Everything Has a Price – a Transfer Price
by François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman of the European Association of Corporate Treasurers
I find it astonishing that a subject as important as BEPS (base erosion and profit shifting) and the new transfer pricing rules has not caused much more of a stir in the world of treasury. It is as if BEPS did not exist. It is, however, essential to review transfer pricing strategies for treasury transactions to ensure we comply. Whether we like it or not, it is a reality that treasurers will have to live with, and they will need to adapt to become a profit centre.
The story is only just beginning
BEPS recently became a reality with the first European Directive adopted by the Commission on 12 April 2016. The rest will soon follow with transposition of most of the OECD’s actions. From a taxes point of view, the ‘Country by Country’ report seems to us to be of only minor interest. Conversely, the impending fiscal measures as a whole, in combination with each other, will create a real headache for tax managers. People are talking about a tax paradigm, of the revolution of the century and of total upheaval. The much sought-after fairness in tax will come at the price of unending difficulties. To point the finger at just one difficulty, we could start with the restriction on deducting interest (see BEPS action # 4). Interest will be deductible only if it is below 30% of EBITDA (with a de minimis threshold of €1m). This might create situations in which entities that are struggling or loss-making will no longer be able to deduct interest, and will therefore be even harder hit. We could also cite the ‘Exit Taxation’, the ‘switch-over clause’, the ‘General Anti-Abuse Rule’, hybrid mismatch (see BEPS action #2), the revision of the AEOI Directive (mandatory automatic exchange of information for taxes + disclosures), and finally and perhaps the worst, the wholesale extension of the German CFC (Controlled Foreign Company) rules (see BEPS action # 2). This last measure will, right from the outset, generate a whole raft of demands and attempts to tax anything that may not have been taxed.
Table 1 – Transfer pricing principles applicable to treasury activities
Finding out where you stand and what your taxes are in this can of worms of tax correctives will be an almost impossible task for tax managers. The aim is to move from preventing double taxation to rooting out double non-taxation. The crisis in public finances requires this new global framework to ensure fairness in tax. Every country is trying to claim its fair share of the tax cake. The main idea of BEPS is to align the taxable base with value creation. It has three main watchwords: Consistency, Substance and Transparency. Against which, you could argue that transfer pricing rules already existed long before BEPS. It is just a matter of applying them in the future. Some countries have already started to ask ever more searching questions to justify the fair transfer price. A major principle of taxation, that of choosing the option that costs the least in tax, has now been called into question. To summarise, BEPS will involve much more complexity, and will make it essential for operational personnel and tax people to get together to align and agree on their strategies. Finally, one of the most important points in our view, BEPS and transfer pricing will involve much more documentation and a review of prices charged between subsidiaries.