Tax noose tightening for global firms

Globalisation has brought many benefits in terms of cross?border trade, efficiency, competition and the free movement of goods and labour. But it has also allowed multinational corporations (MNCs) much greater freedom to reconfigure the location of manufacturing, operations, sales and corporate services in ways which channel reported profits ? and hence tax liabilities ? to low?tax jurisdictions.

While such actions are largely legal, the view has developed rapidly in recent years that tax avoidance of this type is both unfair and economically damaging. Apart from the alleged existence of a moral imperative to pay the 'right' amount of tax, it is argued that avoidance by some shifts the tax burden disproportionately onto those who are less able to take avoiding action; that it distorts economic incentives; and that it brings tax regimes in general into disrepute.

The widespread and increasing adoption of general anti?avoidance rules (GAAR) is a measure of how international concern over aggressive tax avoidance has grown. Since the global financial crisis, this concern has been magnified dramatically. This is in part because virtually all developed countries, faced with the challenge of sustaining broadly current levels of government expenditure during a period of financial stringency and economic slowdown, have generally raised consumption taxes and personal income taxes and intensified their efforts to collect tax wherever and whenever they can. It is also because their citizens, squeezed between declining purchasing power and higher taxation, increasingly resent others who seem to be 'getting away with it'.

Across the world, we are seeing tougher legislation and regulation, more cooperation between tax authorities, and a media climate that, in some jurisdictions, is potentially hostile to business – and to MNCs especially. As a consequence, there is now significant debate over whether long?standing fundamental elements of the global corporate tax environment need to be changed.

Notable factors include perceptions that MNCs are not paying enough tax compared to domestic companies, questions over the suitability of the current global system for allocation of profits in the e?commerce age and the growing tendency to put the burden of tax collection on the private sector.

The fact that governments want to increase tax revenues in times of austerity is not a surprise. Nor is the fact that the countries thatfeel disadvantaged by the current system are looking to change it for their own benefit. Ultimately, many countries around the world are determined to increase the total amount of taxes paid by MNCs; and specifically, developed countries want to ensure that more of that tax is retained in the developed countries where, they argue, most economic value – whether manufacturing, services or sales – is created.

The G20 has taken the lead in driving debate forward, as in many areas of post?crisis response, and has placed responsibility on the Organisation for Economic Cooperation and Development (OECD), with its long history of promoting international tax cooperation, to develop concrete proposals. The results are likely to change significantly the context in which multinational financial institutions operate and constrain further their scope for effective tax planning.

Key drivers of the changes that may occur will be; The OECD's Base Erosion and Profit Shifting (BEPS) project, and in particular those actions designed to ensure that transfer pricing outcomes are in line with value creation, those that ensure that multinational companies provide all relevant governments with details of all operations, revenues and taxes paid according to a common template ('Country?by?Country Reporting') and the move to Automatic Exchange of Information between governments and tax authorities on account holders with multiple or overseas residences.

New regulations are being introduced on potentially very tight time-scales, and companies need to gear up to respond as a matter of urgency. As MNCs develop their responses to the new environment, the impact on tax functions will be profound. Transfer pricing decisions, information gathering, and reporting and information exchange will all be extended and transformed. Against this background, it will be crucial that tax considerations are integrated effectively into overall business strategy and operational decisions.

For certainly, revenue authorities the world over seem to have, finally, attained consensus on various tax matters.