A new corporate tax initiative by the world’s leading economies will significantly impact multinational corporations, likely forcing their treasury departments to re-think their firm’s finance structure in the process.
The Base Erosion and Profit Shifting (BEPS) project was created by the Organization for Economic Cooperation and Development and the world’s 20 largest economies (G20). BEPS was finalized by the G20 finance ministers in mid-October as a comprehensive and coordinated reform of international tax rules. Their goal was clear: to recoup an estimated $100 billion to $240 billion annually in lost corporate taxes, or 4 percent to 10 percent of global corporate tax revenues.
More than 90 countries are involved in the project, including the United States, most of Europe, China and India.
“If [the OECD and G20] are right about BEPS and the likelihood that corporate taxes will effectively rise, it will cause a liquidity reduction for U.S. corporations at the very least,” said Melissa Cameron, who leads Deloitte’s global treasury practice. “For global corporate treasury, this is a call to action.”
Not just how much
Most comments from industry participants about BEPS’ 15 action items were written by executives specializing in tax issues. Ian Brimicombe, vice president of corporate finance at AstraZeneca, was one executive with treasury responsibilities that commented on BEPS Action 7. It seeks to prevent the “artificial avoidance” of permanent-establishment (PE) status, in which a place of business is determined to be fixed and gives rise to income or value-added tax liability.
Brimicombe in his comments argued that the Action 7 eliminates the pharmaceutical company’s use of exemptions from PE status, thus capturing “many arrangements which are entirely commercial and in no way motivated by tax avoidance.”
Cameron said treasury executives’ understanding of the BEPS initiative remains “underdeveloped.”
“Some very large companies have been working on this for months. In others, when I ask treasury about BEPS they know very little,” Cameron said. She added that the BEPS committee reviewed virtually every type of tax planning initiative embarked on by companies and their tax professionals, and their impact on countries’ ability to collect corporate tax. The tax avoidance schemes have been particularly problematic for developing countries, which rely more heavily on corporate tax revenue.
Deloitte has pinpointed numerous ways in which the BEPS initiative could impact corporate treasuries:
- Action 2, for example, addresses hybrid financing and could result in changes to companies’ in-house banking structures and require realigning treasury and tax’s executed financial risk management instruments.
- Action 4 covers interest deductions and could require a reduction in interest expense that impacts cash flow as well as alternate strategies for cash pooling structures that are now viewed as intercompany loans.
- Actions 8, 9 and 10 affect transfer pricing and documentation, and require a review of contractual arrangements that allocate risk in ways that reflects the underlying economic substance, and they could impose requirements to collect, track and report detailed transfer pricing data information on transactions.
Cameron emphasized that while BEPS initiative takes effect at the start of 2017, companies must start reporting an array of data to tax authorities throughout 2016, adding that the operational impact on treasury could be significant. “This breaks the treasury paradigm,” she said. “Traditionally, there’s been a small head count for treasury. Now you may need to add more just to report the data.”
Global companies with less than $10 billion in revenue, for example, tend to operate one treasury center to manage U.S. cash and an offshore, in-house bank that separately manages cash overseas. The latter structures may be set up in a low-tax jurisdiction, and tax authorities will much more rigorously require companies to demonstrate they have substantive operations at those locations.
“If a company has $20 billion in intercompany loans there, who is managing them, are they loans being set up appropriately, are margins being applied, and is it all properly documented,” Cameron asked. “If the answer is no to those questions, then the company will be exposed to substance risk” and may not achieve the tax outcome it sought.
As a result, corporate treasury departments are likely to become more distributed than centralized, ultimately a benefit for many companies because their treasury personnel will be in location to work more closely with the regional business leaders. In addition, said Cameron, Deloitte anticipates the BEPS initiative will prompt treasury departments to re-examine where their companies’ foreign currency exposures are and set up hedging programs locally to mitigate those exposures.
“We will see new cash forecasts developed and updates to intercompany loan arrangements, among myriad other changes including technology,” she said.
Read an expanded version of this article in the November issue of Exchange.