The landscape of international tax is constantly evolving, and the OECD's Base Erosion and Profit Shifting (“BEPS”) project has been a major driver of that change. This initiative aimed to tackle strategies that multinational enterprises (“MNEs”) used to shift profits to low-tax jurisdictions, eroding tax bases in high-tax countries like the United States (“US”).
BEPS: A Global Effort to Level the Playing Field
BEPS is not just a set of guidelines; it is a comprehensive framework with fifteen action points. These actions address various aspects of corporate tax avoidance, with a strong focus on transfer pricing.
BEPS Impact on Transfer Pricing
BEPS introduced several key changes that influence US MNE transfer pricing practices:
- Increased Transparency: US MNEs now face stricter documentation requirements, providing tax authorities with a clearer picture of their global operations and transfer pricing methodologies.
- Emphasis on Intangible Assets: BEPS emphasizes the role of intangible assets like intellectual property (IP) in value creation. This compels US MNE companies to demonstrate the economic substance behind their transfer pricing for intangible-related transactions.
- Allocation of Profits: BEPS provides allocation of profits mechanisms and provide global minimum tax rates, that might impact transfer pricing models of US MNE.
The Impact on US MNE
For US MNE, BEPS might require a reassessment of their transfer pricing strategies. Below are some examples of the actions to be reviewed by their tax departments:
- Enhanced Documentation: Companies must prepare robust transfer pricing documentation based on three tier model (Country by Country, Masterfile and Local File).
- Economic Substance: The focus on value creation demands clear evidence of the economic activities performed by related entities, especially for transactions involving intangibles.
- Increased Compliance Costs: Meeting the stricter documentation requirements and potential challenges from tax authorities might lead to higher compliance costs for US MNE businesses.
- Increased Scrutiny: Tax authorities are now more likely to scrutinize transfer pricing practices, particularly for transactions involving intangibles and low-tax jurisdictions.
Key Aspects US MNE operating in Digital Economy
Additionally, BEPS is providing new profit allocation rules focusing mainly in Large MNE, global minimum tax rate and digital economy considerations.
- BEPS Action 1 address issues as mobility, reliance on data and network impact.
- Pillar One introduces new rules for profit allocations based on certain marketing and distribution activity (Amount B) and the share of the residual profits (Amount A).
- Pillar Two introduces a global minimum tax rate of 15%
Looking Ahead: A More Balanced Playing Field
BEPS represents a significant shift in the global tax landscape. While it presents challenges for US MNE, it also fosters a more level playing field by reducing aggressive tax avoidance strategies. US MNE should embrace transparency and centralization in their transfer pricing documentation process. A closer look at the supply chain, IP and the relationship with economic substance and the allocation of profits. All these aspects will require US MNE to incorporate BEPS in their business culture and operational procedures for navigate the new environment effectively.
The information provided in this article is meant for general information purposes only and should not be taken as professional advice. It does not necessarily represent the views of the authors, facilitators, or TP CUBIT. While all attempts have been made to verify the accuracy of the information at the time of publication, the author, facilitator, and TP CUBIT are not responsible for any losses or liability that might arise from using or relying on the contents of this article.
