EY Global: Focus on tax reform – Jay Nibbe

With the OECD's proposed actions addressing base erosion and profit shifting (BEPS) having an impact on tax departments and compliance, and other core business functions, Jay Nibbe, EY Global vice-chair - tax, assesses why CEOs must address global tax reform as an imminent and broad business issue.

Keeping up with the pace of change in the global business environment is a challenge for any chief executive, not least amid unprecedented international tax transformation that is redefining how enterprises conduct their business.

Perhaps most pertinently, the OECD's proposed actions addressing base erosion and profit shifting (BEPS) will have an impact not only on tax departments and tax compliance, but also on core business functions beyond tax. It is critical, therefore, that CEOs around the world are involved in the continuing debate about the way in which multinational corporations (MNCs) are taxed.

Management teams and tax directors need to align

Many of the proposed BEPS changes are at various stages of implementation by countries across the globe, and they will require MNCs to rethink core business strategy, distribution channels, business operations and supporting infrastructure.
Many CEOs are now enlisting their tax directors to work with the senior leadership team to reconsider and potentially realign whole business models in response to the unprecedented shifting sands of regulatory change.

BEPS is broader than just tax

BEPS will play out through almost every aspect of an MNC's operations and could demand a holistic review of the supply chain as processes become increasingly globalised - from sales to procurement and manufacturing. Among others, BEPS will have a major impact on the following core business functions:

  • research and development, investment in intellectual property and the ongoing protection and value of an organisation's products and services; intangible taxation is at the very heart of the BEPS project and heavily focused on aligning taxation with value creation as defined by the OECD
  • new talent strategies will need to be embedded, as proactive management of the workforce and its mobility will be required to respond to new tax developments
  • treasury teams, financing and cash management will have to align as other business functions adapt.

Another key consideration is the likely impact of BEPS on mergers and acquisitions. Not least, BEPS will affect the tax risk profile of transactions. Understanding a target party's tax position will require a deeper due diligence exercise. In addition, the BEPS proposals are expected to limit the tax deductibility of interest payments, generally to a net interest deduction of 10-30% of an entity's EBITDA, thereby bringing changes to a company's debt and capital mix.

Regulatory change demands a technology rethink

Transparency requirements will further create considerable layers of compliance and reporting. The BEPS project builds on a global information exchange infrastructure that has been established by global tax authorities over the past decade. Tax functions are now preparing for a time when real-time data exchanges with tax authorities become convention, and investment in technology to support transparency initiatives could require an overhaul in IT infrastructure.

Respond now to mitigate risk and prepare for opportunity

If businesses do not respond appropriately to the change looming, they could find themselves preoccupied with matters that are not core to the business, including issues centred on corporate reputation. This could in turn culminate in increased tax controversy or even disputes that have a detrimental impact on financial statements and cash flow.

MNCs must also prepare for the opportunity that regulatory change represents, most notably, to redefine the integrated operating model for the benefit of the business as a whole. We are now seeing MNCs undertaking a structured assessment of the impact of BEPS on the business, with the aim of producing an initial 'heat map' of priority areas that require greater focus. Tax directors can help lead that discussion on a strategic basis.

As we move towards the implementation of the BEPS recommendations, a major business transformation is ahead. CEOs should appreciate that this change will strike at the very heart of business, and ensure that their management teams and tax directors are closely aligned. That could be the key to enabling business growth and being successful in a new era of tax reform.

Jay Nibbe, EY Global vice-chair – tax.