Highly noticeable in a fast moving world is an accelerated globalization trend, leading to the incorporation of more multinational corporations that open subsidiaries in different tax jurisdictions. The different geopolitical conditions lead not only to higher segmentation of the multinational corporations activities, but also to their differentiated specialization on the value added chain of every business.

This structural development of multionational corporations is a result of their tax and economic planning. A successful tax planning implies compliance with the rule according to which the profits need to be allocated between entities based on the functions performed, risks assumed and assets used.

The experience of previous years has led the Governments to conclude that multinationals do not fully comply with the aforementioned basic rule, thus, lately, a special concern has been shown in regard to the analysis of intercompany transactions, of the prices used between entities part of the same group, and mostly on the allocation of profits between entities in different tax jurisdictions.
The European Commission Vice – President, Joaquin Almunia, stated: „in the present context, defined by great budgetary constraints, it is particularly important that multinationals correctly pay their part of taxes”.

Based on this preoccupation of the European Commission, as well as of other international organizations, a hot, largely debated subject in the past years is represented by the anti – BEPS policies and measures.

The Organization for Economic Cooperation and Development („OECD”) has launched an action plan through which the implementation of a series of monitoring instruments for the correct taxation of every entity in a multinational group is desired, depending on the profit that would be attributable to it, according to the share it brings in the profitability of the group as a whole.

Few of the aspects treated by the OECD action plan refer to:

• Defining intangibles;
• Ensuring the allocation of profit is associated with value creation;
• Developing rules for „hard to value” intangibles;
• Updating guidance on cost contribution;
• Clarifying when a transaction can be reclassified;
• Amendment of the transfer pricing documentation.

The amendment of the transfer pricing documentation implies the emersion of a third party, namely Country by Country Report.

The three parts of the transfer pricing documentation shall consist of:

a) Master File:

It will provide an overview of a multinational’s global business operations and transfer pricing policies and will include descriptions of the main profit drivers, intangibles strategy and financing.

b) Local Files:

Represent a report for each entity that will include information on its intra-group transactions that are „material in the context of the local country’s tax system” and how these comply with the arm’s length principle.

c) CbC Report:

It is intended to help tax administrations make a high-level risk assessment, based on aggregate financial information by jurisdiction and based on the identification of the constituent entities in each jurisdiction and the nature of their main business activities.

The report will provide data on a multinational’s global allocation of profits and taxes paid and location of its economic activity.

The CbC Report, besides being a novelty is a supplementary burden for the multinationals groups. G20 estimates that: „We will begin exchanging information automatically between each other and with other countries by 2017 or end 2018, subject to the completion of necessary legislative procedures”.

BEPS Action Plan does not only refer to transfer pricing, but also to the prevention of abusive practices through double tax treaties.

Therefore, the introduction of the next paragraph in the double tax treaties is desired:

“If a resident of a Contracting State is not entitled, under the preceding provisions of this Article to all benefits provided under this Convention, the competent authority of the Contracting State that would otherwise have granted the benefits to which that resident is not entitled shall nevertheless treat that resident as being entitled to those benefits…., if such competent authority upon the request of such resident…… determines that the establishment, acquisition or maintenance of such person and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under this Convention.”

BEPS action plan also refers to the neutralization of the effects generated by hybrid mismatch arrangements.

Hybrid mismatch arrangements can be used to achieve unintended double non-taxation or long-term tax deferral by, for instance, creating two deductions for one borrowing, generating deductions without corresponding income inclusions or misusing foreign tax credit and participation exemption regimes.

Forasmuch as the subject concerning BEPS Action Plan has not even by far been exhausted and OECD is still carrying out discussions with regard to it, we can only stay vigilent to the changes in the national and international legislation in what concerns international taxation and transfer pricing, in order not to face any problems in carrying out a profitable business.

Cristina Saulescu, Tax Manager, PKF Finconta, office@pkffinconta.ro.

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