The base erosion and profit shifting initiative is being designed to influence ultimately how global multinational corporates arrange their affairs from a tax planning perspective. An inevitable result is and will be changes to the way tax practitioners advise their clients. Deborah Tickle explains
Globalisation and the digital age have caused the world to ‘shrink’. The consequent mobility of money and people has made efficient international tax planning easier over the last twenty years, with increasing momentum over the last ten years.
When the world economy was booming, there was sufficient growth in national taxes that some of the wealthy countries, although concerned, did not pay as much attention as currently to the impact of legitimate international tax planning. They ‘competed’, along with everyone else, for a share of the spoils of economic growth in the form of taxes. They put in place the anti-avoidance measures suggested by the Organisation for Economic Cooperation and Development (OECD),1 European Union and United Nations to counter those structures viewed as aggressive at the time, but did not necessarily pursue such structures aggressively.
The main thrust of the suggestions, by the various agencies, related to transparency and disclosure by the named ‘tax havens’, the elimination of harmful tax practices identified in the various countries, the growth of the use of transfer pricing rules (to regulate related party cross border charges by multinational entities (MNEs), and controlled foreign company legislation (to draw largely passive income diverted to low-income countries back to the holding company country).
With the economic crisis that started in the mid-2000s, and which has become protracted despite some easing in some countries, the large economies have found their tax take dwindling as players in multinational markets increasingly included planning for global tax efficiency as part of their business or personal wealth strategies (they wished to retain as much of their hard-earned monies as possible). This has become even easier as the digital age has evolved and now facilitates the seamless mobility of money, people and assets, especially intangibles.
Media exposure of so-called ‘immoral’ tax positions taken by companies with well-known brand names and high-profile individuals in terms of which, it is alleged, too little tax has been paid in various jurisdictions also brought the issue of where (that is, in which country) tax is being paid, and how much, to the front of people’s minds. This has forced governments to focus their minds as they too are being criticised for not making laws that are adequate to combat these positions, or for not adequately enforcing existing laws.
The result has been that, far from being under the media spotlight only a few times a year, mainly at budget time, tax is a regular topic of discussion in many countries’ main newscasts. In addition, the publication of names and exchange of information between countries is becoming more prevalent. For example, in 2008 the Italian National Tax Office published on its website the earnings and taxes of 38 million taxpayers from 2005 (it was subsequently removed by the Italian Privacy Office). Also, Norway, Sweden and Finland have for many years published selected data on individual taxpayers, and in October 2010 the French Finance Minister released to the Greek government a list of some 2 000 names of individuals who had deposits in the Geneva branch of a major bank. In June 2012 the Danish Parliament passed a law requiring publication of the amount of tax payable by all companies.
The G20 and G8 meetings have had tax as a key item for discussion, and pressure has been put on the OECD to ‘up its game’ in this area.
Thus, in February 2013, the base erosion and profit shifting (BEPS) report was issued stating that immediate measures needed to be taken to address the problem of tax planning eroding countries’ tax bases by shifting profit away from them. It stated that whereas in the 1920s the League of Nations recognised the risk that cross-border transacting and investing could lead to double taxation, and thus the concept of double tax treaties was born, the evolution of globalisation now leads to the risk of double non-taxation. Within months of the issue of the BEPS report, plans to address the issues raised were formulated, and in July 2013 the formal action plan on BEPS was issued.
The action plan contains 15 actions that will alter the landscape of tax forever. The implementation timeframe for these actions is mainly one and two years (to September 2015). The action plan emphasises that its success is critical in that, if it fails, it is likely that countries will take unilateral action to protect their tax bases resulting in ‘avoidable uncertainty and unrelieved double taxation’. Such a result would clearly be detrimental to global trade.
The key themes of the 15 actions are: the digital economy (addressing indirect taxes and looking at the concepts of permanent establishment and source, and where the transactions taking place in cyberspace should be taxed); hybrid mismatch arrangements (ensuring that payments in one country will only be allowed as deductions for tax in the paying country if the amounts are taxed in the receiving country; controlled foreign companies (strengthening the stranglehold on income taxed at low or no tax rates in such companies); and transfer pricing (tightening the concepts, rules and documentation). Underpinning these is the concept of ensuring transparency of the tax positions taken in the affected countries through disclosure requirements and the ability of governments to quickly and easily amend double tax treaties through the development of a suitable multilateral instrument.
So, against this background, the question arises: Is there a future for international tax planning, or, for that matter, any tax planning at all?
The answer lies in what tax planning means. True tax planning means structuring so that taxes are paid correctly on commercial transactions that are undertaken (that is, taxes are not underpaid and not overpaid), based on the laws prevailing. Tax is complex and is likely to become more so. The latest tax legislation has clearly reflected some of the principles laid out in the BEPS report.
Along with other tax laws, it is incumbent on taxpayers to ensure they comply with these new provisions. The complexities involved require tax specialists to assist business and individuals to understand and apply them properly.
If tax laws are created to encourage certain behaviours (for example, South Africa’s special tax allowances for research and development expenditure) taxpayers are entitled to engage in that behaviour with impunity.
However, it will be important for tax planners to in future:
- Watch the developments: Ensure that laws are being adhered to at all times and try to predict the longer-term developments that are likely in order to assist taxpayers to ensure they structure their activities and operations so as to achieve as little disruption as possible as tax laws change and develop. Warn them of potential areas that could be questioned from a moral standpoint, not just a legal one.
- Plan for discussion with tax authorities and the public: If a business – that is, it has a tax policy by which it can stand, which can demonstrate that its systems contain controls to ensure it pays the correct amount of tax and it has documentation to support its positions (for example transfer pricing documentation that demonstrates the commercial rationale, as well as the arm’s length price of its transactions and proper implementation) and it can show that it is within the laws of all the relevant countries within which it operates without fear of automatic exchange of information by the relevant governments of those countries – it should be able to address any revenue authority or public discussions with confidence.
- Develop a tax narrative: Taxpayers need to be able to reflect their tax policies in their financial statements in order to avoid media rhetoric up front.
Recent developments in the tax world make it clear that tax planning will be more important than ever – in other words making sure that, going forward, whatever the transaction or structure is can be supported in a transparent process.
1 OECD, Report on harmful tax practices (1998), with progress reports in 2000, 2004, 2006 and 2009.
Author: Professor Deborah Tickle CA(SA) is a Tax Partner at KPMG