Modernising taxation systems and global cooperation to prevent labyrinthine tax-minimisation, avoidance and evasion schemes should be at the heart of the G20 agenda, proposes Mark Azzopardi.
It could almost be a riddle: what happens when Google, a Dutchman and an Irishman enter a bar and order a Double Irish-Dutch sandwich? Answer: the Organisation for Economic Co-operation and Development (OECD) says, “Don’t be Evil” and promptly implements an action plan to prevent profit shifting.
Taxation issues used to barely warrant a mention on the global economic and political agenda. However, with the advent of the digital economy and greater global integration, complex tax manoeuvres – such as the aforementioned “Double Irish-Dutch Sandwich” – allow increasing scope for multinational companies to arbitrage and minimise their tax burden. With governments in slower-growing economies seeking to protect their tax bases in the face of huge budget deficits and public and government sensitivity to tax fairness, the debate around aggressive tax planning by multinational companies has well and truly entered the public domain.
According to the Grant Thornton 2014 International Business Report (a survey of 3500 mid-market business leaders in 45 economies), 64 per cent of business leaders do not feel their country’s tax laws and policies tax the correct people at the correct levels. A further 54 per cent do not feel that their tax system encourages compliance.
From an Australian tax perspective, the evolution of the digital economy poses a significant risk to its tax base. Australian tax legislation has failed to keep pace with the development of e-commerce, and with Australian consumers increasingly embracing internet-based transactions, there has been widespread concern over the potential erosion of the nation’s tax base.
Response to concerns
In response to these concerns, there have been a number of initiatives focused on bringing greater transparency and clarity to tax rules. Key is the OECD project on Base Erosion and Profit Shifting (BEPS), which aims to counter tax-planning strategies that exploit gaps and mismatches in tax rules. These aggressive tax-planning strategies make profits “disappear” or shift them to locations where the prevailing rate of corporate tax is low but where there is little or no real activity. This can result in limited or no overall corporate tax being paid.
BEPS strategies exploit a combination of features of home and host countries’ tax systems. As corporate tax is levied at a domestic level, the interaction of domestic tax systems means that an item of income can be taxed by more than one jurisdiction, thus resulting in double taxation. On the flipside, this interaction can also leave gaps which result in income not being taxed anywhere. While some multinational corporations have urged bilateral and multilateral cooperation among countries to address differences in tax rules that result in double taxation, others have exploited them.
The 15-point action plan presented by the OECD now calls for the development of tools that countries can use to shape “fair, effective and efficient tax systems”. Based around three core principles – coherence, substance and transparency – the hope is that by the end of 2015, this work will modernise multilateral taxation to address major global developments (such as the digital economy), which pose significant challenges to existing, and somewhat archaic, legislation.
Impact on businesses
A poll of Grant Thornton tax professionals around the world indicates that all 15 proposed actions would have a significant impact on businesses. Assuring transfer-pricing outcomes are in line with value creation (as they relate to intangibles, risks and capital or other high-risk transactions) was identified as a core priority. The strengthening of controlled foreign company rules (CFCs), the re-examination of transfer pricing documentation and addressing the tax challenges of the digital economy also ranked very highly.
Focus should also be given to ensuring new regulations do not impact onerously on business. Where new rules bring in additional layers of regulation, tax authorities need to consider relief from some of the existing compliance burden – particularly initiatives relating to transfer pricing documentation. OECD proposals would ideally be married up with existing frameworks in each jurisdiction to ensure that, at the local level, companies are not being burdened by ever-greater tax compliance and administration.
Call to action
Fact: international tax standards need to be stripped down and rebuilt for the world we live in today. But for the implementation to be truly successful, full participation of individual states is vital. If the OECD proposals are to hold sway, individual states must implement all of its recommendations in their domestic tax legislation. There can’t be a “pick and mix” approach, and implementation will need to happen at considerable speed in order to achieve the traction needed to ensure no comparative disadvantage.
For business, there will be a new order to consider, so it’s important to complete changes in a timely fashion so as to reduce uncertainties. Australia has already implemented major reforms to transfer pricing rules and reporting requirements in the last few years, so comprehensive guidance by the Australia Taxation Office and the OECD as to the material and specific changes to regimes is vital to assist business decision-making.
In the near future, tax authorities could easily be focusing on BEPS risk reviews targeting a broad range of issues: substance, value creation and intangibles, funding and financial arrangements, thin capitalisation, asset valuations, CFCs and transfer pricing. Good tax risk management will be central to delivering against such a review and to providing the necessary transparency in case of additional investigation.
In spite of the scope of this issue it’s wise not to resort to exploitative stereotypes – CEOs around the world are not engaged in a never-ending war with governments over how much tax they pay. A third of business leaders in the Grant Thornton survey cited lowering their tax bill as a strategic priority in 2014, but it ranked well down the list in tenth place overall. In fact, it was far behind issues such as increasing productivity, gaining market share and cutting costs.
Nonetheless, there is a clear need for G20 governments to coordinate to provide a better road map for businesses to direct the debate out of the realms of morality – and as such, the G20 Leaders must continue to be committed to eliminating BEPS.
Mark Azzopardi is the National Head of Tax in Grant Thornton, Australia.
This is an extract from G20: Words into Action Brisbane 2014, to be published by Faircount Media in association with the Australian Institute of International Affairs in October 2014.