Much focus has recently fallen on the issue of tax avoidance, as research on the subject has increasingly shown that the global economy is losing out on billions of dollars to a byzantine system. One paper published by the Congressional Research Service shows that the US federal government loses as much as $100bn a year to offshore tax abuses, whereas Global Financial Integrity estimates that the price for developing nations is just as great.
Responding to growing pressure from all quarters to enforce tighter and more consistent controls, policymakers across the globe have taken pains recently to level the playing field and consider how new laws might serve to mitigate spiralling losses. Published in July 2013 with a view to addressing perceived flaws in the international tax system, the OECD’s base erosion and profit sharing (BEPS) action plan is nearing completion (see Fig. 1), and promises to bring with it a greater degree of uniformity and responsibility to proceedings.
Most of the associated actions have been completed already, and on occasion; select companies have been forced into making dramatic changes in a bid to meet the requirements. However, the finer points of the plan will take time to implement, and the part played by outside experts is crucial in what will likely prove a difficult adoption process.
Forthcoming refinements mean that companies must reassess their operating models and ask whether they suffice in this
new climate
World Finance spoke to Luis Carrillo, Director of Transfer Pricing Solutions at Bureau van Dijk (BvD) to discuss further how BEPS will change legislation in the future. “The OECD is on target to complete the BEPS project, and many of the action items are already completed”, says Carrillo. “The remaining question is how quickly countries around the world will take to implement the BEPS recommendations into their legislation.”
Forthcoming refinements mean that companies must reassess their operating models and ask whether they suffice in this new climate. However, the impact of this evolving environment will likely vary from country-to-country with inconsistencies possibly undermining the credibility of the reforms. Carrillo says: “One key danger is the fact that certain countries have moved ahead of the OECD’s completion of the BEPS project, and their requirements may not be in line with OECD. All this said, it looks like companies will have to be ready for BEPS as early as 2016.”
Getting BEPS ready
BvD plays a pivotal role in the process with its global database of company information and business intelligence, meaning that affected Multinational Enterprises (MNE) can more easily come to terms with how BEPS might impact their operations. “BvD works with a network of 120 specialist information providers locally, to source and adds value to information on millions of companies worldwide. BvD regularly reviews the quality of the data from the information providers to ensure its quality and integrity; to the extent the data comes from official filings, providing access to original filings that can be used to corroborate the veracity of the financial data in our products”, says Carrillo. With a database (Orbis) containing information from over 120 sources and spanning almost 150 million companies, any person drawing on BvD’s data set has access to unrivalled company coverage on a regional and international scale.
“BvD’s expertise in company and business information provides MNEs with the necessary tools to quantify arm’s length results. MNEs can rely on BvD to establish policies that are compliant with arm’s-length requirements based on the new international framework evolving from the BEPS project”, Carrillo continues. The company can also help MNEs monitor their global operations and assess areas of risk, where their existing policies may be inadequate – particularly under the new BEPS regime. There is now more than ever a need for financial information on a global scale, with BvD providing the scope and reliability that can best help MNEs.
As company and business information specialists, BvD differs from competitors by providing reliable financial information for a wide range of analytical functions – from M&A to credit and supplier risk to transfer pricing. The scope of coverage – over 18 million companies with detailed financials and 150 million in all – and the level of descriptive information (business overviews, corporate ownership links, news) in the company’s products make financial risk management and transfer pricing analysis with solutions more reliable, robust and simple to implement. BvD’s software solutions, like TP Catalyst, streamline the workflow around transfer pricing analysis, documentation and reporting.
“Moreover, our local presence in 35 offices around the world provides a level of service and support for our customers that goes beyond what competitors offer in the area of transfer pricing”, Carrillo attests. However, such a comprehensive database brings its own set of challenges, and BvD has been investing continually in technology to ensure that the data set is both usable and updated on a constant basis. “Technology is essential to the compliance and reporting process, especially as the reporting burden on tax payers increases as a result of BEPS”, says Carrillo.
“BvD’s technology solutions can help MNEs create Master File and Local File documentation in a streamlined manner, help MNEs periodically monitor their global operations against their arm’s length benchmarks for risk assessment and planning, and streamline country by country (CbyC) reporting.
“Furthermore, through its customised solutions team, BvD can help automate the transfer pricing management process from a day-to-day operational perspective by developing bespoke data warehouses that are directly linked to MNEs’ accounting systems and BvD databases, to automatically produce transfer pricing calculations and reports for documentation.”
Complying to the action plan
A number of elements come together to maintain the company’s successful track record. From standardising financials and ratios, linking data sources, creating unique identifiers, linking directors and contacts, adding bespoke research, appending and linking corporate structures, integrating information on M&A rumours to applying data verification, cleansing and quality control, BvD metrics add value to the information.
Considering any complications that may arise as a result of changes such as the BEPS action plan, its content has an important role to play in ensuring companies are complying with relevant reporting criteria.
For example, “CbyC reporting is extremely data intensive. To the extent that the financial data of a high percentage of MNEs operations already exist in BvD’s databases, BvD can automatically fill a large number of the CbyC reports directly from Orbis”, Carrillo adds.
“MNEs can also upload customised Excel templates with the necessary information to automatically produce the CbyC reports in TP Catalyst. Also, our customised solutions team can further automate the CbyC reporting process by mapping the relevant data from any custom-built data warehouse directly into the necessary CbyC reports, adding an additional layer of automation to the process.”
Speaking on the biggest challenges facing BvD clients currently, Carrillo says that increasingly stringent regulatory ties are problematic for multinationals, whose everyday operations have been interrupted by compliance demands. “The biggest challenges MNEs are facing include the additional reporting burden, the anticipated increase in tax enquiries, and the apparent divergence from the Arm’s Length Principle, which is likely to result in greater double taxation”, continues Carrillo. “This last point, in our view, is particularly concerning. As experts in business information, we find that there is sufficient information in the public domain to establish arm’s length policies – including in emerging markets. However, we worry that the OECD and many taxing authorities are pushing more and more for the use of profit split methodologies, which given the available data may, not yield reliable arm’s length results.
“With the degree of disclosure required under BEPS, the insistence by tax authorities to use profit-split methodologies is likely to increase. This will be to the detriment of the arm’s length principle where more reliable market-based methodologies – like the Comparable Profits Method or the TNMM – can produce more reliable measures of an arm’s length standard.”
It appears that the tax landscape is evolving in much the same way that the OECD has envisaged in the BEPS proposals, and with the issue of tax avoidance ranking high on the political agenda, particularly in mature economies, some contest whether the rules are at all necessary. Tax authorities are taking pains to recoup lost revenues, though the BEPS agreement still represents something of a paradigm shift for an international tax system that has for too long fallen foul of changing corporate behaviour.
With the public pushing for greater transparency on tax issues and reforms on the subject gathering momentum, the importance of companies like BvD has never been greater. As multinationals around the globe take their vital first steps toward the implementation of BEPS reforms, arriving at a fitting operating model depends significantly on the ability of affected companies to partner with firms who can make sense of data on the subject.
