BEPS Shifting Global Tax Rules: A Q&A With BDO’s Joseph Calianno

In early October, the Organization for Economic Cooperation & Development (OECD) released final rules for its Base Erosion and Profit Shifting (BEPS) initiative, which is, among other measures, designed to reduce tax-rate arbitrage by multinational corporations shifting profits artificially to low-tax jurisdictions.


Financial Executive spoke with Joseph Calianno, international technical tax practice leader at BDO USA, LLP, about BEPS and some of the reporting and compliance implications for multinationals.

Financial Executive: Can you provide a high-level explanation of the BEPs initiative?


Joe Calianno: We have a number of action items taken by the OECD that are designed to prevent tax base erosion and profit shifting. Those action items have taken the form of developing transparency rules that are designed to prompt multinational companies to disclose certain information, rules designed to limit interest deductions in certain cases, rules dealing with transfer pricing as it relates to certain transactions , rules dealing with the use of treaties, rules dealing with controlled foreign corporations, and rules that are designed to prevent the use of hybrid entities or hybrid instruments to obtain certain tax benefits, to name a few. These rules are designed to work in connection with one another for the most part.

Financial Executive: What are some of the questions you're getting from clients?

Joe Calianno: There's some uncertainty with how the rules will be applied by different countries. So if you're a tax director at a U.S.-based multinational group, as a result of these BEPS action items, you can have different countries taking different actions that could impact your global group, and the tax consequences of certain transactions, or certain structures you have globally.

So if you're doing business in five countries, you're going to have to monitor what rules are being adopted from this BEPS proposal by those countries to determine the impact it could have on worldwide group.

You have to look at this country-by-country, and what each country is doing with respect to these BEPS action items. In the United States, for some of these action items to be implemented, it may require either statutory or regulatory changes. Other jurisdictions might be able to adopt these action items much quicker than the United States.

For instance, Item 13 has certain rules dealing with country-by-country-reporting. That’s going to require a master file of information relating to the multinational group, as well as local files detailing the operations and transactions relevant to a particular jurisdiction, as well as economic analysis of inter-company transactions. You're looking at your compliance burden being enhanced as a result of this.

Financial Executive: Is there uncertainty about the potential for different rules being implemented inconsistently?

Joe Calianno: I think uncertainty comes in the sense that you're going to have to watch what each country is doing with respect to each of the BEPS action items. One thing you to have to look at is whether all countries are going to apply all these rules 100 percent consistently with the OECD recommendations. Probably not. There's flexibility in a lot of these items. Will all countries adopt each item? Not necessarily.

There's generally a commitment by the major countries to implement various BEPS action items, Some countries could do it very quickly. In others, it may take a statutory change or a regulatory change to implement some of these actions.

Financial Executive: As rules are implemented, are multinationals likely to have to improve their reporting capabilities?

Joe Calianno: I'll focus on one in particular, the country-by-country-reporting, as well as the transfer pricing information. That’s going to require greater reporting. For instance, the United States Treasury Department has said it will implement country-by-country-reporting along with a number of other countries, so you are looking at a much greater compliance burden. That's going to require certain details on operations and transactions relevant to various jurisdictions that you're doing business in, and the economic analysis of inter-company transactions.

If you're a tax director, one of the items that you're going to have to look at what countries are going to adopt, or modify, Controlled Foreign Corporation rules, and how are they going to apply those rules? The OECD recommendation gives guidelines, but you're going to have to look at each jurisdiction. What type of CFC rules are going to be adopted? What is going to be the impact on the U.S. multinational group?

Financial Executive: Does BEPS go beyond being a tax issue?

Joe Calianno: It could change, in some instances, how you might be doing business. These measures are designed to deal with tax issues by their nature, but they could alter how things are done within your global structure. Also, from a financial statement standpoint, you're going to have to look at what's happening in the jurisdictions that are implementing BEPS recommendations. What implications will that have, not only from a tax standpoint, but will that impact your financial statement reporting?

These action items could have broad-reaching implications. You're going to have to monitor these action items, and what actions various countries are taking with respect to these action items, to see how it's going to impact your particular organizational structure.

Financial Executive: Is BEPS likely to require technology upgrades?

Joe Calianno: There are some detailed reporting requirements here, so there may be a requirement to enhance your systems to be able to report this information. I think that would vary from company to company as it relates to a company’s ability to comply with certain BEPS action items, such as country-by-country-reporting.

To a large degree, this comes down to monitoring. What are the different countries where you're doing business, and what BEPS measures are they adopting? And what are the specifics of those measures that they are adopting locally?

Financial Executive: Given the tight timelines that OECD is suggesting, what should companies be doing now?

Joe Calianno: What you need to do now is to be examining your organizational structure. You might be looking at, "Am I deducting interest? Do I have hybrid entities or instruments in my structure? What kind of transactions am I undertaking? What transfer pricing am I doing? Where?

Then you would look at, "Well, okay, these are the various transactions that I'm undertaking and these are the structures that I have in place in my organizational structure. . What are the implications if country X adopts this rule or that rule?" Those are things I think you're going to be focusing on.

The devil always comes in the details of what various countries are adopting, so you really have to analyze the specific implications to your group. BEPS is really going to change the landscape, and it can have broad implications on multinational groups.