Multinational companies are facing the biggest shake-up of cross-border tax regulation in years. The OECD has proposed reforms to the rules that its member states and several other nations, including G20 countries, had signed up to in 2015 to counter base erosion and profit shifting (Beps).
Known collectively as Beps 1.0, these were designed to ensure that multinationals would pay their fair share of tax wherever they made their money instead of moving profits to different jurisdictions to minimise their liabilities. The OECD has estimated that profit-shifting practices cost about £190bn a year worldwide in lost tax revenue.
The OECD’s proposed changes – Beps 2.0 – are grouped into two pillars. The first focuses on redressing the key shortcomings of Beps 1.0, which didn’t account for how to tax firms operating in the digital economy. This deficiency led some countries to impose unilateral measures that created double-taxation problems. The updated rules mean that any business turning over at least €20bn (£17.7bn) globally a year won’t necessarily need to have a physical presence in a given country for it to owe tax there.
The second pillar has a more ambitious reach, introducing a global minimum tax rate of 15%. Any multinational generating €750m-plus in annual revenue will be subject to this in every jurisdiction where it makes a profit. That is likely to apply to thousands of companies around the world.
Why firms are still waiting for formal guidance
The OECD had originally intended the Beps 2.0 rules to take effect this year, but delays in passing local legislation have meant that the deadline has been pushed back until the start of 2024. Those setbacks have also made it hard for businesses to prepare fully for the changes.
There is concern that these rules could be perceived as a cash grab by the G20
“Until you see the draft legislation and receive formal guidance for each country in which you operate, there’s very little that you can do,” says John Weybourne, global head of tax at financial services provider Apex Group. “It’s simply been a case of monitoring the proposals from the OECD and waiting for legislators around the world to take the blueprint and pass it into law. Only once that information is available, people will know what they must report and where.”
Catherine Hall, international tax partner at accountancy firm Mazars, observes that firms have tended to approach the situation in one of two ways. Some have been engaged with the OECD from the start and are much further advanced than most with their planning, if not necessarily their implementation. Others have adopted a more relaxed attitude, given that there will be a three-year transition period during which there is no risk of being penalised for compliance failures.
But the latter approach may be problematic, because auditors will start asking from next year to see evidence to support the positions businesses are taking, she warns.
Where will the difference be paid?
There is also uncertainty about the information that companies will need to provide to comply with the Beps 2.0 rules, Hall adds.
“There’s a big exercise to be done in terms of data,” she predicts. “Taking what data you already have for things such as country-by-country reporting (CBCR), it will undoubtedly not have everything you need. That’s because CBCR reports income and doesn’t report the tax level – and those don’t always match up.”
This means that companies will need to figure out what information they are missing and where they can find it.
“Businesses should not assume that their existing accounting and enterprise resource planning systems will easily provide the data required,” says Emma Locken, corporate tax partner at accountancy firm Crowe. “It will be important to understand where gaps in the systems could exist and what modifications may be required to capture the data.”
Other unanswered questions are fuelling debate, particularly when it comes to jurisdictions with corporate tax rates of under 15%, where top-up taxes will therefore need to be paid. Take Ireland (12.5%), for instance. It has yet to be established whether a multinational firm profiting there would be expected to pay the extra 2.5% in Ireland or its home country. That could have significant implications for emerging economies that have adopted low tax rates to boost their competitiveness.
“There is concern that these rules could be perceived as a cash grab by the G20, because multinationals are headquartered in its member states,” Weybourne says. “For developing markets that are using lower tax rates to attract investment, that might be a little unfair if the additional tax ends up in the countries where those companies are based.”
What difference will Beps 2.0 make to compliance teams?
The ongoing lack of clarity is also making it difficult for multinational businesses to make long-term tax plans.
“Until it becomes clear as to how different territories will implement these provisions domestically, you can’t plan for what the impact will be on your tax strategy,” Hall says. “But we always say that your strategy shouldn’t drive what’s happening with the business anyway. It should be a question of asking ‘what is the strategy for the business?’ and then making it as efficient as possible from a tax perspective.”
However the laws end up being applied locally, the new rules are likely to have a significant impact on finance departments. Locken believes that many teams are “likely to be under-resourced in terms of both assessing the impact of pillar two and having the right training to manage the ongoing compliance and reporting requirements.”
Some businesses have started strengthening their compliance teams in anticipation of the extra workload. Apex Group is one of them, as Weybourne reveals.
“I’m already recruiting extra resources to ensure our compliance with Beps 2.0 and what it’s going to introduce,” he says. “The volume of work is likely to be onerous. You’re looking at potentially having to use different reporting requirements, disclosures and software in each country of operation.”
Weybourne adds that he doesn’t expect the new rules to have a material impact on where multinationals choose to do business.
“This is really a compliance and admin burden, rather than something that’s going to really move the needle from a tax structuring and investment perspective,” he predicts.
It seems that, while multinationals will inevitably end up paying more tax, the task of complying with Beps 2.0 is set to cost them plenty too.
