BEPS Tax Storm Is Coming This Year

BEPS, the OECD's Base Erosion and Profit Shifting plan, lays out actions designed to realign current tax policy with the realities of the global ec...
Joe HarpazJuly 9, 2015

Remember when Dodd-Frank was just a series of angry speeches and calls for consumer protection from a group of impassioned politicians? If you’re old enough, you may also remember when Sarbanes-Oxley was little more than a rag-tag collection of ideas about changing corporate auditing policies and procedures.

Joe Harpaz

Joe Harpaz

These epic reforms, which have forever changed the course of business, were once just rhetorical sound bites bandied about by lawmakers and lobbyists to stir populist support for regulatory change. In hindsight, it seems obvious that both of these laws would become major historical milestones. At the time, however, there were serious questions about whether they’d even pass the Senate and the House.

Opinion_Bug7A similar set of reforms is currently on its way to becoming one of biggest business challenges you’ve ever had to deal with, but few people outside of the geekiest recesses of tax policy are even aware of its existence. It’s called BEPS and, based on some recent events in the world of tax, it’s about to become the C-suite’s least favorite acronym.

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BEPS is short for the Organization for Economic Cooperation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting — and this obscure business issue is going to have a huge impact on the way multinational corporations run their operations starting this year.

At its root, BEPS lays out a series of actions designed to realign contemporary tax policy with the realities of the global economy. The most significant of these suggests that companies should file detailed tax reports in every country where they do business. They’ve never had to do that before.

Previously, companies had to show only the transaction flow from one country to another. Now, the full details of each company’ tax payments to each country will be available globally in a standardized, shareable template. Beyond that, the new reporting guideline will require financial, sales, and personnel information to help countries determine the value of the operations within their borders and how that should be reflected in taxes for that jurisdiction.

While the ramifications have been obvious for tax professionals, the full implications of BEPS have not been mainstream news thus far because of the unique nature of the OECD and the role it plays in the global marketplace. Unlike Dodd-Frank or Sarbanes Oxley, which were clear-cut laws enacted by Congress and signed by the President, BEPS is a series of suggestions made by a consortium of global government representatives that has no real legislative authority.

So, while the OECD does have a clear-cut agenda and detailed deadlines it hopes to meet with its BEPS Action Plan, passage and enforcement of these guidelines will be left to individual countries.

And that’s where the BEPS story is starting to get interesting. A couple of countries — the United Kingdom and Australia — have already enacted laws that preempt several of the BEPS ideals, even before the final BEPS road map is completed.

In March, U.K. Treasury chief George Osborne introduced a Diverted Profits Tax, which is a 25% tax on foreign companies’ profits derived from economic activity in the United Kingdom. Quickly dubbed the “Google Tax” by the U.K. press, it is meant to capture the tax revenue for goods and services consumed by U.K.-based customers. For example, under this plan Google would pay U.K. tax on revenue from ads that are clicked by users in the United Kingdom.

Australian Treasurer Joe Hockey introduced similar legislation, which will levy a 25% tax on diverted profits. He said he anticipates the measure will raise AU$350 million over the next four years.

In the United States, the Treasury department has publicly signaled its support for BEPS. But Congress has indicated that it will need to review the details more closely before it commits support.

Sensing this burgeoning tax issue will blossom into something bigger, Amazon has announced it will change the way it accounts for revenue from retail sales in Europe. Under the new arrangement, Amazon will book all revenue from retail sales in individual countries in those countries, rather than routing the profits through Luxembourg, which has the lowest corporate tax rate in the European Union.

Clearly, Amazon has fought its fair share of public tax battles and concluded it is better to take the potential tax hit to avoid becoming a poster child for tax avoidance when the BEPS Action Plan is finalized.

Will more companies follow suit? It’s still early days, but one thing is clear: multinationals will soon have to provide an unprecedented level of tax transparency. Many will need to get their houses in order before they will be able to comply. The intervening months, during which many multinationals will awaken to this issue, will be filled with difficult management decisions.

If there’s one thing history has taught us about preparing for the impact of regulation on our businesses, it’s that you can never underestimate the power of today’s rhetorical stump speech to become tomorrow’s very real business challenge.

Joe Harpaz is head of the ONESOURCE Corporate Market for the Tax & Accounting business at Thomson Reuters.