How to prepare for new international tax rules: four key actions

Justin Liebenberg, International Tax Leader at EY Africa.

Companies need to begin preparing for changes in international tax law related to base erosion and profit shifting. Speaking at EY’s Tax Conference 2015, EY’s Justin Liebenberg, International Tax Leader at EY Africa identified four areas that international companies need to be thinking about now.

The issue of base erosion and transfer pricing is global, and is being tackled globally by the Organisation for Economic Cooperation and Development (OECD) and the G20. The OECD’s 15 action plans related to different aspects of this complex issue will be finalised next week, but the main elements of the plans are now clear enough to begin preparing, Liebenberg says.

“The overall message that companies need to understand is that they are going to have to disclose much more information relating to their international operations, and that revenue authorities are going to work more closely together,” he explains. “Owing to the complexities created by globalisation and the new business models enabled by digital technology, EY expects an upsurge in controversy relating to international tax. Companies must make their preparations accordingly.”

Liebenberg says that companies should perform a thorough review of the impact of all action points on their operations and in relation to transfer pricing consider the following four key actions:

Assess reporting information needs and capabilities by country

Under the country-by-country reporting requirements companies will need to gather and report on certain predetermined types of financial information for each country. This information will be shared with the tax authorities in each of the countries in which they operate. “For example, companies need to see what kind of picture the specified information paints about them, and the resulting questions that the various tax authorities are liable to ask,” Liebenberg says. “This will give them the opportunity to evaluate their affairs and take action where necessary.”

Review transfer pricing documentation

Liebenberg recommends that companies review all their transfer pricing documentation and establish where gaps might exist between existing documentation and the new requirements. They should also, ensure that the documentation is sufficiently robust to withstand scrutiny.

Get advance rulings on transfer pricing structures

In countries where this is possible, it is a good idea to obtain upfront rulings on the transfer pricing policies the company intends to put in place. “Advance transfer pricing agreements are not that readily available in Africa, but the position is expected to change,” advises Liebenberg. “Tax authorities should prioritise this service because it creates the certainty that business really values, and could be seen as a differentiator for countries keen to attract investment. Uncertainty over taxation can cause tax flight.”

Ensure IT systems can cope

Collecting the required information manually is not practical for large companies, so they need to do a thorough due diligence on their financial systems to make sure that the collection and collation of information can be automated as much as possible. “The systems also have to be flexible enough to provide the necessary ‘proof’ of transactions that could be required by multiple tax authorities over extended periods of time,” Liebenberg notes. “In some instances, this could require some fairly significant system adjustments.”