies and frameworks; this historically has not been the case. A BEPS review of existing structures and arrangements will help address any gaps which will allow them to withstand any post BEPS challenges.