Bureau van Dijk: Shift in the market, reduce exposure risk for BEPS compliance – Luis Carrillo
As world governments begin to implement the recommendations contained within the Organisation for Economic Cooperation and Development's 'Base Erosion Profit Shifting' report on transfer pricing, the race is on among multinationals to brace for the increase in transfer pricing risk and compliance burden. Chief Executive Officer talks to Luis Carrillo, director of transfer pricing solutions at Bureau van Dijk, about how the company's published databases and software solutions can streamline the compliance process for the benefit of multinationals.
Transfer pricing is the price related parties belonging to the same corporate group pay one another for goods and services. Given the potential for use as a mechanism to shift profits and alter the amount of taxes owed, transfer pricing has become a topic of focus for tax administrations globally. The guiding principle in transfer pricing for tax authorities and multinational enterprises alike is the "arm's-length principle": namely, that related entities (belonging to the same corporate group) should transact with one another as if they were unrelated third parties.
To help determine what constitutes an arm's-length price in a transfer pricing context, the Organisation for Economic Cooperation and Development (OECD) issued a set of recommendations in its 'Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' (the OECD Guidelines) in the mid-1990s. These were, in large part, implemented within the individual tax codes of member states and, since then, a large degree of regulatory uniformity has existed among the world's advanced economies.
Until now, that is. In October this year, acting in response to concerns that multinational enterprises continue to actively use transfer pricing as a profit-shifting and tax avoidance mechanism, G20 finance ministers meeting in Lima endorsed a new set of OECD-issued guidelines. As part of its 'Base Erosion Profit Shifting Project' (BEPS) report, the international body called on multinationals to tighten their documentation standards across the board. Among other new compliance obligations, such companies will be compelled to issue detailed country-by-country (CbC) reports on their operations within individual tax jurisdictions, to be made available to the relevant tax administrations."
Potential for problems
As the number of OECD member states signing up to the new recommendations has grown exponentially, industry experts such as Luis Carrillo are increasingly worried about the potential for misinterpretation of the information in the proposed CbC reports, and about the increase in transfer pricing risk that BEPS represents for multinationals - especially those operating in emerging markets.
Having worked in the sector since 1998, Carrillo has been privy to the shift in attitudes towards the activities of multinationals over that time. As director of transfer pricing solutions at Bureau van Dijk - a firm that provides, among other things, databases on company information and software capabilities that allow multinationals to discern whether their transfer pricing models meet international standards - he is privy to the concerns such companies express about how the politicisation of transfer pricing increasingly impacts their global operating structures.
"Certainly, the OECD has done a good job in taking feedback from member states and taxpayers alike," says Carrillo. "For the most part, however, the BEPS project does seem to be driven by emerging market economies' agenda to keep a larger portion of multinationals' global profits within their borders."
"Many of these governments feel that multinationals set up operations within their borders to take advantage of their lower labour costs but then proceed to strip all of the profits they make out of that country through the mechanism of transfer pricing."
In and of itself, this strikes at the core of why transfer pricing is regulated in the first place. However, Carrillo questions whether the recent politicisation of transfer pricing is undermining the arm's-length principle and the attribution of profits based on free-market economics.
"At its core, transfer pricing is an accounting issue," he says. "It's debits and credits. Because of the risk that accompanies the potential abuse of the system, it becomes a tax issue and, to that extent, a political one also.
"The global financial crisis definitely highlighted the abuse that some multinationals had perpetrated in certain industries, and so there has been a general uproar against corporate greed and a call for more regulation. However, when it comes to transfer pricing, multinationals in general set up their policies in line with the available legal frameworks, driven by their international growth strategies and not tax."
Ultimately, what worries Carrillo is the question of whether the BEPS project will undermine the arm's-length principle to a point where transfer pricing policies are set by formulary apportionments that lead to greater double taxation for multinational enterprises.
"If the OECD is now saying that more profits should be attributed to a given country's tax jurisdiction, are the profits of local companies similar to those of their foreign-owned counterparts?" he says. "If the answer is yes, fair enough; but if it is not the case, then companies owned by a foreign parent are being asked to leave a larger portion of profits to be taxed merely due to the fact that they have a foreign parent."
As OECD member states begin to implement the recommendations of BEPS, multinationals are waking up to the reality that the documentation regimes they currently run to comply with tax standards in multiple jurisdictions will simply not do under the new regime. The need to adapt accordingly has become urgent.
"The CbC reports are intended to offer a bird's-eye view of the global presence of the company," explains Carrillo. "These will include details on all the subsidiaries in all the countries in which a multinational has operations, as well as the high-level financial information of sales, profits, assets, employees and related party transactions.
"The risk is that when tax authorities are presented with that information without any context or understanding of what the business does, it is very easy for them to come to the conclusion that the company is parking all of their profits and assets in specific countries, possibly to the detriment of their own jurisdiction."
In certain jurisdictions, that may entail a palpable increase in tax audits if multinationals are not fully cognisant of the depth to which they are newly exposed to the BEPS-inspired regulatory framework among OECD member states.
As a supplier of sophisticated database technology that can pinpoint a company's exposure in an individual national jurisdiction and provide guidance on transfer pricing models accordingly, Bureau van Dijk is ideally placed to become the pilot light that companies look for when the blizzard of BEPS-mandated documentation begins to whirl.
"Our databases, such as Orbis, allow multinationals to see how far off they are from an arm's-length transfer pricing policy in the territories where they feel they are most at risk," Carrillo explains. "That helps our clients correct their transfer pricing policy before they close the books for the fiscal year as well as allowing them to quantify what the potential tax impact would be if you were under audit in a particular country.
"To the extent that we are able to obtain financial data for perhaps 30-40% of all the legal entities within a multinational group, we can also help our clients to automate the population of CbC reports on their BEPS commitments directly from our databases," he adds. "Lastly, our tools are a vital aid in financial planning. Using Bureau van Dijk's software solutions, multinationals are able to produce and update their transfer pricing benchmarks used to substantiate their yearly results."
The firm also offers a documentation platform allowing multinationals to manage the workflow around transfer pricing paperwork. Using this, Bureau van Dijk's clients are able to concentrate all the questionnaires and relevant financials from various stakeholders in the business, and collect them into one centralised data repository platform. "From there, you can produce all your different transfer pricing reports, including your master files, your local files and your CbC reports," says Carrillo.
Insofar as the BEPS requirements allow, Carrillo sees this as easily becoming the future of the transfer pricing sector. As compliance demands begin to mount, the temptation to bring accounting practice in house is set to become overwhelming.
"Investing in appropriate software tools to provide relevant solutions will probably be the way forward," he says. "To that extent, we're very well established to provide those kinds of solutions for multinationals."