Transfer pricing and BEPS in global finance

Aggressive tax avoidance is a serious issue that affects corporations, international governments and the economy. Learn more about how the OECD is working to give governments the required tools to identify unacceptable tax practices.

Aggressive tax avoidance that is outside the spirit of the law is an ongoing problem for governments and the global financial sector. The Panama Papers information release is a timely reminder of how sensitive this issue is across the world. It not only affects international business markets and economic growth, but public interest and the credibility of the accounting profession.

MULTINATIONAL ENTERPRISES AND TAX AVOIDANCE

To combat the veil of secrecy that allows funds to be transferred between jurisdictions and hidden offshore from tax authorities, the OECD has introduced new transfer pricing guidelines that facilitate increased transparency and fight illicit flows. The OECD is also working to bring the legal and regulatory frameworks of all member countries up to international standards.

Since tax regimes are national in character, large corporations can face a dizzying array of conflicting treaties and rules, reports Gowling WLG. The OECD’s goal is to create a unified response that balances the desire of multinational enterprises (MNEs) to avoid unnecessary tax burdens with the need for international tax compliance, accountability and integrity.

THE BEPS ACTION PLAN

The OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan is one of the most important pieces of legislation the transfer pricing community has seen in years, particularly for countries like Canada and other subsidiary-based economies.

The initiative’s core principles exist to ensure coherence, substance and transparency in transfer pricing while eliminating tax loopholes that allow for treaty shopping and other questionable MNE tax planning strategies that shift high portions of taxable income to offshore locations.

Primary measures of the BEPS Action Plan:

  • Increasing the similarity of tax rules for participating countries to ensure that profit is only taxed once in the jurisdiction where it is earned
  • Taxing MNE profits in the country where most economic activity occurs as determined by people functions and value creation
  • Instituting a country by country reporting policy that tracks revenue, stated capital, accumulated earnings, number of employees, tangible assets and subsidiary activities
  • Requiring MNEs that meet the projected reporting threshold of €750 million to disclose their business and tax planning strategies for corporate transparency

Other supportive OECD measures include strengthening dispute resolution procedures and recommending a fixed interest percentage restriction on EBITDA.

CANADIAN TRANSFER PRICING

Canada’s new federal budget is tackling the ethics of transfer pricing and BEPS in domestic legislation to increase OECD cooperation with other G-20 countries and improve the integrity of Canada’s international tax system. This means enforcing country by country reporting requirements, reviewing MNE audit and assessment practices and introducing significant consequences for bilateral and multilateral treaty abuse.

Budget 2016 also proposes improved interpretation of the existing arm’s length principle for transfer pricing to better align how our country categorizes and applies tax to MNE profits with the economic activities that are generating those profits.

BUILDING A BETTER TAX SYSTEM

At CPA Canada, the driving force behind our mandate is to serve members with integrity and promote economic growth as we continue to foster greater trust and accountability in the profession. Issues in transfer pricing and BEPS by large corporations warrant careful examination. We support our government’s joint mission with the OECD to crackdown on tax evasion.

Optimizing MNE profits and reducing tax payable are good business, international or otherwise – but risking stakeholder investments, endangering long-term corporate viability and lining executive pockets at the expense of the public and the economy are not.

Learn more about transfer pricing, international business best practices and Canada’s commitment to confronting the BEPS problem:

In-Depth Transfer Pricing
September 26-28, 2016 | Toronto, ON
CPD hours: 24 | Satellite options in Calgary and Ottawa

Transfer Pricing (Elearning)
CPD hours: 11 | On-Demand

Highlights

Gain practical organizational insights and learn from industry experts at this annual event for not-for-profit financial leaders.