Aqua On BEPS and CBC, Published In

Aqua On BEPS and CBC, Published In "Finance Malta"

Aqua On BEPS and CBC, Published In

BEPS and CbC — The New Dawn

By Joanne Luce -Managing Director of Aqua Trust Services Malta Limited

The Country-by-Country ("CbC") Reporting and its Relationship to Base Erosion and Profit Shifting ("BEPS").CbC reporting is likely to impact on any, either Multi National Business or BEPS Business focused on using other non-home based jurisdictions for commercial or structured endeavour.

The OECD has issued what is referred to as BEPS, namely Article 13 Transfer Pricing.  This in simple terms will mean that documentation and CbC reporting will be required.

There will be a new level of transparency in overall Transfer Pricing and Reporting. Different countries are approaching this with some enthusiasm.  More developed jurisdictions championing BEPS as a Project, as this can be seen as a countermeasure so that profits are shifted outside, of what they refer to as, their solvent Tax Base by some Multi National Businesses.

Luxembourg has seen Amazon and Google and other large Multi Nationals have come under significant pressure; this has been replicated by American Multi Nationals who have used the Republic of Ireland to lower an overall tax base. There are other countries, such as Japan or Korea, who have not encountered Double Non Taxation situations and therefore are moderate in approach, however supportive of BEPS. Recent developments reflect that it is likely that China and India will endorse and adopt CbC Reporting.  Equally the GCC will be impacted.

Financial and Trading hubs of Regions, such as Singapore and the EU Countries, which may be viewed as lower tax or business friendly, may feel increasing heat as they respond to the BEPS initiative, as the reporting countries will want to protect an underlying revenue base. The expected time frame will vary across countries.  BEPS implementation has a certain dimension, as if a country remains in a place of status quo and does not utilise the new transparency tools, it may mean that the Country inadvertently slows tax revenues.

Implementation will occur with the largest Multi Nationals getting in line with medium sized companies following after, and with them "materiality thresholds" adopted, to exempt smaller Managed Entities.

The latest scaled documentation identifies that data points required from a reporting perspective by each country will be the following:

  • Revenues from both related and unrelated party transactions;
  • Profits before income tax;
  • Income tax paid (on a cash basis);
  • Current year income tax accrual;
  • The stated capital;
  • The accumulated earnings;
  • The number of employees;
  • Tangible assets, which will exclude cash or equivalent.

A clear implication is that the template is designed to identify low tax jurisdictions if a significant amount of income is allocated without a corresponding proportionate presence of employees.

What this means, in practice, is there will be pressure to look at profit allocations over a jurisdiction.  Ultimately revenue must be supported in any jurisdiction by sufficiently, appropriately qualified people who are able to make a "substantial contribution" to the creation and development of intangible value.

Concerns remain regarding confidentiality of data, and potential for adjustments by local tax administrators, based on the proportionment, mainly as a result of further Transfer Pricing.

It has been said that CbC will not form part of a master file for reporting but will be a separate process. It has been said that financial data reporting will be on an aggregate country wide basis rather than entity by entity. It has been said that transactional reporting for Interest, for Royalties and other Inter Company Payments will be removed and will only be held in the local file of Entities doing business in the relevant jurisdictions. Information will be asked about the number of Entities and the number of Permanent Establishments in each Country, together with an understanding of the proposed nature of the business codes. There will be an option to build this data, from either statutory or financial reporting, provided a consistent method is approached across the group and from year to year.

Professional Advisors will now be working with those they serve to determine the most effective way of implementing and assisting with the restructuring of their affairs to optimise and future proof ongoing developments.

Practitioners will tell you that there are some obvious issues which need to be ironed out, mainly around Private Equity Funds, usually structured as simple Partnerships Agreements.

Generally these are tax transparent; often it follows that there is no taxable base to erode. Equally, the use of Intermediate Holding Companies may simply be utilised by stable jurisdictions to minimise Permanent Establishment Risks or to achieve administrative efficiencies, because it is usually helpful to have a generic approach to facilitate one over-arching Corporate Filing.  EU Intermediate Holding Companies often have a dual purpose; to have a participation in a target business; their returns will be tax exempt and would usually be ignored when looking at treaty abuse.

If Structures are involved in financing activities; more often than not, these take the form of what we would refer to as "back to back" loans with a small profit margin being realised by the Financing Company. These loans are often difficult to determine at an appropriate price, at a cost plus basis and usually the financing cost is minimal. Practically, if Practitioners end up in the position where there becomes "exaggerated" Transfer Pricing, then that can create using overly complex Transfer Pricing methodologies. Possibly it may run the risk of artificial substance i.e. adopting uncommercial arrangements.

Generally, like any change, BEPS and CbC reporting will create a new reality, but looking at the overarching business and where it drives it's revenues from ensuring the structure has sufficient resource to support those revenues. Guidance to clients must be to retain and use treaty structuring where appropriate, but equally where there is proper and real presence, it will create opportunities and threats, which is a concept all successful business owners will be aware of and address.