BEPS 2.0 – What Can Companies Consider Doing Now?

November 11, 2019 | KPMG's Steve Blough summarizes the potential impact of BEPS 2.0 on all companies and what actions taxpayers can take now and how KPMG can help. [6:42 minutes]

BEPS 2.0 Unpacked videos

Transcript – Is my company really affected by BEPS 2.0? Are there actions companies should consider undertaking now, despite uncertainty surrounding BEPS 2.0?

Steve Blough: A lot of companies feel that they’re not in the crosshairs of this effort—that they don’t have a lot of income in low-tax jurisdictions, they don’t have highly digitalized business models, and that they have very robust transfer pricing including taking into account marketing intangibles and things like that—and, therefore, think that maybe this just doesn’t apply to them and they don’t need to worry about it.

The problem with that is that what the OECD is very explicitly considering is changing the rules to go beyond the current arm’s-length standard and rules that are explicitly subjecting income or allocating income under rules other than the current OECD transfer pricing rules. And this could very well apply very broadly, at minimum create a compliance burden for companies to comply with it, and quite possibly change where they’re going to be taxed regardless of their business model. If they have significant markets where they don’t have a lot of profit there, there are pools of profits out there that countries want to go after, and this could reallocate where it’s going to get taxed regardless.

Potential taxpayer actions

So, a lot of folks are saying with some justification that it’s so uncertain right now what these OECD rules are going to look like, but there’s not a lot they can do about that. So, what should companies be doing now given the uncertainty about what these measures look like or uncertainty whether the OECD will even reach consensus at all?

First of all, if you think the OECD isn’t going to reach consensus on that, you better be thinking about what the world is going to look like in that case. We’re already seeing a proliferation of unilateral measures, which include the digital services taxes that people have been hearing about a lot but also other measures. Some of these countries, like the U.K. and Australia, have been adopting these very aggressive anti-tax avoidance measures, and I think everybody feels we’re going to see more of those, more unilateral measures, if the OECD doesn’t reach consensus.

So, it’s not at all clear to me. Thinking the OECD won’t reach consensus and will stay at status quo is an option. I don’t think that’s going to happen, and so thinking about what your tax profile is going to look like in a world of unilateral measures bears thought if you think there’s a high chance the OECD won’t reach consensus.

Secondly, a lot of corporate boards are asking questions about this, and they want to know what’s going to happen. They want to know how their company might be affected. While we don’t know where the OECD is going to go, we have a fair number of specificity in terms of plausible scenarios.

There are some fairly specific proposals out there of what the measures might look like and how they might work, and thinking about how those measures would affect you and doing some scenario analysis will give you the ability to talk to your board, talk to your C-suite about what might happen. Once you have those conversations, then you can think about whether you actually want to be involved.

One thing that is certainly true of both the OECD and governments is they are desperate to hear from companies about practical scenarios and how these measures might actually work for them, particularly not just the tax impact on them but administrative burden. What’s feasible and what’s not? A lot of these measures get discussed based on fairly simplified ideas of how corporations are set up, what their value chains looked like, what their corporate structures look like, and educating them about other cases that are more complex that they’re thinking about and the complexities in implementing some of these things with some of the more complicated structures that are out there is really, really important.

A third thing, and I think this is really important, is if you are engaged in any kind of tax planning exercise—if you’re thinking about your supply chain, if you’re thinking about where your IP is going, you’re worrying about how to react to, you’re still trying to come to grips with the original BEPS measures—you ought to be thinking about how the rules might change. You do not want to invest a lot of time and effort in a planning exercise that you think will optimize your profile under the current rules only to have it blow up with new rules coming out. So again, some scenario analysis, putting in place structures that will be robust under some of the proposals that are out there is probably a really good idea. 

How KPMG can help

KPMG can help you with this in a number of different ways. We have professionals who are keeping very, very close to these discussions, and we have a lot of insight into some of the proposals under discussion: What are some of the interests to different countries? Where the pressure points might be if you want to try and influence the discussion as well as what impact might be, given your specific facts? So, it would be great to talk to you about what your own company’s profile is and talk through what the impact of different measures might be on that.

Now that said, it’s important to keep in mind, as one of the participants in these discussions said, is in the new world of tax, “intuition is dead.” You have to model. What that means is that all of these provisions are not just complex in their own right, but they have weird interactions with each other.

So, for example, if you think that there’s one proposal for Pillar One that’s particularly favorable to you, that would be the best for you under a certain set of facts, you probably need to think about how that might interact with Pillar Two, because we found that things can go in very unexpected directions once you look at interactions between the different proposals. So, thinking about at what point you actually want to start modeling out the impact of these measures under different scenarios for you is something that you really want to be doing.

That’s something else KPMG can help with. KPMG has developed a technology tool, a BEPS 2.0 model that we’ve set up specifically to be able to take your data and use it to model a lot of different scenarios. We can certainly consult with you about designing, about what proposals might look like and what their impact would be on you, again taking into account the interaction of different proposals together rather than just looking one at a time.