Middle market businesses feel the pinch as OECD tax plans are introduced

  • Middle market businesses report uncertainty with Base Erosion and Profit Shifting (BEPS) rules
  • Businesses split on who will bear the cost of BEPS rules between shareholders, customers and business
  • Business community supports the creation of a global tax standard, despite the costs

72 per cent of internationally operating middle market businesses (defined as having revenues from $50m to $1bn) expect to pay more tax as a result of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan as uncertainty around how the rules will be implemented hits the boardroom. An independent survey of middle market businesses worldwide commissioned by RSM, the world’s sixth largest audit, tax and consultancy network, shows that these organisations plan to bear the brunt of the costs, but will pass on some costs to shareholders and customers.

41.2 per cent of middle market businesses expect their tax burden to grow by up to 10 per cent, with 31 per cent expecting their effective tax rate to increase by more than 10 per cent. The pattern continues for compliance costs with 65 per cent of middle market companies expecting these to grow by more than 10 per cent. The majority (53 per cent) intend to absorb some of the costs themselves but 35 per cent expect customers and 30 per cent expect shareholders to also shoulder some of the burden.

Ken Almand, Tax Partner and Head of Transfer Pricing, RSM UK, said:

'The global tax avoidance debate has to date focussed on the actions of very large multinationals. What the survey responses confirm is that the co-ordinated global crackdown to tackle those actions will hit many middle sized and smaller businesses too. The costs could be significant as respondents expect both increased effective tax rates plus additional compliance costs. Given that many of these organisations lack the in house resource available to the largest multinationals the costs could be disproportionately higher than for the larger corporations that have been in the public spotlight.'

Despite the potential impact to their bottom line, just 18 per cent of middle market businesses have undertaken planning to bring them into line with the new permanent establishment rules and 20 per cent are fully aligned with the revised transfer pricing rules.

More than three quarters (78 per cent) of middle market companies say that the rules are creating uncertainty.

Even with these cost increases, businesses of all sizes are broadly in support of BEPS, with 69 per cent admitting a global taxation standard is necessary. Indeed, when asked to rank the guiding principles of BEPS legislation, simplicity and business practicality ranked the highest with cost of implementation ranked as the lowest consideration.

However, most businesses surveyed see BEPS as a work in progress rather than the final solution, with more work needed by governments globally to ensure the original objectives of the proposals are met. 61 per cent of those surveyed felt the BEPS action plan only moderately, slightly or did not at all satisfy the primary objective of ensuring tax is paid where profits are created and only a third (35 per cent) felt it would largely or completely satisfy the objective of levelling the international playing field. 

Rebecca Reading, leader of RSM UK’s large corporate and international tax group said:

'Middle market companies are conscious of the challenges of BEPS and are open to the prospect of these proposals meeting their overall objectives in spite of the possibility of paying more tax. Middle market businesses would do well to think about BEPS as being about more than tax; it is about having the right business model and operating it in a structured and organised way.'