Why BEPS Compliance Might be a Good Thing

June 10, 2022

In July of 2021, more than 130 countries approved a framework intended to reform international tax rules under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

There are plenty of arguments both for and against the plan. What’s not in question, though, is that BEPS constitutes a radical shift in the way taxes are levied on multinational companies. For the tax teams at such organizations, this new paradigm will undoubtedly be disruptive. It’s generally agreed that the plan will result in higher corporate taxes for most global companies.

It’s critical, therefore, that corporate finance teams get ahead of the challenge by familiarizing themselves with BEPS compliance and putting good tax reporting solutions in place now that will put them on the right track for when the new rules take effect.

An Overview of BEPS

The BEPS agreement is built around two “pillars.” The first aims to align corporate taxation with the actual economic activity that takes place within a given market. It shifts the focus away from the concept of nexus, that is, physical presence in the jurisdiction where tax is imposed. Instead, taxation is driven by the production and consumption that take place within each member country. This initiative emerged as a response to the dramatic increase in digitization and ecommerce over the past two decades.

The second pillar effectively creates a global minimum tax by aligning rules within each member country to a common standard, which includes a floor for tax competition amongst jurisdictions. Although both pillars are important, Pillar Two applies to a broader range of organizations, including any multinational entity with consolidated group revenues of €750 million or more.

Pillar One, in contrast, will initially only impact companies with much higher revenues – initially, €20 billion or more in global revenue. Over the next seven years, that threshold would be reduced so that businesses with €10 billion or more in revenue will also be subject to BEPS Pillar One provisions.

The Rationale Behind BEPS

The impetus to create this new standard arose from a number of high-profile cases in which large multinational corporations were found to be minimizing their tax liabilities by shifting their profits to low-tax jurisdictions.

A 2020 US Tax Court decision, for example, found that Coca-Cola’s long-standing practices around cross-border intercompany charges had violated arm’s-length norms with respect to transfer pricing. This practice resulted in profits being shifted from higher-tax jurisdictions such as the United States to lower-tax countries like Mexico. The case was highly complex and touched upon a myriad of transfer pricing compliance issues, and it highlighted the dire need for greater clarity and transparency. Among the key issues in this case was the valuation of intellectual property applied in Coca-Cola’s intercompany transactions.

The Organization for Economic Development (OECD) created BEPS as a set of non-binding rules, initially to address the challenges of taxation in the context of the so-called information economy. Although the OECD has no authority to set tax rates or rules within the 139 countries that make up the organization, it has proposed a framework which member nations may choose to adopt through their own respective legislative processes. As the number of countries adopting BEPS increases, this new framework could become a de facto global tax regulation.

Other purported benefits of BEPS include increased ability for governments to prevent money laundering and financing of terrorist activities by criminal organizations, as well as increased sustainability. Third-world countries would see higher tax revenues under BEPS Pillar Two than they currently collect and would therefore presumably have more resources to spend on sustainability initiatives.

Preparing for BEPS Compliance

Generally speaking, there’s a good deal of trepidation about the burdens associated with BEPS compliance. The new regimen is expected to increase effective global tax rates for a majority of companies, and it will require organizations to align with a whole new set of rules that will govern transfer pricing and permanent establishment. The learning curve may be steep. Compliance costs are expected to be fairly significant, and uncertainty abounds.

To get a handle on BEPS compliance, companies should begin preparing now. They should have systems in place that can adapt frequently as additional changes come down the pike. It’s expected that the OECD will modify BEPS in the coming years, so any new tools and processes that corporate tax teams implement should be flexible enough to accommodate new provisions in the framework.

Purpose-built tax planning and tax reporting solutions can automate the process by collecting and collating information from source accounting systems, modeling scenarios and predicting the likely tax implications, as well as serving as a foundation for documentation and compliance transfer pricing decisions.

While many companies struggle to perform tax forecasting and reporting with manual processes, spreadsheets, and a disjointed collection of tools, the best tax reporting software brings it all together under one roof, streamlining and simplifying processes while also improving accuracy.

Longview Tax from insightsoftware improves tax reporting and forecasting across your enterprise by replacing disconnected systems, manual spreadsheets, and error-prone email communications with a single source of truth, purpose-built for centralized tax provisioning and reporting, analytics, and comprehensive tax management.

Longview is also backed by insightsoftware’s team of global experts, with experience in tax forecasting and reporting for midsize and large corporations dating back to 1994. Over the past year, our team has been meeting with top global CPA firms, leaders at multinational companies, and other key stakeholders to understand the full implications of BEPS for our clients. We’ve been working side-by-side with people who will be directly responsible for complying with the new BEPS rules, and we’ll continue to do so even after the rules take effect.