As we advance into the winter months, we have been reflecting on the evolving tax landscape for commodities trading companies. Rather like those fading memories of the beach in summer, the old days of the pre-BEPS era are well and truly behind us. The pressure is rising to ensure that your tax compliance is in line with the revised rules.

We’ve been reviewing the latest policies and regulatory developments, and our top three priorities for commodities companies are:

1. Don’t underestimate compliance – allocate appropriate internal resources to meeting your global documentation filing deadlines; the new documentation requirements are tighter in many countries and require additional information, so you can’t necessarily rely on your prior years’ approach.
2. Proactively embrace tax scrutiny – we’ll continue to see an increased interest in corporates’ tax affairs so consider whether proactively approaching tax authorities is better than the tax authorities knocking at your door, with particular attention paid to your CbyC Report analytics. 
3. Prepare for the future – making sure that you’re on top of your compliance responsibilities now will mean that this can be leveraged and easily adapted in the years to come with minimal effort. 

With this in mind, we’ve outlined some detailed considerations based on the main changes that need to be reckoned with.

Last year was generally viewed as a transition year post-BEPS. Some countries were early adopters of new documentation rules. Full implementation is to be expected in 2018 and next year – with a significantly increased compliance burden.

Many commodity traders have now had to submit their 2016 CbyC Report, their Master file and specific Local files. Many developing countries have adopted mandatory local files, so commodity companies with operations in these countries now have no choice but to comply. CbyC is also shining a light on areas where the implementation of transfer pricing policies through the financial statements has not been properly followed through. 

There is no denying that filing all the relevant documentation and ensuring proper implementation of intra group charging represents a significant amount of work. In our experience, it helps organisations to think about the task through three lenses: people, processes and technology.

• People means ensuring you have the right teams in place as well as considering whether you can do all the work internally or may benefit from sourcing external assistance too. 
• Processes are important because you need to build an accurate picture of the different filing requirements and timings in different countries of operation and ensure that you can meet these deadlines in good time. 
• Technology can help to ease the burden: firstly, through generating the documentation needed and, secondly, by providing the mechanism for calculating transfer pricing efficiently in a way that minimises operational risk. There are many different suites of technical tools available. 

There is a lot to think about, as many commodity trading companies have been finding – but if you set things up appropriately the task will become significantly easier.

BEPS is enabling tax authorities around the world to access more information on individual taxpayers than ever before. It is becoming apparent that many tax authorities are beginning to clarify their thinking over how to risk-assess groups post-BEPS: the ‘grace period’ may be on the verge of ending.

Also to be factored into the equation is the International Compliance Assurance Programme (“ICAP”). The ICAP is an OECD ‘tax risk assessment program’ that is intended to help countries coordinate their risk assessment efforts for multinational companies rather than making assessments unilaterally. Eight countries including the US, the UK, Canada, Spain, Australia, the Netherlands, Japan and Italy are participating in this pilot, and a number of large multinational taxpayers have become involved as part of this voluntary process. This is a project to watch.

Another reason for commodity traders to engage with tax authorities is that they are becoming more likely to want to engage with you. After the sluggish performance of some commodity prices in 2017, oil and other commodities have bounced back. There has also been volatility in prices – which, for good traders, increases the opportunity to make good profits. Tax authorities may therefore wish to scrutinise the books even more closely. If the likelihood of challenge is rising, with little comfort over what tax authorities may deduce from CbyC Reports – many groups will want to consider proactively approaching tax authorities to mitigate potential unnecessary risks and manage conversations.

Added to all of the above, change and market uncertainty continue to define the global political and economic landscape, with implicit tax and transfer pricing consequences. Brexit is drawing ever closer, the implementation of a revolutionary US Tax reform is now on its way and further tax and transfer pricing guidance from the OECD all suggest a continued period of turmoil.     

Regulatory change continues to take centre stage. MIFID II went live at the beginning of 2018 and is bedding in.

A small number of unregulated firms may still need to become regulated or to adjust their business portfolio to avoid regulation, while the rest will need to watch the impact of changes to transparency and trading venues on market liquidity and pricing.  

Looking further ahead, the European Commission and European Parliament are gearing up to finalise legislation on a new prudential regime for investment firms, which includes many brokers, advisers, portfolio managers and trading firms. While the proposal is intended to simplify the banking capital adequacy regime to work better for non-banks, the devil is, as always, in the detail, and while the detail is in some respects still a moving target, it is already clear that a significant amount of entirely new information will need to be collected and processed to become part of the formal regulatory reporting books and records. The faster that information can be gathered, the faster firms will be able to assess the impact of the new regime on their business and operating models.

The combination of MiFID II fallout, the new prudential capital regime for regulated participants, and Brexit means that some form of restructuring could be hard to avoid for many. From a tax and transfer pricing perspective, the stability of the pre- and post-tax business outcome forecasts and hence the continuing reliability of existing transfer pricing arrangements, and in some cases the ongoing commercial justification of the business operating model, will require close scrutiny. 

The initial BEPS implementation stages, laying the groundwork for the future, should now be all but over. This year to date may have provided you with time to address any issues identified when preparing CbyC data, solidify the internal collaboration links with other key teams (e.g. treasury, finance, regulatory) and consider ways to simplify your work going forward, for example by using enabling technologies.

If you haven’t done these things, there is still time – but the next filing deadlines are likely just around the corner. With the colder winds of winter coming, it’s a good time to take a look at your tax policies and make a plan for full compliance for this year, as well as optimise your model and processes for the next. 

Richard Murray - Partner, Transfer Pricing

Ana Vladareanu - Director, Transfer Pricing

Mitesh Patel - Senior Manager, Transfer Pricing