Tax & Accounting Blog

Deloitte’s Philippe Penelle on Companies’ Response to BEPS Action 13

BEPS, Blog, Checkpoint, ONESOURCE, Transfer Pricing July 12, 2016

Philippe Penelle is a managing partner and leader of the Washington National Tax Transfer Pricing practice of Deloitte Tax, LLP. Mr. Penelle answered the following questions for BEPS Global Currents on June 6, 2016 regarding the OECD BEPS project:

Q: Are your clients generally taking a wait-and-see approach for the U.S. to finalize its CbC reporting regulations before they feel the need to begin preparing and performing TP documentation testing? If so, what are their general reasons for doing so?

A: Many U.S. multinational corporations, especially those relying heavily on intellectual property, started assessing the state of their transfer pricing documentation and structures, in light of the BEPS TP Actions, before the CbC Temporary Regulations were issued, and continue to do so after the U.S. finalized its CbC rules on June 29, 2016. Other smaller U.S. multinational corporations relying heavily on intellectual property did take that wait-and-see approach until the CbC Temporary Regulations were issued but started shortly thereafter to think about what their CbC report would look like. For those companies, I don’t believe that the finalization of the CbC rules will have a significant impact on the work streams they started in the first months of 2016 to assess or test their documentation. U.S. multinational corporations that are less reliant on intellectual property may have been less inclined to react to the Temporary CbC rules and some may have taken a longer wait-and-see approach.

Q: Are your clients expressing any concern about the EU pending proposals to implement public CbC reporting that would require U.S. MNEs with EU operations above a certain threshold to provide CbC reporting information on their websites for a five-year period? If so, are they taking proactive steps to restructure any of their tax transactions?

A: Public CbC reporting is definitely an area of major concern for most US multinational corporations. Although some U.S. companies may be generally concerned about providing this documentation online, the reporting of functional activities of subsidiaries by jurisdiction and the disclosure of financial information required by the CbC template is perceived by many U.S. multinationals as the disclosure of competitive information. For example, a company starting to perform certain functional activities in a specific jurisdiction for commercial reasons may be concerned about the informational value to competitors of such information and the use of such information by competitors to adjust their own commercial strategy in that region. I do not believe that companies have yet fully assessed the potential impact of such public disclosures on their business. Therefore, I do not believe that changes in structure or other reactive postures have yet been fully implemented other than in a few cases of companies ahead of the curve. Having said that, some U.S. companies are definitely in the process of informing their C-suite of this development and have started the process of generating internal conversations on how to respond.

Q: Although the U.S. Treasury has not yet announced its position on implementing master and local files from the OECD BEPS Action 13 recommendations, are your clients generally preparing these additional forms of transfer pricing documentations in anticipation of the U.S. possibly requiring them in the near future?

A: Not many U.S. multinational corporations are particularly concerned about the U.S. adopting the master and local files from the OECD BEPS Action 13 recommendations, given the expected master file/local file requirement within the foreign countries in which they operate.  Some companies may continue to rely upon traditional 6662 TP documentation for U.S. purposes but will develop BEPS-compliant master file and local files for foreign country compliance purposes. Other companies will develop a U.S. local file that is BEPS-compliant regardless of U.S. requirements. The thought process for these companies is that a BEPS-compliant local file contains the ten principal documents required under 6662, and should thus be compliant with U.S. regulations whether or not these regulations are changed to require a local file.

Q: Do your clients generally believe their IT systems are capable of complying with the OECD BEPS Action 13 recommendations, and if not, what do you generally propose they do to make them compliant?

A: As far as the CbC report is concerned and the data required to fill out the template, some U.S. multinational corporations feel that their IT system is either already capable of dealing with or will be capable with minor adjustments. Other companies, especially those that grew by acquisition and never integrated reporting systems, are in a very different position and often feel that they will need substantial IT work to get to a place where the reporting can be sufficiently automated. The most significant IT system issue I see is in connection with potential structural changes companies may make to accommodate the BEPS Final Deliverable. Thus, the issue is not so much a reporting of data issue as it is a change in structure issue that results in substantial changes in IT systems.

This article does not constitute tax, legal, or other advice from Deloitte LLP, which assumes no responsibility regarding assessing or advising the reader about tax, legal, or other consequences arising from the reader’s particular situation.

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