Fighting tax evasion and avoidance is essential to secure greater fairness and economic efficiency in the EU’s internal market. The public has become more sensitive to tax fairness issues in the context of increased pressure on public finance at times when large multinational enterprises can reduce the amount of corporate income tax to single-digit percentages.
Corporate income tax avoidance is thought to deprive EU Member States’ public budgets of billions of euros every year.
Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually , or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.
G20 finance ministers endorse reforms to the international tax system for curbing avoidance by multinational enterprises – OECD
Aggressive tax planning, harmful tax regimes and tax fraud all rely on an environment of opacity, complexity and non-cooperation. Taxation is at the core of countries’ sovereignty, and the interaction of different national tax rules remains a source of discrepancies and frictions.
This may lead to harmful tax competition. Some enterprises rely on the complexity of tax rules and the lack of cooperation between Member States to shift profits in order to minimise their taxes.
Large multinational companies may engage in aggressive tax planning due to their presence in several jurisdictions, which SMEs and natural persons typically do not have. This can lead to distortions of the internal market and the level playing field between taxpayers.
On 18 March 2015, the Commission presented a package of measures to boost tax transparency, concentrating on the most urgent issues and including a proposal for the automatic exchange of information on cross-border tax rulings between Member States.
The package is complemented by the Action Plan adopted on 17 June. The main objective of the initiative is to explain the Commission’s vision for a fair and efficient corporate tax system in the EU and beyond.
The Commission wants to move to a system on the basis of which the country where a business’ profits are generated is also the country of taxation (see A New Start for Europe: Political Guidelines for the next European Commission - July 2014).
An impact assessment is being prepared under the aegis of the Communication and Action Plan to assess whether and how further corporate tax transparency, exposing enterprises to more intense scrutiny on the part of authorities or by different stakeholders, would contribute to this objective.
Such scrutiny would rely on information being made available either to tax authorities or to the public. More specifically, it could ensure compliance with tax laws, dis-incentivise tax avoidance and increase pressure on States to take appropriate measures. The corresponding detailed objectives would be:
To increase pressure on enterprises to geographically align taxes paid in a country with actual profits, through enhanced scrutiny and decisions of either citizens or tax authorities (“enterprises should pay tax where they actually make profit”);
To increase public or peer pressure on countries to take measures that contribute to more efficient and fairer tax competition between Member States, thus ensuring that the country where profits are generated is also the country of taxation (“Member States should stop harmful tax competition”);
To assist tax authorities in orienting their tax audits in view of targeting tax evasion and avoidance, i.e. business decisions whereby tax liabilities are circumvented (“help tax authorities orientate their audits on enterprises”);
To align corporate tax planning practices with multinational enterprises’ own commitment / statement to corporate responsibility, such as their contribution to local and social development (“enterprises should act as they communicate in terms of contribution to welfare through taxation”);
To ensure that enterprise structures and investments are more founded on economic motivations and not exclusively on corporate tax-related motivations (“enterprises should structure their investments based on real economic reasons, not just to avoid taxes”);
To remedy market distortions based on corporate intransparency and multinational companies’ comparative advantage over SMEs when engaging in aggressive tax planning (“fairer competition between multinational enterprises and SMEs”)
This consultation will help the Commission gather and analyse the necessary evidence to determine possible options to attain those objectives.
Transparency on taxes paid to governments, in the form of country by country reporting, already exists for financial institutions established in the EU under the Capital Requirement Directive with a view to regain trust in the financial sector.
Large extractive and logging industries will also soon have to report their payments to governments on a country-by-country basis under the Accounting Directive and the Transparency Directive. The latter aims mainly to allow local communities of resource-rich countries to know about payments made to their governments, so that these can be better held to account.
The increased public concern regarding fair taxation in today’s difficult economic environment is also felt beyond the European Union. Base erosion and profit shifting (BEPS) have preoccupied governments around the world. OECD and G20 countries will finalise by the end of 2015 a 15-point Action Plan on these issues as part of a BEPS Project.
Once agreed, it should lead in the coming years to legal requirements in each participant jurisdiction and to tax treaties, possibly including a multilateral instrument – however, it must be noted that OECD and G20 countries are not obliged to follow or implement the recommendations of the BEPS project, and that not all EU Member States are OECD members. Some of the recommendations will be connected to corporate transparency (e.g. actions 5, 12, 13).
Assuming that all G20 and OECD countries will implement BEPS action 13 on country-by-country reporting, very large multinational enterprises with turnover above €750m would have to provide a Country-By-Country Report (CBCR) to the relevant tax authority from 2017 onwards.
Tax authorities would then share the CBCR submitted to them with the objective to perform a more substantial risk assessment in the area of transfer pricing. The information provided would not be available to the public.
This consultation wants to gather views in particular on the following:
- Transparency by whom? Transparency could be required from different kinds of companies, varying e.g. in size, location and extent of cross-border business. Light has been shed recently on cases involving non-EU multinational enterprises operating through branches or subsidiaries in the EU.
- A key question is whether these enterprises should, if feasible, be covered by any EU attempt to extend corporate tax transparency. In view of this, the consultation aims inter alia to examine the risks implied by a distorted level playing field between EU and non-EU enterprises.
- Transparency towards whom? Enhanced transparency could be vis-à-vis tax authorities or could include the wider public.
- Transparency of what type of information? The type of information to be disclosed might concern tax rulings, CBCR, statements or other types of information given by enterprises - there is a range of possibilities in terms of the degree of detail and scope of information that could be sought.
This consultation document sets out a number of tentative options. One of the key questions to be considered in relation to these options is whether
(i) to follow up or implement the new OECD recommendation in the context of action 13 either at national or EU level which would mean to improve information exchange between tax authorities and
(ii) whether to disclose certain tax information to the public, for example by extending requirements on country-by-country reporting currently in place for financial institutions to all other sectors.
Respondents are encouraged to propose other relevant options if they wish. This public consultation also seeks views on the potential impact of enhanced tax transparency.
UK’s Large Business Compliance Consultation: TEI’s comments
Introduction of secondary adjustments into the UK’s domestic transfer pricing legislation
Publication date: 26 May 2016 - Closing date for comments: 18 August 2016
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BEPS and Indirect Tax
Let's highlight action 7 and 13:
- Prevent the artificial avoidance of PE status'
- Country-by country reporting (CbC)
Action 7 – prevent the artificial avoidance of PE status
The final BEPS report includes changes to the definition of PE for income taxes of Article 5 of the OECD Model Tax Convention. Action 7 broadens the threshold to determine when such PE status exists. Currently such a PE status does not exist for commissionaire arrangements and the specific activity exemptions in treaties, such as warehousing, purchasing and “preparatory and auxiliary activities.
The indirect tax definition of a fixed establishment (FE) is different from a PE and has its foundation in EU VAT law and should therefore not be affected by the BEPS initiative or OECD definition. Some countries however do (still) not accept the absence of a FE once a PE has been established. Note that the amount of PEs will increase when "Action 7" is in force.
As businesses are facing global challenges it makes sense that the existing business model is reevaluated and amended when necessary to meet the new PE environment. That most likely means moving away from a commissionaire structure?
Action 13 – country-by country reporting (CbC)
Action 13 provides a template for multinationals to report on an annual basis and for each tax jurisdiction in which they operate revenue figures and other key figures. The data of these reports give direct tax authorities the possibility to audit the amount of direct tax paid.
However for indirect tax authorities it is useful data as well. From a custom perspective it could be supportive during auditing the valuation of the transactions when customs duties are due and for VAT cross border intercompany transactions have always qualified as a high risk area.
The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format for bot corporate income tax as VAT. This leads to much more efficient and effective tax inspections. Data analytics will become the most efficient and effective way of future tax auditing.
Written by Richard Cornelisse
I started my career as a manager at Arthur Andersen and then became a partner in EY where I led the indirect tax performance team for Netherlands and Belgium. Currently I am a senior managing director of Phenix Consulting.
I have over 20 years’ experience advising clients on international VAT issues. I am specialized in the tax aspects of financial transformations, shared service centre migration, and post merger integration work. I am also somewhat of a mentor, giving back to the profession. If you are interested in conversation and discussion, please feel free to contact me.
Interested in conversation and discussion, please feel free to contact me.
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Compliant tax software solutions for the global management of tax processes
In essence, HRMC’s increases its expectations towards large businesses with regard to a more and more transparent tax management strategy. However, the publication of a tax strategy will clearly not be sufficient. It is just the starting point for the provision of a clear picture about the risk management and controls in place of tax relevant processes. The daily management turns on the radar.
State-of-the-art tax compliance management software is required.
In difference hereto, the view into the current daily practice provides a different and non-compliant picture:
Widespread use of Excel spreadsheets, decentralized storage of tax relevant documents, lack of documented controls, lack of automation, global lack of tax compliance software tracking individual changes and filings, lack of standardized reports immediately available upon request, lack of in-built double-checks for the calculation of current and deferred taxes on reporting entity level, lots of tax relevant data stored at external outsourcers (e.g. external tax advisors and accounting firms), several tax software tools in place at various locations which are neither interfaced among each other and with the ERP systems in place, etc.
It is obvious that tax departments which are not adapting its process management to the requirements addressed by HMRC and other tax authorities may struggle with regard to compliance, efficiency and transparency.
Therefore, compliant tax software solutions for integrated tax management like the U² software from Universal Units become more and more important
Related GITM articles
- Examples of public Fiscal Transparency statements
- The Tax Transparency Benchmark 2015
- BEPS 2015 Final Reports
- EU - Public consultation on further corporate tax transparency
- CbC reporting / tax transparency: Accounting Directive
- Improving large business compliance
- Tax administration: large businesses transparency strategy
- Spreadsheets and Compliance
- Tax Strategic Plan
- Tax Control Framework