Delivering the international tax system of the future, together
The tax world has been actively following the G20/OECD Base Erosion and Profit Shifting project since it was first suggested. As the project moves forward, all stakeholders need to keep in mind a number of crucial points.
First, it is in everybody’s interest, taxpayers, tax advisors, tax authorities and other interested parties, that all these stakeholders work together. The project outcome should establish a baseline for far more coherent cross-border tax architecture. While any international tax system will necessarily remain a patchwork of the systems of the individual countries, it is hoped the project will strengthen the “stitches” that connect the fabric. If all stakeholders continue to work together, we can get closer to ensuring that neither double taxation nor so-called “double non-taxation” exists.
The outcomes need to be designed to work for both governments and business, and it is necessary that this architecture recognizes the different needs of all parties. To date, there has been extensive consultation and the BEPS proposals have been amended to address some of businesses’ concerns. However, the real test will come as the Action Plan is viewed in its final and consolidated form and is then translated into national legislation.
Businesses, and those advising them, need to work closely with policymakers to reconcile the BEPS project’s aspirations with the practicalities of businesses operating across borders.
Risk of disputes rising
Second, there are significant risks in implementing changes of this nature. As highlighted by EY’s 2014 Tax Risk and Controversy Survey, many businesses as well as legislators are expecting many more disputes to arise as a result of BEPS reform. This is perhaps not surprising, as any tax change will create uncertainty when first implemented. But the work undertaken on BEPS to date offers an opportunity to get many of the potential areas of dispute addressed earlier, not later.
Resources, focus and prioritization all need to be put in place to head off, or at least minimize, the impact of major disputes. Failure to do so risks undermining the benefits of the project, to both business and governments.
Beyond the BEPS discussions themselves, there are a number of other expectations and concerns that need to be managed, both at a global level and by the individual governments.
Not everyone, for example, is waiting for the OECD to complete its multilateral BEPS work, and the work so far has been a catalyst for change in both tax policy and its administration by some countries. These changes include policy revisions in the areas of interest deductibility, hybrid instruments, transfer pricing documentation and controlled foreign company rules, while on the administration side many companies report that some countries are applying future BEPS concepts to previously executed transactions.
While countries might justify their actions on a case-by-case basis, these early actions could also threaten to undermine the basic principles already set out in the announcements so far, even if directionally consistent with the BEPS project. This could create more uncertainty, greater risk and an erosion of trust between tax authorities and taxpayers. Each unilateral change also increases the risk of double taxation and the risk that there will need to be an “unpicking” when the final recommendations are delivered.
One way to address this is for governments to commit to reviewing their recent changes and to “align” once the final outcomes are known. Again, this is a process that needs the input of business.
A risk of stagnation?
At the other extreme, there is a real risk of “stagnation” when it comes to tax administration. For example, the Australian Taxation Office has confirmed that it suspended the granting of certain APAs on the basis that it wanted to test some propositions that had previously been accepted. Given the current timeframe of the BEPS project delivery, waiting on the outcome could imperil real business decisions. This is in no one’s interest.
Planning for implementation
Following the finalization of the BEPS project next year, the focus is likely to shift to the countries themselves. There is an opportunity now to plan for that period, to maximize the benefits to all. These plans should include two key focal points:
- Greater investment into tax administration: The focus on the international tax regime is going to result in more situations where countries initially disagree with how profits are allocated cross-border. From a business perspective, it will be important that these disagreements be resolved quickly, so that focus can remain on the business rather than dealing with disagreements between governments on tax. To this extent, the BEPS project needs to be followed with greater investment in resources for tax administrations to support the Mutual Agreement Procedure and arbitration.
- Commitments to consistent implementation: Inconsistent implementation is also a key source of risk. Published plans for implementation will help ensure that changes are successfully delivered.
In conclusion, much effort and hard work has gone into the BEPS project to date. The next stage, however, is the most difficult one, where principles are converted into practical change. In these times, more than ever, we all need to be working closely together if we are to create a better working world for all stakeholders.
Disclaimer – The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
About the author
Chris Sanger leads EY’s global tax policy network that brings together the tax policy advisers in the 140+ countries in which EY operates. The focus of Chris and the network is to deliver successful policy change through strategically engaging both business and policy makers. Before joining EY, Chris was Head of Business Tax Policy at the UK Ministry of Finance (HM Treasury). In addition to his role at EY, Chris is Chairman of the Tax Policy Committee of the Institute of Chartered Accountants in England and Wales (ICAEW), a member of the Tax Law Review Committee of the Institute of Fiscal Studies and the founding Chairman of the Tax Committee of the Alternative Investment Management Association.