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BEPS and Indirect Tax

Understanding the touchpoints and implications for businesses

Changes to domestic laws as a result of the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting ("BEPS") project will likely have a significant impact on multinationals and their cross-border trading activities. Changes to core corporate income tax and transfer pricing principles have been well publicised. However, the impact of BEPS on indirect taxation, is less well-defined.

Specific BEPS considerations that are likely to have an indirect tax impact on multinationals include the following:

  • Implementation of the "destination principle" for cross-border supplies of services and intangibles, with value added tax (VAT) collected via the reverse charge (for B2B) or vendor registration requirements (for B2C);
  • A lower Permanent Establishment threshold that may lead to the restructuring of supply chains and business models, which in turn may create local VAT and customs compliance requirements, cash-flow implications, unexpected VAT costs and non-resident importer status issues;
  • New transfer pricing requirements, including the possible need for changes to pre-existing intragroup pricing and more frequent retroactive price adjustments, may affect the nature, degree and value of intercompany transactions for duty and VAT purposes;
  • Changes to transfer pricing methods and structuring, which may impact customs valuation compliance and, potentially, the amount of customs duty owed on related party imports; and
  • International collaboration and information sharing between tax authorities, resulting in increased scrutiny and tax audits.

The accompanying placemat highlights a number of the key indirect tax interactions with BEPS. It is intended to stimulate and support conversations aimed at identifying the types of businesses and operations affected by BEPS, as well as the broader indirect tax compliance, cash flow and potentially cost consequences which could arise as a result.

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