Tax Planning in a World of Increased Transparency
Multinational Enterprises (MNEs) are facing an evolving international tax landscape with long-term implications for tax compliance, planning and controversy. Understanding these changes requires continual effort. Tax Executives Institute recently invited us to explore Country-by-Country (CbC) reporting issues at the 2017 Global Tax Symposium in Houston, Texas. We had a lively discussion and know this will be a hot topic as jurisdictions begin reviewing the CbC reports.
As background, the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project has been a key driver of international tax reform. BEPS “Action 13” outlined a CbC reporting standard that has been adopted in more than 55 jurisdictions. The CbC report is an annual filing obligation identifying, among other things, the amount of revenue, profit before income tax, and income tax paid and accrued for each tax jurisdiction in which the taxpayer does business. The resulting transparency directly affects global tax strategies since the CbC report is subject to automatic exchange provisions and more than 1,000 such relationships have been established worldwide. Tax authorities will be using this information to perform tax risk assessments so taxpayers need heightened sensitivity to the breadth and depth of information available through the CbC report. If you are involved in the process of preparing a CbC report, discussing the CbC report with a tax authority, or are otherwise interested in how the CbC report could be used by a tax authority, the OECD’s Handbook on Effective Tax Risk Assessment is a valuable resource.
But the OECD is not the only international body examining resolutions for the underlying issues relating to base protection of respective countries. In the European Union, the agenda includes the ongoing “state aid” process, complimented by consideration of a formulary apportionment mechanism (the so-called CCCTB) and potential digital taxation regime. The new United Nations Committee of Experts on International Cooperation in Tax Matters has already approved a regime of taxing outbound payments for technical services (Article 12A of the UN Model Treaty) and is presently addressing additional tax base matters including dispute resolution mechanisms (largely rejecting the BEPS insistence on binding mandatory arbitration). As if this were not enough, some countries have adopted their own base protection regimes (often with declaration that they are not subject to double taxation relief via treaties), including the UK “diverted profits tax” and the India “equalization tax.” This is without mentioning how United States tax reform, which represents a seismic shift for international tax planning, affects tax base erosion considerations.
These international initiatives reflect concern that BEPS does not address the fundamental residence vs. source issue of tax base design, which was originally formulated just after World War I. Needless to say, the world has changed in the interim.
Practice Point: As a result of these developments, all MNEs are, or should be, reassessing their global tax strategies as the initial round of CbC reports is completed.