The BEPS effort, designed in part to reduce the shifting of revenue by multinational companies into low-tax jurisdictions, includes a variety of reporting rules that would rewrite international tax regulations, along with financing and derivative activity provisions that will affect corporate treasury departments. FEI Daily spoke with Melissa Cameron, Global Treasury Leader & Deloitte Advisory Principal, about the implications for corporate treasurers and finance leaders.
FEI Daily: Can you describe BEPS?
Melissa Cameron: BEPS is being viewed as a global reset of taxes. And, when one thinks of it as a global tax reset, then you start realizing that this may impact the ways in which companies operate, and as a consequence of that, it eventually gets down to the functions of finance including treasury. Additionally with the specific actions targeted at financing, Deloitte believes this is going to impact the treasury department.
At a very high level, BEPS has momentum with just under a hundred countries around the world that now considering how they will legislate domestically the 14 finalized actions that look at ways in which international companies have leveraged strategies to manage their costs including the tax base.
In aggregate, the BEPS committee estimates that corporate taxes may increase globally the effective tax rate, , by 4 to 10 percent on average. Which means it’s something that the CFO and the CEO need to pay attention to and, those that can, anticipate and minimize any impacts.
FEI Daily: What kinds of questions are you getting from clients so far?
Melissa Cameron: I think the general themes are fairly under-evolved. While there are many people in tax departments that will understand the actions that have been taken, many of the questions are coming back to things like, “How quickly do you think this is going to impact us?” and, “What do you think it will do to our business?”
We say that this is a broader issue than a tax issue, and while your chief tax officer or VP of tax should be identifying the measures that impact the business, there are broader measures that need to be assessed very quickly, such as, for example, “How do we sell to customers? How does our supply chain work? Are there any impacts specific to supply chain or the way we organize?” And these are business issues at the heart of C-suite and board positioning.
My view now is, this topic needs to be elevated to the board and especially to the CFO. And once these decisions are made, from an individual business perspective, you’re going to move through to implementation reasonably quickly because the reporting for BEPS starts effective with data collection from January of 2016.
Another question I get is, “Will this really be legislated?” And, I think this is a moving thing. Each country has to legislate locally. Everyone’s going to have their own cycles for legislating and interpreting these rules and bringing them into their own domestic tax law, and that’s going to make it quite difficult as well.
We’ve already seen a number of countries take actions in advance of the OECD finalizing the proposals. We’ve got Australia, Austria, Brazil, and China, along with France, Germany, Ireland, Italy, Japan, Luxembourg, Mexico and Russia. So, you can see that there’s a lot of momentum that’s making it very difficult for one to ignore this or to think that it’s not going to impact them.
When you get 100 countries with this level of momentum around something and saying, let’s get our fair share of corporate taxes, it’s got a political momentum around it as well, given the fiscal situations of many countries. So, there is much more to come on this, but certainly it’s something that is taking hold quite quickly.
FEI Daily: Is there a perception that this is exclusively a tax issue?
Melissa Cameron: Some people might see it exclusively as a tax issue. You may even find some tax people thinking it’s exclusively a tax issue. However, the minute you start reviewing the specific provisions and seeing what elements of business are captured, then it quickly moves into a sales issue or a supply chain issue, a financing issue, or many other topics. I think that perception quickly gets eroded away.
For example, if you were speaking to someone in charge of tax at a corporation and you asked them, for example, “Do you have a sales principal? And they say, “Yes.” And you say, “Are you thinking about some changes?” And they say, “Yeah, I might be.” The next thing I would ask them is, “How are you catering for that in your ERP systems?”
And immediately the light goes on and they realize that they’ve got to make some pretty significant system changes to accommodate the updates to the way in which they’re selling to customers, for example. Then IT is brought in and marketing is brought in, and it becomes a cross-functional issue with various departments of the organization.
FEI Daily: For the treasury function, what are some of the immediate challenges?
Melissa Cameron: There are two areas of immediate challenge. The first is looking at what will be the decisions made on the underlying business model. The second challenge is creating a sustainable operating model for the treasury department that captures and responds to the articles that are specific to treasury. In fact, nine of the 14 actions are impacted.
BEPS strikes at the heart of financing, liquidity, foreign currency management, and the push-down of debt and internal derivatives to subsidiary companies, as well as the broader substance issue of, if we have foreign financing companies that are handling our international cash, do we need to put more people in the location of the financing entity to create greater substance and robustness against further reviews by tax authorities of our business?
One other key item will be much greater documentation of inter-company activities and the need that we move people offshore to support these structures. Do we have the right governance practices in place, and policies and technology enablement, to have the controls that we want? After all, treasury is looking after the money of the firm. So, all of these matters start saying we’re going to have some form of redesign of treasury organizations globally.
FEI Daily: Is BEPS likely to require technology upgrades as well?
Melissa Cameron: I think we have a good portion of companies now running on treasury management systems. However, there are a lot that still even manage on Excel spreadsheets or do a lot of things on an off-line basis outside of their core treasury systems.
There are new country-by-country, or CBC, reporting requirements under BEPS, and that will require some treasury inputs that best be dealt within the system. But I think the minute you move people outside of your core center of treasury, the system allows you to gain the comfort that if you have a few people in a location on the other side of the world, you have the ability to know that they’re working within the control structure, and you can have visibility into what they’re doing even though they’re not in the same office as the treasurer or the CFO.
FEI Daily: As companies look at what they need to change in response to BEPS, does that create an opportunity for process improvements?
Melissa Cameron: I think any time you take the opportunity of re-examining your business, you have that opportunity to leapfrog what you’re doing today. So, for example, if I am a CFO and I’m faced with, “I need more substance in a location,” I might also have, then, an initiative where I could say, “I’ve got very decentralized finance operations activities. And perhaps this is our opportunity to create a shared services center in the same place, get better automation and efficiency out of what we do today.” So, certainly, I believe that there is an opportunity here. It’s not just bad news. When you’re given lemons, make lemonade.
FEI Daily: Given that, what are you advising treasurers to be doing now?
Melissa Cameron: The first things we’re recommending are to take a review of the BEPS initiative. Take the opportunity of reviewing the materials that have been published, and engage quickly with your tax team around, “What does this mean for us? What does it mean to my financing company? What does it mean to our inter-company leverage?”
Once that’s through, don’t expect the tax people to have all the answers at hand. But now companies dealing with a lot of very complicated initiatives, with varying degrees of legislation around them, depending on which market you’re in in the world.
I think this is going to require treasury teams to have some dedicated focus on, firstly, undertaking an impact assessment, and then going through some degree of alignment around, “What does this mean for our operating model, and the way in which we structure our business?” And that, in and of itself, will lead to some forms of enhancement to the treasury design before these activities get enabled through treasury systems, updated practices, and changes to leverage, or whatever might be required.
We think companies need to revisit forecasting, exposure management, amongst many things. And there will be some decisions made about the possibility of having some additional treasury professionals offshore, for example, especially for U.S.-based companies who have operated with their teams exclusively at HQ.