What should you be doing now?
August 11, 2015 | KPMG LLP’s Tom Zollo, International Tax partner, discusses the possible impact of the OECD’s BEPS project and other global tax developments on value chain management planning by multinational companies and outlines three actions that tax executives at these companies should consider. Visit KPMG's Base Erosion and Profit Shifting (BEPS): Tax Transparency site for more insights.
Tom Zollo: Certainly, the most obvious example is the OECD's BEPS initiative. It is the largest concerted effort by a number of countries to address these issues, but it's really only one example. So the European Union, for example, is taking on harmful tax practices.
And various countries have taken unilateral action; for example, France in its last tax bill. Even the United States, where there has been no comprehensive tax reform over the last couple of decades, you can see the IRS changing the way it administers old rules to try to adapt them to current circumstances.
They present real challenges in the sense that many of the principles that companies rely on in having a tax efficient structure depend upon the certainty given by current rules. So, for example, tax concessions that are given by certain countries that are used as principle companies. Second, the use of cost sharing and other arrangements to clearly establish which members of the group are entitled to intangible property returns, and then finally the use of structures like commissionaires or limited risk distributors to make sure that the tax base in high-tax-developed countries is relatively confined.
All those are subject to change based on some of the BEPS initiatives, and they really will jeopardize the ability of companies to rely upon existing structures going forward.
Now the opportunity, of course, is that everybody is going to have to adapt to the new rules, and so the companies that get on top of these changes and understand how to optimize their position within the context of the new rules will end up being the winners.
So, there are three things that executives ought to consider off the top.
First, we're going to have country-by-country reporting, which means the tax administrations will be able to assess a company's tax footprint against its commercial footprint, meaning where it has employees and assets. And tax directors should know whether they are going to be subject to increased scrutiny if those two footprints don't match up.
Secondly, companies should look at how they hold their intangible property and make sure that they have enough substance in the owners of the intangible property so that they will be respected going forward as owners. That means not only funding IP development but also controlling it through the actions of employees.
And third, they should consider whether changes to the permanent establishment standard, particularly as it relates to commissionaires and similar structures, will expose nonresident companies to a greater risk of tax in high-tax jurisdictions.
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