The global tax policy landscape has changed over the past several years and there are reasons to believe that it will continue to evolve for some time. Nowadays, international tax policies are being built, not only to raise revenue and redistribute wealth, but also to regulate corporate behaviour. Multinationals will need to be increasingly mindful of balancing business growth with potential financial and reputational risks.
There are three particularly noteworthy elements in the global tax sector shaping the way that multinationals are conducting business:
How are these global tax policies affecting the way international companies conduct their business?
The BEPS project, led by the Organisation for Economic Cooperation and Development (OECD), has been a primary driver for change. BEPS addresses tax avoidance derived from the use of tax strategies available to multinationals to artificially shift part of their profits to low or non-tax locations using gaps in tax regulations.
The OECD's minimum standards for countering harmful tax practices, treaty shopping, country-by-country reporting, and dispute resolution, have led to policy changes in transfer pricing, digital economy, tax transparency and others.
For example, country-by-country reporting is a new compliance requirement for multinationals that has been implemented in 66 countries. As the country-by-country reports are subject to automatic exchange of information provisions, the global activities of multinationals will now be subject to far greater scrutiny regarding the alignment of their tax burden and the generation of their profits. Tracking the various implementation dates, documentation deadlines and requirements for this initiative alone represents a significant compliance burden for multinationals.
The taxpayer data generated by wider reporting and an increased exchange of information is leading tax authorities to make significant investments in technology to analyse the data. Taxpayers and tax advisors will need to keep up, and find innovative ways to use technology to anticipate the conclusions drawn by the tax authorities and comply with more global requirements.
Other OECD agreements focused on tax abuse have had an impact on the standardisation of treaty abuse provisions, permanent establishment, hybrid mismatch, mandatory binding arbitration, and other related issues.
Taxing jurisdictions have also applied greater scrutiny to potential jurisdiction shopping for preferential tax treatment. It has now become more difficult for multinationals to reap those benefits, as preferential tax regimes have now been identified and many jurisdictions have enacted legislation with respect to transactions in these regions.
A second significant development in global tax policies relates to the concept of "state aid" in the European Union. Under EU rules it is illegal for member states to give a selective economic advantage (including beneficial tax treatment through a tax ruling) to certain companies in a way that results in unfair competition and affects trade between member states.
The European Commission State Aid investigations, which commenced in 2013, have aimed to identify what they consider to be unfair tax competition resulting from corporate tax practices in the EU.
For multinationals, this means that they must now consider whether tax certainty can better be achieved with or without a ruling (given that rulings were precisely meant to provide such certainty); and whether or not a ruling is likely to increase the chance of subsequent litigation either (i) as part of an EC State Aid investigation, or (ii) with any other jurisdiction that will now have the benefit of knowing the existence and the details of such rulings (given that we should now assume full disclosure of cross-border tax rulings across Europe).
Recent practice shows that in some situations it may be safer and more advisable for multinationals to operate with a robust transfer pricing study or tax opinion, rather than request a ruling which could be subject to more intense scrutiny.
Ultimately the EU's actions will certainly impact a jurisdiction's ability to offer, and consequently, a multinational's ability to benefit from, tax competition.
The challenges for multinationals are not limited to compliance and transparency issues.
The US recently passed the most significant overhaul of its tax code in over 30 years. Central to the US Tax Reform is a one-time tax on the foreign accumulated earnings of US taxpayers (the so-called “deemed repatriation” provision) and a shift to a territorial tax system where US corporations benefit from a participation exemption for dividends received by US shareholders from foreign corporations.
In addition to lowering the corporate tax rate to 21% and eliminating the tax on repatriated foreign earnings, the legislation grants multinationals immediate expensing on new investments and imposes a "minimum rate" on certain payments to foreign affiliates.
Importantly, the move to a territorial tax system will end the “lock-out effect” where US companies’ earnings are trapped offshore, and give US companies the opportunity to repatriate their profits at a lower tax rate. With the repatriation of offshore earnings to the US, it is possible that we will see M&A activity increase (and consequently increase the price of acquisitions) in the future.
For many multinationals, these reforms make the US a better place to do business. We are already seeing discussions on restructuring, on revisiting global tax strategies, and on repatriating profits from abroad, which may change the worldwide game on acquisitions. There are also discussions on whether it still makes sense to hold investments through the traditional European holding vehicles.
In conclusion, changes are coming. For a long time, multinational companies have benefited from a range of global tax rules to reduce their tax burden. But now that more countries are adopting uniform taxation standards, it is time for them to reassess not only their tax strategy but the way they do business.
In the future, we will likely see increased transparency between multinationals and the tax authorities, more intense scrutiny of international transactions and structures, and more comprehensive disclosures from multinationals on how much and where they pay tax.
Multinationals will also be required to demonstrate a closer alignment between their operating model and tax structure, which may impact where and how they run their business.
Companies doing business globally are now receiving the impact of these tax regulations and will continue to do so. They need to be well-prepared for this environment of increasing compliance and transparency due to the growing exchange of information between tax authorities around the world.