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Tax Pricing Agenda 2021: Tax Certainty

29 Jan 2021
BEPS, Current news, Europe, Tax Planning, Tax Pricing Agenda
ADS, BEPS, BEPS 2.0, CFB, global tax, KPMG, OECD, Pillar One, Tax digitalisation

Tax security and certainty are the backbones of the world of taxes. The goal of the OECD/G20 BEPS project is to create a consensus-based international tax rule to address base erosion and profit shifting, thereby protecting tax bases. At the same time, this also ensures the provision of more certainty and predictability to the taxpayer.

 

The development of BEPS 2.0

On the 14th of October 2020, the OECD, with support of the G20, published the Tax Challenges Arising from Digitalisation report on the  BEPS 2.0 Pillar One¹ Blueprint. The deadline for (draft) submissions for the report focusing on Pillar Two² was the 14th of December 2020, with virtual public consultation meetings on the 14th and 15th of January 2021. Reports with a consensus solution and elaboration of technical aspects are expected to be published during this year, with implementation – using MLI – for the relevant agreement by the end of 2021.

¹In Pillar One the profits are redistributed among market countries.

²Pillar Two introduces the global minimum tax rates.

Pillar One

Pillar One aligns tax rights with the involvement of the local market. There is a need for a multination consensus for this to happen; otherwise, the unilateral digital tax measures could increase significantly.

Pillar One is a series of proposals to rethink tax allocation rules in a changing economy. The intent is to attain some of the remaining profits of multinational corporations taxed in the jurisdiction resulting in revenue. Think of residual profit generated by capital, risk management functions, and/or intellectual property. Automated Digital Services (ADS) and Consumer-Facing Businesses (CFB) apply as well. This makes the scope wide enough so that the encompassing companies can benefit from significant and long-lasting interactions with customers and market users. This process links tax rights related to these companies’ income sources, which do not need to depend on physical presence in the jurisdiction.

 

 

Amount A:

The new tax law awards high profits based on a formula, which does not necessarily take the business position. Amount A includes winnings earned through online activities of an automated digital nature of goods or services sold to consumers, including the associated IP licenses. Specific inclusions and exclusions are suggested from this. In addition, Amount A has been allocated based on local revenues, determined through procurement rules, with elimination measures for double taxation.

 

Amount B:

Amount B is the standard business compensation for ‘baseline’ routine marketing and distribution activities. Alternative methods for this Amount can be applied if supported by evidence.

 

 

What companies should be aware of

The changes regarding taxation have a multinational set-up. They are also technically complex; the effects and uncertainties will be drastic for many companies. The size of the covered companies is not yet final. However, this is by no means limited to highly digitized business models.

Implementation of the BEPS 2.0 measures is likely to occur soon, although many details are still unclear. The rules do not only apply to classic digital companies. In addition, these rules will shift the installation location in favor of the market states. The technical implementation is demanding; the demands on availability and integrity of data are high. New risks of double taxation are emerging, which can probably only be mitigated by international communication processes.

 

It is important to stay on top of the news and keep your business as stable as possible. Useful and necessary information on BEPS can be found on the websites of OECD and KPMG. Seeking professional assistance is always helpful to avoid potential issues. We are always here to hear your needs.

Related GCA articles

Tax Pricing Agenda 2021: Tax Innovation

Tax Pricing Agenda 2021: Tax Efficiency

Transfer Pricing Guidance on Financial Transactions by OECD

Certainty in Global Tax Issues Expected to Increase

Base Erosion and Profit Shifting

 

Sources

OECD – KPMG

Transfer Pricing Agenda 2021: Tax Efficiency

27 Jan 2021
BEPS, Current news, Europe, Tax Planning, Tax Pricing Agenda
BEPS, COVID-19, tax, taxes, Transfer Pricing Model

To perform tax work efficiently, one must be aware of developments in the tax world, as well as the external factors that come into play. According to the OECD, COVID-19 significantly affects the tax world. However, what is the situation during and after the pandemic? How do you efficiently work on the BEPS-analysis, design a TP-model, make the correct situation analysis, and implement an appropriate implementation strategy?

 

COVID-19

On the 18th of December 2020, the OECD published their guidance on the transfer pricing implications of the COVID-19 pandemic. The guidance states the need for the analysis of industries and the competitive situation. However, the current situation cannot be compared to the financial crisis of 2008. Therefore, you should pay attention to the differentiated benchmarking, based on the outcome tests and the allocation of extraordinary costs, according to the distribution of functions and risks. ‘Force majeure’ is an exception. State aid is granted according to general TP principles. Besides, always stay alert to changes and assume that you have to make adjustments once the pandemic is over.

 

BEPS-analysis (Base Erosion and Profit Shifting)

Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies of multinational corporations that exploit gaps and discrepancies of tax rules to avoid tax. The BEPS-package provides governments with 15 actions with (inter)national instruments to tackle tax evasion. The tools give businesses greater certainty by reducing disputes over the application of international tax rules and standardizing compliance requirements.

Recognizing the characteristics and risks of tax evasion, as well as safeguarding the assets and other value drivers, is useful for companies. A DEMPE-analysis (Development, Enhancement, Maintenance, Protection & Exploitation) is convenient for intangible assets.

 

TP-model (Transfer Pricing Model)

The aftermath of COVID-19 has caused changes in TP-models for multinationals. Multinational corporations must evaluate specific steps in their transfer pricing policies for protection and support during the pandemic.

In addition, a suitability analysis – e.g., benchmarking, TNMM and/or profit distribution – can help you with the design of a TP-model. A transaction structure, such as the extraction of permits, can play a significant role in the TP-model format.

The requirements fora n efficient TP-model are:

  • Be holistic. Take all tax aspects into account and make use of the operational management concept.
  • Be flexible. Respond flexibly to operational developments and take economic cycles into account.
  • Be alert. Active management of profit distribution by function and risk distribution is possible, so make sure you keep an eye on this. In addition, ensure sufficient availability and integrity of data.
  • Be compatible. Always work according to the correct specifications, work globally and consistently and ensure that you sufficiently document and declare.

 

Tax situation analysis

When analyzing the tax situation, pay attention to the following:

  • The BP history
  • The tax attributes, in particular, loss compensation
  • The tax rulings
  • The tax incentives
  • The extra tax aspects

 

Implementation strategy

Consider the following points in the implementation strategy:

  • The advance uni- or bilateral price agreements
  • The rollbacks
  • Joint audits of tax audits

Crisis-related adjustments to the TP-model concerning compliance and tax efficiency may be necessary. In principle, the situation regarding COVID-19 does not allow for unique TP routes; however, there are planning options. BEPS sets new requirements for the TP-model but also offers the possibility to check the efficiency of this model. The Base Erosion and Profit Shifting often suggest the analysis of margin-based TP-models with central strategy carriers. International mutual agreement procedures can be part of the tax strategy.

 

If you have any inquiries, feel free to talk to us, so we can work together to see how you can move forward with your company. You can find information about tax matters on the websites of the OECD and KPMG as well.

 

Related GCA articles:

Tax Pricing Agenda 2021: Tax Innovation 

Tax Pricing Agenda 2021: Tax Certainty

Transfer Pricing Guidance on Financial Transactions by OECD

More Global Transparency on Assets and Less Tax Havens on the List

Certainty in Global Tax Issues Expected to Increase

Sources

OECD – KPMG – KPMG Germany

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