For corporate tax accounting teams, BEPS adoption will bring some changes. The next few years will be a pivotal time for finance departments at multinational companies. For tax professionals in particular, this is an opportunity to shine – to demonstrate the strategic value of tax accounting to others in the organization, including executive management.
To do that effectively, tax accounting teams need a foundational understanding of the implications of these coming changes. Ultimately, they will also need the right tools to help them step into a more strategic role contributing to the financial health of the organization.
This article reviews the basics of BEPS adoption and provides some tax accounting tips to help tax accounting teams manage these coming changes. We will also touch upon the impact that BEPS could potentially have on the strategic value of the tax function in most organizations and how mindful tax leaders can proactively demonstrate to executive management the real value that they provide.
BEPS: A Brief Overview
BEPS stands for “Base Erosion and Profit Shifting.” It’s an initiative of the Organization for Economic Cooperation and Development’s (OECD), and its aim is to ensure a more equitable tax regimen for multinational entities (MNEs).
Initially, BEPS was intended to resolve questions around digital assets such as software and services, which defy traditional notions of goods and services being produced and delivered in specific jurisdictions. Later, it was expanded to account for the broader concerns revolving around corporate taxation and efforts companies have made to shift profits to avoid tax liability.
Prior to 2015, a number of MNEs pursued tax planning strategies that effectively transferred profits from higher-tax jurisdictions to lower-tax countries, thereby eroding the tax-bases of the higher-tax jurisdictions.
Some large, well-known multinationals have made the headlines as a result. Google, Amazon, and others have been widely criticized for not “paying their fair share” of taxes. This has led to a spate of proposals for so-called “anti-avoidance” legislation, also commonly called the “Google Tax.”
BEPS aims to address this on a broader scale by proposing a 15% minimum tax globally. BEPS consists of two broadly defined provisions known as “pillars.” Pillar One pertains to the allocation of business profits to various countries based on actual business activities in each nation, but Pillar One will initially only apply to very large companies.
BEPS Pillar Two will affect a much larger range of organizations, requiring that companies first calculate taxes for each country in which they operate, then pay a minimum of 15% in each jurisdiction in which they operate.
BEPS already requires that companies itemize their revenues by country, and as taxation bodies develop more sophisticated models that compare BEPS data with corporate tax return data, there may be an increase in investigations, again reinforcing the growing need for data scientists.
Predicting the (Somewhat) Unpredictable
BEPS represents a change in global taxation, but it isn’t the only change. Other elements of change include IFRS 16/17 and parallel modifications to lease accounting under US GAAP, political uncertainty, a push toward higher tax rates and increased enforcement, and rising inflation.
To prepare for change, rein in the chaos, and add value for your organization, here are five tax accounting tips to keep in mind as you prepare for BEPS adoption:
1. Automate Wherever You Can
Tax teams that intend to play a strategic role must focus on high-value activities. That’s hard to do when you’re burdened by manual processes built on large collections of spreadsheets.
If you’re currently using Microsoft Excel to manage your transfer pricing policies and calculations, you’re spending far too much time on tedious, error-prone processes. It’s common for individuals to create custom formulas that can’t easily be transferred or standardized. How, then, can you ensure consistency in your overall narrative to management? When every member of the team is using the same tools in a collaborative way, the team can shift its attention to high-value activities. When automation is in place, you can eliminate errors, increase standardization, run the numbers more frequently, and explore a broader range of scenarios.
2. Identify Key Drivers
As big changes continue to unfold, it’s important to identify the material drivers that could impact your business. Work with your accounting team to understand the top factors, and align that list of drivers around your corporate strategy. For virtually every multinational entity, BEPS adoption will be high on your list. Not only does it represent a shift in the way corporations pay tax globally, it’s also likely to change further as BEPS is rolled out. Expect further fine-tuning in the coming years.
3. Get a Handle on Transfer Pricing
It’s critically important to get a handle on transfer pricing within your organization. This area requires close attention to ensure compliance and consistency across your entire organization.
To avoid the headaches of audits or hefty fines, break the cycle of manual reporting. Error-prone processes inevitably lead to a risk of late material adjustments, which looks bad to internal stakeholders and is a red flag to auditors.
Prioritize policy over numbers. Make sure that your transfer pricing policies are solid and that they’re supported by the right documentation. Check to see that the distribution of profits across your company looks right when viewed through an auditor’s eye.
4. Explore Possible Outcomes
Organizations should consider using tax software that consolidates financial statements and can be updated easily as new tax regulations emerge. The best corporate tax software will also offer the ability to run multiple scenarios, which can then be incorporated into both short-term and long-term forecasts.
If you’re still using manual spreadsheet-based methods to build scenario models, you’ll be inherently limited. There are only so many iterations that can be explored without adding substantial resources to your team. The best corporate tax accounting software makes it easy to model scenarios and outcomes based on multiple variables.
5. Foster Agility and Be Prepared for Change
Recent events have clarified that agility is a key factor for success in today’s global economy. Consider adopting dedicated tax accounting software and transfer pricing software that integrates with your financial software, including ERP systems. For the best, most flexible approach, look for software that integrates with multiple ERP systems, even if you’re using different software in each subsidiary.
These systems accurately collect and organize transfer pricing data, model various tax scenarios, identify gaps in targeted profitability, and enable you to make corrections before closing the books. That way, you can use the time you save to take a step back so you can see the wider picture.
Longview Tax from insightsoftware can help you manage BEPS adoption smoothly and strategically. BEPS constitutes a change, to be sure. For corporate tax teams, the challenge also presents an opportunity to step into a more strategic role within your organization. To learn more about Longview Tax, contact insightsoftware today for a free, no-obligation demo.