Managing Transfer Pricing: Impact of OECD Action Plan

In October 2015, the 34 member countries of the Organisation for Economic Cooperation and Development (OECD) developed a Base Erosion and Profit Shifting (BEPS) plan to combat the practice of artificially shifting income into tax-advantaged environments through the misuse of transfer pricing. (For more background information on previous transfer pricing scrutiny, be sure to read the article from the July 2015 issue of Bottom Lines.)

Since its release, legislation around the BEPS Action Plan has been taking shape to help enforce compliance with the rules and regulations. Both the U.S. Senate Finance Committee and the House Ways and Means Subcommittee on Tax Policy held separate hearings on BEPS in early December 2015.

On December 21, 2015, the IRS released proposed regulations requiring multinational enterprises to provide information on a country-by-country basis related to the multinational group’s income and taxes paid, as well as indicators of the location of economic activity within the group.

Further, officials from 31 countries signed an agreement in January 2016 that implements the automatic exchange of country-by-country reports on multinational corporations. While the U.S. did not sign the agreement, U.S. multinational companies will still be required to file reports if their group includes entities with operations in a foreign country in which these requirements have been implemented.

Countries within the European Union are taking the lead on instituting reporting requirements. The United Kingdom issued final rules on February 26 on country-by-country reporting; the Netherlands, Belgium, Spain, France, Poland, and Germany have already introduced or passed legislation that increases the transfer pricing reporting requirements. Australia, Mexico, and Brazil have also introduced legislation related to the BEPS Action Plan, with more countries likely to follow suit.

The OECD BEPS Action Plan and subsequent legislation marks a defining moment for transfer pricing compliance. Multinational companies will have to make significant changes to manage the additional compliance requirements. Noncompliance will become more costly, arduous, and time-consuming.

Companies should work with their advisors to minimize tax risk and move to the forefront of the reporting requirements, which include increased audit scrutiny, country-by-country reporting, and new anti-avoidance legislation.

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