beps: practical responses to action items 7, 8–10 and 13 · page 3 beps: practical responses to...

BEPS: Practical responses to action items 7, 8–10 and 13 Peter Griffin Stephen Bates

BEPS: Practical responses to action items 7, 8–10 and 13

Disclaimers

► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances

► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.


Start

Direct sales model

(non LRD/reseller)

Cost plus % of revenue

Cost plus % of cost

Commission

Commission agent Commissionaire

Cost plus (service)

BEPS action 7 Direct sales decision framework

Options 1. Keep status quo 2. Prepare better documentation on Transfer Pricing, internal processes and external statements (e.g., LinkedIn) 3. (Introduce a) Master Distributor 4. Increase local compensation (i.e., margin) 5. File local tax returns for Permanent Establishment (PE) of the principal (with/without income) 6. Change model to a buy-sell model 7. Identify/quantify third party comparable transactions 8. Divest distribution network Considerations 1. APA/PE Rulings 2. Financial statements impact


BEPS actions 8-10 IP alignment decision framework

Start

Maintain IP offshore A

1. Onshore functions ► New headcount – hires,

transfers, secondees, travelers ► New Roles, Reporting

2. Timing ► Business Change – external or

internal 3. Location

► Substance – In country and/or in branch (US, Other)

► Availability of IP regimes, step-up/amortization, debt funding

4. Valuation

Indefinite Temporary*

Restructure IP company Restructure

Restructure

Full Onshore Partial Onshore

Onshore IP

Split Technology vs.

Brand IP

Phased Platform IP vs. Buy-Sell Rights

1. Reporting requirements ► Country-by-country reporting ► Master/Local file

2. Developments in the international tax landscape ► OECD and EU developments

(e.g., BEPS) ► Unilateral law changes (e.g.,

UK DPT) 3. Transparency

► Ruling analysis in view of exchange of information under BEPS Action 5 and automatic EU exchange of information

1. Board of Directors ► Composition of the board ► Location/frequency of meetings ► Substance of the meeting

(content) 2. IP/Risk Management Committee

(BoD appointed) ► Meeting at rotating locations

(no branch) ► Semi-Permanent (branch?)

3. Employees ► Offshore hires, transfers ► Branch (US, other)

New IP Owner – see B5

Historic IP Owner – See A4

B3 B4 B5

B1 B2

B

A1

A4

*E.g., Double Irish structure

A2

B6

Low or zero tax offshore IP ownership

Considerations Considerations Considerations

1. Hub Co operations ► Supply chain (production

oversight) ► Sales/marketing, regional

management, (including limited DEMPE functions)

2. Transfer Pricing ► Margin on revenue (or even

profit split) after royalty to IP company –DEMPE oversight substance? (See A4)

► Bilateral v unilateral APA options

Considerations

Status Quo (Re)structure Principal/Hubco

A3 A5


BEPS action 13 – key considerations

Master file High-level information about the multinational enterprise’s (MNE’s) business, transfer pricing policies and agreements with tax authorities in a single document available to all tax authorities where the MNE has operations

Local file Detailed information about the local business, including related-party payments and receipts for products, services, royalties, interest, etc.

CbC report High-level information about the jurisdictional allocation of profits, revenues, employees and assets

Key Considerations:

1. Plan on needing to create a CbCR, Master file and Local file for 2016

2. Master file/Local file: Identify gaps between current documentation and future state requirements

3. CbCR: Determine timing and location; mock up form; assess technology and process


Master file transfer pricing gap analysis template


Local file transfer pricing gap analysis template


CbC reporting decision tree 2016 transition planning

Identify which of those have

secondary reporting rules.

Create initial shortlist of reporting

jurisdictions.

Identify which from the initial shortlist

exempt local filing if there is a surrogate

parent.

Identify which from the initial shortlist

exempt local filing if there are information exchange provisions.

Create second shortlist of reporting

and potentially exempt jurisdictions.

Review surrogate rules to determine

limitations of exemptions.

Create third shortlist of final potential

reporting jurisdictions.

Identify provisional surrogate parent/

representative filer.

Monitor local country

developments and additions to

list in item 2.

Identify jurisdictions of operations

outside the US.

1

Re-perform periodically

The decision tree illustrated below represents the sequential decisions to consider when creating your 2016 CbC reporting compliance plan.

2

3 6

5

7 4

8

9


Assess risks and opportunities Gain insight into your company’s profile

Prepare a sample CbC report to identify issues to be addressed before compliance requirements begin. The report should identify: a) Data sourcing and quality issues b) Potential structural changes c) Transfer pricing policy amendments d) Intercompany agreement review e) Detect outliers and evaluate potential tax

exposure f) Assess your readiness for CbC reporting g) Connection to master file/local file h) If actions are necessary for your company in

advance of your initial filing(s)

Pre-filing risk assessment Action steps


Key considerations Data inventory dictionary

Steps to create the Data Inventory Dictionary (a comprehensive list of discrete data elements and their source)

1. Identify and map CbC data points to existing sources. 2. Determine transformation necessary to reach fit-for-purpose

validated data (e.g., carve-out of branch information). 3. Determine data quality and identify solutions to solve bad

quality data. 4. Determine and assess alternative data sources for each

CbC data point. 5. Create a mapping between group Chart of Accounts and

the CbC data items. 6. Determine data sources for unstructured data

(e.g., business activities). 7. Identify missing data and determine solutions to add data to

the consolidation system (e.g., through manual input).

Country by Country Reporting - Baseline Information and Data Points

SAP Module Data Type

DatapointMaster,

Financial or Transactional

SubmissionSAP Table /

ReportComments Availability

Fitness for Purpos

C1Completion of the country by country reporting template

CO (Controlling) Master List

C1.1 Place of effective management for each entity

C1.2 Important business activity code CO (Controlling) Master ListPrescribed list of codes included in the draft CBCR Requirements consultation - page 18.

C1.4 Revenues FI (Financial Accounting) Financial Numeric FAGLFLEXT GL Fiscal Year ReportC1.6 Earnings before income tax FI (Financial Accounting) Financial Numeric FAGLFLEXT GL Fiscal Year ReportC1.7 Proft before tax per TB FAGLFLEXTC1.8 Income tax paid (on cash basis) to country of organisation FI (Financial Accounting) Financial Numeric FAGLFLEXTC1.9 Income tax paid (on cash basis) to other countries FI (Financial Accounting) Financial Numeric FAGLFLEXT

C1.10 Total withholding tax paid FI (Financial Accounting) Financial Numeric FAGLFLEXTThere is a specific withholding tax code from which a report can be run for a defined time period

C1.11 Stated capital and accumulated earnings FI (Financial Accounting) Financial Numeric FAGLFLEXT GL Fiscal Year Report

C1.12 Number of employees HR (Human Resources) Master Numeric S_AHR_61016369

Note that the draft CbCR guidance requires that employees seconded to other members of the group do not need to be reported, whereas secondees from other group members must be included.

C1.13 Total employee expense FI (Financial Accounting) Financial Numeric FAGLFLEXT

Pay Accumulation Statement (Appears to include employee expenses but it may be easier to use the GL Report)

C1.14 Tangible assets other than cash and cash equivalents FI (Financial Accounting) Financial Numeric FAGLFLEXT

This data should be based on assets and values as at 'the last day of the relevant fiscal year' per the draft CBCR Requirements (page 20 para 4).

C1.15 Royalties paid to constituent entities FI (Financial Accounting) Financial Numeric FAGLFLEXTC1.16 Royalties received from constituent entities FI (Financial Accounting) Financial Numeric FAGLFLEXTC1.17 Interest paid to constituent entities FI (Financial Accounting) Financial Numeric FAGLFLEXTC1.18 Interest received from constituent entities FI (Financial Accounting) Financial Numeric FAGLFLEXTC1.19 Service fees paid to constituent entities FI (Financial Accounting) Financial Numeric FAGLFLEXTC1.20 Service fees received from constituent entities FI (Financial Accounting) Financial Numeric FAGLFLEXT

CB

CR

TA

BLE

Current Requirements ReData Format SAP Solution

Ref

Source data readiness Action steps

Entity management

Data inventory dictionary


Sustain future compliance Improving and sustaining CbC process and tools

To create a sustainable and repeatable process for future years: 1. Review existing and new technology

options 2. Develop a CbC reporting process

manual 3. Convert manual data gaps to software-

enabled solutions 4. Define data governance, extraction,

mapping and analytics 5. Pilot report preparation and filing

processes

Practical considerations as you evaluate your technology alternatives and data sourcing strategy: 1. How will your CbC reporting system

integrate with your corporate tax return filing system?

2. How will you leverage enterprise data instead of duplicating it?

3. How will you approach reconciliations to ensure the CbC data agrees with a trusted and verifiable source?

4. Will local controllers have system access to validate certain aspects of the filing (e.g., related and unrelated revenue)?

Reporting technology readiness Action steps What you should be thinking about


Action 13: Leading practices What types of actions do we see companies taking?

► Immediate timeline: ► Creating a draft CbC template ► Gap analysis of current global documentation compared to new requirements ► Requests for proposals (RFPs): investing in and centralizing transfer pricing process and

consolidating providers ► Reviewing for longer-term consequences and restructuring:

► Debt ratios ► Rulings ► Global transfer pricing policies of supply chain structures ► Actual target margins across countries and intercompany pricing process for monitoring

the margins ► Reporting capabilities of the current technology environment ► Intercompany agreements ► Alignment of legal ownership with economic ownership ► Existing substance ► Intangible property (IP) strategy ► Advance Pricing Agreement (APA) strategy ► Global footprint compared to global tax footprint

Thank you

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