Tax transparency: what every CEO needs to know about BEPS
The OECD and G20 BEPS project is a reminder that tax strategy needs to align to business strategy, says Chris Sanger, EY Global Tax Policy Leader
The political, social and economic fabric of many countries in recent months has been characterized by disruption, increased nationalism and seismic shifts that many thought were unimaginable. In such an environment of change, it is imperative that the tax system functions effectively and, if needed, is adapted to meet the needs of governments, communities and taxpayers.
What is BEPS?
The Base Erosion and Profit Shifting (BEPS) project was initiated in 2013 by the G20 and the Organisation for Economic Co-operation and Development (OECD) to address political and public concern about the taxation of multinational companies and the perceived inadequacies in the global international tax system. In a cooperative environment between governments themselves and between businesses and tax authorities, a deeper shared understanding of the challenges faced by the international tax regime has been developed and policies to address those challenges have been identified.
Broadly, BEPS policy outcomes are focused on building coherence between different countries’ tax laws – aligning taxable profits with the business functions that contribute to value creation – and providing tax authorities with greater insight into the global operations of taxpayers.
Implementation, however, is going to be far from straightforward: even with all this cooperation, countries will still choose the tax system that suits them best and will have different tax policy and operational objectives in mind when deciding which of the BEPS recommendations to implement and how.
So, what are the key themes that the C-suite should understand when it comes to BEPS? How can the inevitable changes happening within the tax environment be used to create transparency and certainty instead of a regulatory headache?
You need to collect and manage the right data
One of the things that will profoundly affect business across the entire enterprise is the collection – and analysis – of data. This is an essential element of BEPS and lies behind the requirements to file information with tax administrations. It will impact how the tax function is audited by the tax authorities in the future. Organizations need to monitor and review changes in legislation to help ensure that they are able to fully comply with all of the detailed filing and reporting requirements within the timeframes established by legislation. The ability of organizations to understand the data infrastructure, software, systems and process changes that will be required to accurately collect and manage large amounts of data is going to be critical if such requirements are to be met. This emphasis on collecting and retrieving the right data means that many businesses will need to review their data enterprise strategies to make sure that the data they collect aids transparency rather than creates a fog of confusion.
Gathering the correct data, however, is only part of the story; the extra value for businesses lies in the insights that can be drawn from such data, rather than in the raw information itself. Organizations that possess the know-how to develop insights from these data, using analytics and cognitive technology, will be able to identify new market opportunities and establish a sustainable competitive advantage, whilst also complying with legislation and establishing trust in the market.
You’ll need to face up to controversy
Tax authorities will also receive information about organizations and the way their business is conducted via other tax authorities. Armed with this and the data they collect domestically, tax administrations can be expected to raise more questions over areas that have not been challenged in the past. Organizations must therefore be prepared to face up to any inconsistencies that arise as a result, and ready to deal with any questions and controversy that follows.
Given this, the CEO needs to know the answers to a range of questions: where are the controversies of tomorrow likely to come from? What information should be shared with which tax authority at what time? Are data sets being considered holistically or from a country-only perspective? How ready is the organization for the shift in information asymmetry, whereby tax administrations know more about business activities than the company does itself?
The appropriate response for each organization depends on a variety of factors, including whether it is a business-to-consumer or business-to-business enterprise, whether it has resources dedicated to corporate communications, which industry it resides in, its overall brand visibility and reputation, and in which geographies it operates. However, across the board, we are seeing companies rapidly changing the way they communicate about tax risk and controversy to their stakeholders, both internally and externally.
Your tax strategy will have an impact on your brand’s reputation
The approach that businesses take toward their tax planning is becoming increasingly scrutinized in public, whether by formal requirements such as the UK’s tax strategy publication requirement or through supra-national transparency initiatives such as the publication of country-by-country reporting, as adopted in Europe for banks and advocated by the European Parliament for all large companies.
In Europe, such transparency is quickly becoming the new normal and across the globe reputation risk is a permanent fixture. All things considered, robust transparency readiness processes to ensure that data can be sourced and presented in an effective, efficient and clear manner are becoming more and more important.
BEPS could change your business structure and operations
A holistic approach to BEPS is essential and will require close cooperation between all the business functions. Tax has become more global and changes (and filings) in one country may affect outcomes in another, requiring a more centralized tax department.
The corporate structures used today for operating cross-border will shift, impacting the treasury function (with restrictions of tax relief for interest), the business structure (such as Commissionaire arrangements), and financing and capital structures (with changes to tax treaties).
BEPS will likely drive up effective tax rates and increase the costs of the tax department (as it is faced with new rules and additional reporting), so CFOs need to be prepared to account for this. IT department costs will also increase, as automation for tax compliance and tax function support will become a necessity for organizations to swiftly respond to global tax authorities that are automating at top speed.
Organizations should not ignore BEPS developments and must be prepared to address necessary changes in order to increase transparency and build trust. Whatever changes are to come, in whichever country, organizations that work to ensure that their tax strategy closely aligns to their overall business strategy will be in a far stronger position.