“This is happening.”
That line describes an important narrative from the 14th annual International Tax Review and TPWeek Global Transfer Pricing Forum I attended in Washington D.C. recently.
The event, organized in association with Deloitte, identified several important steps tax professionals should consider as they contend with “this” –the G20 and OECD’s Base Erosion and Profit Sharing (BEPS) project.
And it is indeed happening: In mid-September, the OECD published the final version of its “Guidance on Transfer Pricing Documentation and Country-by-Country Reporting” (CBCR). This documentation and reporting template is designed to be used by multinational companies (MNCs) to report income, taxes paid, and other indicators of economic activity, and it was included among the seven action plan recommendations that are part of BEPS.
How Does Transfer Pricing Guidance Affect Tax?
Transfer pricing allows certain deals to be made between separate tax entities with the same parent company or ownership. This is often done as a way to shift the tax burden within a larger organization.
Leading tax professionals and experts are beginning to develop approaches to address BEPS and CBCR. Listed below are a few insights discussed at the forum that can help tax professionals begin to sketch out a response as they conduct deeper analyses of the new guidance and its implications:
- Transfer pricing agreements should be the result of business projects – not tax projects. If transfer pricing agreements appear to be driven by tax motivations, the taxing authorities are more likely to view them as requiring a deeper look – or, worse, as inappropriate.
- A detailed understanding of how the company creates value is crucial. The tax function should understand how and where value is created, and how that value relates to income, profit and, as a result, taxes. Strategic-focused tax leaders know this, of course, but all tax professionals should know that the importance of developing this understanding and communicating it appropriately is increasing.
- Data is a leading factor. Understanding how and where value is created and conducting related scenario planning requires the analysis of massive amounts of data (including tax data). Will your data foot to your strategic narrative? They better be harmonized.
Developing a Tax Strategy Around Transfer Pricing
A Deloitte presenter also emphasized to attendees that their own tax stories must be able to withstand greater scrutiny. The presenter offered several questions that tax professionals can ask to get a feel for how well their stories – i.e., their tax strategies – will stand up to examination, including:
- What is our tax strategy? Can we articulate it and are we ready to defend it, if needed? Will it be considered to be “fair” as well as “legal” in the current political and press environment?
- What is our organization's appetite for risk in this arena, and where does our current portfolio "place" us along the spectrum of acceptable risk-taking?
- Are there any elements of our current tax strategy that we would be uncomfortable explaining on national television?
- What would be the impact on our business if we were challenged by the press or politicians on our tax planning strategy?
Compliance with the CBCR reporting requirements and other BEPS rules will require a comprehensive effort, which is why it’s smart to start asking these questions right now.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.