BEPS Poses Substantial Tax Data Management Challenges

The Organization for Economic Co-operation and Development’s (OECD’s) Action Plan on Base Erosion and Profit Sharing (“the BEPS Action Plan”) outlines 15 specific compliance requirements. One of these requirements, the country-by-country reporting (CbCR) template, will add new challenges and additional complexity to what many tax executives currently identify as their function’s toughest data management issue: the disconnect between financial reporting systems and the required income tax reporting process.

The CbCR requirement calls for multinational companies (MNCs) to report their income, taxes paid, and other indicators of economic activity on a country-by-country basis through the use of a common template. CbCR marks an extremely important component of the BEPS Action Plan for two reasons:

1. For the first time, taxing authorities throughout the world will be able to understand how MNCs allocate their income and tax payments to their specific country, and other countries as well; and
2. The template will serve as an essential tool for taxing authorities to determine which and how MNCs should be audited regarding their intercompany transfer pricing.

OECD and G20 countries representing 42 of the largest economies in the world have expressed public support for CbCR. As a result, the OECD has been fast-tracking its CbCR initiative, and the recommended template is expected to be finalized by September 2014.

There is an overall consensus by global thought leaders that CbCR will:

• Be a game changer;
• Begin to be adopted by countries in late 2014, with reporting by MNCs commencing as early as 2015;
• Result in an uptick of intercompany transfer pricing inquiries and audits for MNCs;
• Likely become publically available at some future date; and
• Pose a significant challenge for MNCs in complying with these new reporting requirements, specifically as they relate to the calculation and defensible allocation of book income; which will required to be done not only by legal entity, but also further broken down by branch and/or permanent establishment, and by country.

The existing financial reporting systems for many MNCs simply are not in a legal entity format. In other words, many financial reporting systems are substantially disconnected from the required income tax reporting process. As a consequence, it is not uncommon for MNCs to have to manually compute their “legal entity book income” (which includes intercompany transfer pricing), by relying on a combination of excel spread sheets and manual processes.

CbCR will soon place much greater stress on this disconnection between the financial systems and the income tax reporting process.

*This post is adapted from an article written by Bill Brennan, published in the May 2014 issue of International Tax Review, which is available here.

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