New international taxation results in higher tax risk

At the year’s tax congress organised by the International Fiscal Association, one seminar stuck out from all of the others. This was when the tax managers of a number of international major corporates, amongst them Volvo AB’s Jesper Barenfeld, commented on their views of the effects of the current re-making of international corporate taxation on their companies.

All in all, these changes in the tax environment, driven by the OECD, EU and G20 countries, aim at counter-acting aggressive tax planning, supporting openness and transparency, and ensuring that profits are taxed, to an increased degree, in the source countries.

This change process involves the OECD and EU producing a number of directives with proposals for rules which are, then, implemented locally in each country and in the double taxation agreements between countries, in order that they are binding. In other words, this is a very extensive process and demanding work has to be undertaken as the different countries have different legal traditions. Certain countries try to legislate through relatively precise regulations, while others prefer to legislate based on principles, which are already in place. In this environment, even the lawyers can, sometimes, feel a bit powerless.

Following is a summary of the tax managers’ views of the process currently underway.

• The new environment will lead to dramatically higher risks for companies. These risks must be assessed by the companies, which is difficult.
• The companies’ finance managers understand, in general, these new challenges.
• In this new environment, the ”image risk” also increases, that is, that the company becomes front page news, such as Apple, most recently, and, previously, Starbucks. From this perspective, tax is now a Board issue for companies.
• The requirement of so-called country-by-country reporting implies increased costs. This means that the largest companies, based on a “master file”, must provide complete tax reporting for each country in which they have operations. This implies entirely new challenges and additional bookkeeping. All international activities must be documented and must be able to be tracked. In addition, accounting principles often differ between countries. This also applies to valuation principles for Research and Development and intellectual property rights in terms of determining the value of the asset in different markets.
• A number of participants wanted to know how this information will be used in the respective countries.
• The country in which profits are to be taxed will partially be determined by where the decision on certain measures or responses is actually taken. How can this be determined if, for example, Board members fly in in the morning, have a luncheon meeting and then fly back in the afternoon?
• Many companies seek to avoid having a so-called permanent establishment in other countries, that is, they seek to avoid incurring tax liability in those countries. This is due to administrative reasons.
• Tax managers see an increased risk of double taxation of certain profits, which two countries both want to tax, and the company can end up caught in this squeeze during a number of years.
• Based on the views expressed in various debate forums, one can understand that many observers just cannot understand the rationale of tax politics.

If this sounds gloomy, what were the solutions suggested by the corporate tax managers?

• There is a need for a real and effective dialogue between the tax authorities and companies. The companies want answers and clear decisions to follow.
• In their guidelines to countries on how the principles of new taxation are to be implemented, the OECD needs to emphasis, as far as possible, that the new policies are to stimulate growth in companies. The implementation phase is unbelievably important. Otherwise, the profit pie risks becoming smaller, instead of bigger.

Comments

This is the new reality for the larger companies. The impression is that their representatives are very professional. In spite of this, the companies will incur increased internal costs for producing various descriptions of the operations. At the same time, they see increased tax risks when a number of countries now want to tax them and, in addition, when various countries adopt new rules and receive more information, facilitating the work of the tax authorities.

For medium- sized companies who are operating internationally, the questions are less dramatic but, in principle, the same. These companies will, also, experience increased uncertainty as to where the profits in future years are to be taxed.

A part of the new international work is, therefore, the establishment of various dispute settlement forums.

It can be noted that at Almedalen 2015, PwC addressed one of the areas the tax managers have now taken up, that is, the difficulty companies have in navigating between the various written regulations, and the increased ”image risk” which the new tax environment can imply.