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A Global Tax Evolution: the changing world in tax

By Albert Baker
Deloitte

The global picture

Recent years have witnessed considerable public anger, particularly in Europe and Australia, over apparently low tax bills paid by certain companies. As a result the OECD plan was drawn up to tackle this perceived tax avoidance by multinationals (Base Erosion and Profit Shifting (“BEPS”)). Existing principles of international taxation were designed decades ago before the globalization of business and the digital economy. Policy makers are now recognizing these wider issues, and recognize too that maintaining the status quo is not an option.

The OECD has set out their objective as providing “comprehensive, balanced and effective strategies for countries concerned with base erosion and profit shifting.” The OECD states that essential elements of this framework include the arm’s length principle and the elimination of double taxation as well as the elimination of inappropriate double non-taxation, “whether that arises from aggressive strategies put in place by taxpayers or from tax policies introduced by national governments.”

Tax is no longer something limited to business and tax authority relationships—it has become a significant strategic business issue, and with tax increasingly under the spotlight, it is important that the way tax is managed is both transparent and clear across all business areas. There are also growing demands for tax information from many non-traditional sources.

The issue of tax transparency continues to be part of the global political and media agenda. It is too early to assess the impact of all the changes in the marketplace; however it is highly likely that most multinationals will be affected. Identifying risks and opportunities that current developments bring is critical and requires regular monitoring and review of an organization’s position and options. As the strategic goals and operations of a business change over time, so should the tax strategies adopted to support them.

As part of this global tax [r]Evolution, there is a perception multinational businesses are not paying their fair share of taxes. Responsible tax (e.g. reputational risk) is now an important component of international tax matters. There are three components to this [r]Evolution: the administration of tax laws and treaties by jurisdictions (we see a growing number of instances of potential double tax where more than one country is seeking to tax the same income); unilateral tax law and treaty changes (we see a growing list of countries that are enacting or proposing uncoordinated legislative changes to protect their tax base, which can lead to double tax situations); and the OECD BEPS project.

Curling Fern Detail

A survey of the current tax landscape

The purpose of Deloitte’s “Base Erosion and Profit Shifting (BEPS) & Responsible Tax survey,” completed in March 2014, was to gauge contacts’ views regarding the increased media, political and activist group interest in “responsible tax” and BEPS, and the resulting impact on their organizations. Nearly 600 Deloitte contacts responded to the survey.

Ninety-three percent of survey respondents agreed or strongly agreed that there has been an increased media and political interest in tax in their country. Overall, 74% agreed or strongly agreed that their organization is concerned about the increased media, political and activist group interest in tax and 60% have received questions from their C-Suite and/or Board of Directors about the increased interest.

  • Nearly 90% of respondents are anticipating that their income tax compliance burden will substantially increase as a result of additional reporting arising from the BEPS recommendations.
  • Over 50% of respondents are anticipating significant unilateral legislative changes to protect the tax base in their jurisdiction that is not coordinated with what other countries are doing.
    • Almost 50% of respondents are anticipating significant legislative and treaty changes as a result of the BEPS initiative.

Challenges and aspirations

Companies need the certainty of conducting tax affairs based on laws that are clear and reduce the risk for tax disputes. There is currently a rare opportunity for governments to achieve this on a multi-lateral basis and in the spirit of cooperation. Of course, society should not underestimate the challenge of this given that at least on a short term basis it is unlikely that all governments will see the same proportionate increases or decreases in corporate tax revenues as a result of the BEPS initiative.

Adding to the complexity is that, even in a post-BEPS world, governments can be expected to continue to provide economic and tax incentives in their domestic laws. Many of these incentives are designed to encourage investment and increase employment. Also, governments want to ensure that the tax rules applicable to their headquartered companies do not put those companies at a competitive disadvantage relative to their foreign peers.

This is an opportunity for governments to define acceptable incentives within the tax area. No one underestimates the challenge of this because it will likely require governments to give up some degree of sovereignty. This is also an opportunity to educate public perception about fairness of tax policies. BEPS should provide governments the opportunity to set the record straight with the public, the media and the business community regarding the rules of the tax road. To date, it has not always been clear in the media and elsewhere as to the distinction between legitimate tax planning and illegal tax evasion (which nobody should be in favour of). There exists, in some circles, highly subjective views on “morality” and “fairness” relating to how much tax an entity pays but businesses cannot operate under a subjective tax regimes. Business needs the certainty of laws with which it can comply. This is an opportunity for governments to enact those laws.

In general, business understands the need for increased reporting, but given the increased costs associated with this they want to be sure that the information will be of real benefit to tax administrators and that information requests will be streamlined whenever possible.

Summary

Tax has become a significant strategic business issue. It can impact an organization’s competitiveness but can also impact an organization’s brand and its broader approach to corporate social responsibility. The global landscape of BEPS, unilateral action by countries and increased international tax audits, is resulting in in a global tax [r] Evolution. As such, it needs to be managed strategically.

The OECD began work on their BEPS project to address concerns in some quarters that current principles of national and international taxation were failing to keep pace with the global nature of modern trading and business models. In particular, a perception that existing rules give business too much opportunity for arbitraging tax rates and regimes. However, this is a challenge, as a number of the issues being examined by the OECD represent well established government policies that individual jurisdictions have adopted for many years in the name of competitiveness. Also, as indicated earlier, any increase in overall tax revenue is not likely to be shared proportionately amongst countries. Policy makers are now starting to tackle these issues, and, politically, maintaining the status quo does not appear to be an option.

Deloitte will continue to contribute to this process, including continuing to discuss with and make submissions to the OECD, as well as continuing the discussion in global and domestic forums. In our submissions Deloitte strives to represent the range of businesses we provide services to and the aim is to shape legislation in a practical and sustainable way. We will also continue to advise clients and contacts on developments. We recommend that multinationals assess the potential impact of the OECD’s recommendations on their business.

Additional information and contacts

For further information, please visit the BEPS page on Deloitte.com or contact Albert Baker, Deloitte Global Leader – Tax Policy.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 200,000 professionals are committed to becoming the standard of excellence.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2014. For information, contact Deloitte Touche Tohmatsu Limited.

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