5 things to know about the upheaval in international tax law
INSIGHT ARTICLE |
News stories about aggressive tax planning by multinationals have led to a political backlash and ongoing sea of change for international tax rules, even producing a variant of WikiLeaks known as LuxLeaks. Five things merit special note with respect to the current turmoil in international tax.
1. Multinational companies are under increased scrutiny
Discussions about the obligation to pay tax are now commonplace. Multinationals, often criticized for not paying their fair share of tax, are now under greater pressure to be seen as compliant tax payers. As a result, tax has been elevated to the boardroom where strategic decisions are being taken to protect corporate reputations. Moreover, many nations have implemented heightened political scrutiny of perceived abusive tax planning. The European Commission has brought legal action against various European Union member states, questioning tax rulings in favor of multinational corporations, by which those member states provide impermissible state aid in the form of fiscal benefits.
2. Countries are working together to close loopholes in tax laws
In 2013, the perception that national tax laws had not kept pace with globalization, leaving gaps by which multinationals could artificially reduce taxes, led the Organisation for Economic Co-operation and Development (OECD) to launch the base erosion profit shifting (BEPS) project. The project aims to provide governments with ways to close perceived gaps in existing international tax rules that might allow corporate profits to be shifted artificially to low-tax jurisdictions where little or no economic activity takes place. More than 80 nations contributed to the project. Today, these countries are implementing the recommendations resulting from the project. The European Commission is also working on its own Anti-Tax Avoidance Package with measures to prevent aggressive tax planning, boost tax transparency and create a level playing field for all businesses in the European Union.
3. Enhanced transparency is a key theme
Public leaks of information have added to concern about aggressive and illegal tax planning. For example, the Panama Papers brought forth millions of leaked documents exposing the financial details of more than 200,000 companies using offshore business entities for illegal purposes, including tax evasion. The LuxLeaks scandal resulted in confidential information from Luxembourg tax rulings being leaked to the general public. This information flow has prompted governments to create greater tax transparency. One key goal of the BEPS project is enhanced transparency and improved data collection with the aim of preventing the growing disconnect between the place of economic activity and the country where profits are reported for tax purposes. Final recommendations from the project included requirements for taxpayers to report aggressive tax planning arrangements, and follow new rules about transfer pricing including providing a breakdown of information on a country-by-country basis, in order to help governments identify risk areas and focus their audit strategies.
4. Tax reform in the U.S. is … well… a little complicated
In an election year, everyone has thoughts on how to reform the U.S. tax code, although little agreement exists about how the task should be accomplished. Corporate rates in the United States are high, and the current tax system is complicated. Tax on certain categories of foreign income can be deferred until profits are distributed to shareholders or reinvested at home. The U.S. Department of the Treasury is attempting to make it more difficult for companies to move their permanent tax homes offshore in so-called inversion transactions which enable companies to reduce their corporate tax rate. Several recent attempts to shut down these transactions have been met with criticism from large businesses that argue that stricter rules would have a chilling effect on U.S. competiveness. However, the White House and Treasury argue that inversions create unfair loopholes that shift the tax burden to everyone else.
5. International tax law changes cannot be ignored
The upheaval in the world of international tax cannot be disregarded. Some people thought that the large undertaking of the BEPS project would fail and that countries would not be able to work together to change international tax laws. Not only has this proved to be incorrect, but the OECD has now announced a new framework in which all countries around the world have been invited to join global efforts to review the implementation of BEPS measures. With organizations like the OECD facilitating this cooperation and the enhanced information exchange of multinationals’ tax information, the waves of international tax law change are crashing even higher.