No. 2016-23
24 May 2016
To the Point
Global tax changes may affect
multinational companies
Companies need
to make sure
they can address
any accounting
implications in the
appropriate period.
What you need to know
•
Governments around the world are developing tax legislation and reconsidering their
interpretations of existing tax law to address concerns that multinational companies
are shifting profits to jurisdictions with lower tax rates.
•
Governments are often basing their efforts on recommendations the Organisation for
Economic Co-operation and Development (OECD) issued in its Base Erosion and Profit
Shifting (BEPS) project.
•
Multinational companies need to make sure they have processes and controls in place
to track developments in countries that are significant to their operations and
address any accounting implications in the appropriate period.
Overview
Governments around the world are developing legislation and changing their interpretations
of existing tax law based on recommendations from the OECD on how to address concerns
about multinational corporations shifting profits to jurisdictions with low tax rates from
higher-tax jurisdictions where they make, provide or sell the goods or services.
In its final BEPS reports last year, the OECD 1 recommended that governments use the
following strategies:
•
Implement the OECD’s revised transfer pricing guidelines
•
Limit the deductibility of related party interest expense
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•
Modify treaties with other countries to expand tax nexus standards, allowing them to
directly tax foreign entities, or propose multilateral agreements to override existing treaties
•
Increase substance requirements to use treaty benefits such as reduced withholding tax
•
Significantly increase tax information reporting requirements with country-by-country (CbC)
reporting and expand transfer pricing documentation
The Group of Twenty major economies has endorsed the OECD’s recommendations, and the
European Commission has released a package of draft tax measures that if finalized would
require all member states to implement several of them. Many countries are also beginning to
apply the new transfer pricing guidelines in their audits of transfer pricing arrangements.
In the US, the Treasury Department and the Internal Revenue Service proposed regulations
implementing country-by-country reporting and also proposed “anti-inversion” regulations
addressing earnings stripping (i.e., excessive debt owed by a US entity to a foreign subsidiary).
The proposed earnings stripping regulations also would apply to transactions between foreign
subsidiaries of US companies. Additionally, the proposed regulations address whether
intercompany debt is considered debt or equity for tax purposes.
The European Union is separately investigating whether certain countries’ tax rulings
constituted state aid, which has led to changes in tax legislation in certain member states.
Key considerations
The swift action by governments around the world is unprecedented, and multinational
companies need to monitor developments to make sure they account for any changes in tax
law or a government’s interpretation of tax law in the appropriate period. Companies will also
need to monitor how taxing authorities are interpreting the new transfer pricing guidelines.
Multinational companies could be affected in the following ways:
•
Funding, liquidity and risk management activities – Restrictions on interest deductions,
changes in the taxation of certain instruments, limits on the use of treaty benefits to
reduce withholding taxes and possible changes to a government’s interpretation of
existing tax law could require substantial changes to global treasury functions. Long-term
funding structures and liquidity and risk management activities could be affected.
•
Transfer pricing and supply chain business models – Companies may want to consider
relocating offices or modifying the form of transactions in response to changes in tax
nexus standards that allow a country to tax foreign sellers. The tax efficiency of existing
supply chain business models could be affected if countries implement the OECD’s
recommendations on transfer pricing, which include changes to the arm’s-length
standard, a country’s tax ruling practices and how a country considers compensation for
intangible property.
•
Tax operations – Tax operations will likely have to respond to more inquiries from tax
authorities. Increasing compliance responsibilities related to CbC reporting and expanded
requirements for transfer pricing documentation could strain tax department resources.
Income tax accounting considerations
Companies will need to assess what governments are doing in response to the BEPS
recommendations in countries where they have significant operations or tax risk.
2 | To the Point Global tax changes may affect multinational companies 24 May 2016
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Change in tax law
Companies should keep in mind that, under Accounting Standards Codification (ASC)
740-10-45-15, the effects of any changes in tax laws that affect taxes currently payable and
deferred tax balances are recognized in the period a new law is enacted. The total effect of
tax law changes on deferred tax balances is recorded as a component of tax expense related
to continuing operations for the period in which the law is enacted, even if the assets and
liabilities relate to discontinued operations, a prior business combination or items of
accumulated other comprehensive income.
Change in interpretation or application of tax law
Careful consideration of a company’s facts and circumstances is necessary to determine the
income tax accounting implications of changes in transfer pricing rules based on the OECD
recommendations. A company should begin by evaluating its existing uncertain tax positions,
including those related to transfer pricing. Positions related to transfer pricing should be
evaluated to determine whether they are now less certain.
Companies will
need to monitor
developments in
countries where
they have significant
operations or
tax risk.
In assessing transfer pricing positions, a company needs to understand how a particular
country has incorporated the OECD’s recommendations into its tax laws.2 Additionally, if a
taxing authority changes how it evaluates transfer pricing arrangements based on the OECD
recommendations, that could constitute new information that should be evaluated for financial
reporting implications, including accounting for uncertain tax positions.
Care should be taken to evaluate each position, presuming that the tax position is examined
by the relevant taxing authority that has full knowledge of all relevant information. 3 In
accordance with ASC 740-270-35-6, changes in judgment that result in the subsequent
recognition, derecognition or changes in measurement of a tax position recognized in a prior
annual period (including any interest and penalties) are considered discrete events and are
recognized in earnings in both the interim and annual period the change occurs.
Changes in organizational structure
If companies make changes to their financing structures or supply chains, they will need to
consider the effects on their income tax provisions. For example, if a company changed its
financing structure or supply chain, that may affect a company’s indefinite reinvestment
assertion. ASC 740 requires the recognition of the income tax effects related to the change
in indefinite reinvestment assertion to be recognized in the period the assertion changes.
Internal control considerations
Companies also will have to consider whether they have processes and controls to properly
identify, evaluate and account for the matters noted above. For example, management should
identify the countries it considers significant to its operations and make sure the company can
track tax law changes or changes in interpretation of tax laws in each of those countries in a
timely fashion. The controls should be sufficiently precise to identify the change in the interim
and annual period in which it occurs.
In periods of significant change, management’s processes and controls to identify, recognize and
measure uncertain tax positions are critical. Management must be aware of the full population of
uncertain tax positions, including those that may have been considered highly certain 4 in the
past, because a change in tax law or ruling or a change in the taxing authority’s interpretation
of existing tax law may require a change in the entity’s recognition or measurement of a tax
position. A company’s current controls may not be precise enough to identify changes in tax
laws and interpretations. Management might consider implementing several levels of review
into their process, including interaction with the company’s legal department.
3 | To the Point Global tax changes may affect multinational companies 24 May 2016
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How we see it
Companies should have robust processes and controls in place to:
• Timely identify new tax laws and new interpretations of existing tax laws
• Ascertain the population of uncertain tax positions
• Determine how changes to the existing supply chain and financing structure may have
accounting implications
Endnotes:
1
2
3
4
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SCORE No. 01086-161US
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The OECD is a nongovernmental organization that has 34 member countries from North and South America, Europe
and Asia-Pacific.
For example, existing tax law in some countries refers directly to OECD recommendations. Other countries refer to
OECD recommendations in administrative guidelines, practice notes, circulars or other publications produced by their
tax administrations. Still other countries make no reference to OECD recommendations in law or other publications.
ASC 740-10-25-7b.
ASC 740-10-55-100 to 55-101.
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
4 | To the Point Global tax changes may affect multinational companies 24 May 2016