The Shifting Sands of International Tax Regimes

A recognition that regional and international tax regimes are no longer suitable for the digital economy is driving widespread change for multinational enterprises (MNEs). Being prepared for the regulation that is now unfolding should now be top of organizations’ agenda for the years ahead.

Transformation of the taxes paid by large organizations has gathered pace during the pandemic, because there are significant demands on governments to generate revenue following the massive borrowings undertaken to support businesses during lockdown.

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There are now continued efforts to respond to the digital economy by appropriately taxing in jurisdictions where consumers are located. This is happening either unilaterally by individual countries via digital services tax (DST) or multilaterally via the proposals being developed by the Organisation for Economic Co-operation and Development (OECD).

Faced with such monumental potential changes, tax and transfer pricing are now front and centre of MNEs’ operational risk registers. Investing in the right skills and tools that help reduce that risk is a matter for the senior leadership team, not just tax and TP professionals.

The Current Picture

In August 2021, the OECD announced that 134 countries and jurisdictions had joined a new two-pillar plan to reform international taxation rules. This would ensure that multinational enterprises pay a fair share of tax wherever they operate.

The OECD explains why the proposals have been so important to the international economy: “At the centre of the debate is whether international income tax rules, developed in a “brick-and-mortar” economic environment more than a century ago, remain fit for purpose in the modern global economy. The fundamental elements of the global tax system which determined where taxes should be paid (“nexus” rules based on physical presence) and what portion of profits should be taxed (“profit allocation” rules based on the arm’s length principle), have served their purpose well. Namely, they have enshrined tax certainty and helped to eliminate double taxation stimulating global trade.”

However, there has been growing discontent about the fairness of the current system. This, in turn, has led some governments to adopt unilateral measures as a single, centralized agreement is finalized. In Europe, countries including the United Kingdom, Poland, Turkey, France, Italy and Spain have introduced their own versions of DST.

The scope of these arrangements vary country by country. Some cover just digital advertising revenues, whereas others are going further to include revenues from the provision of a digital interface, targeted advertising, and the transmission of data collected about users for advertising purposes.

Meanwhile, the European Union (EU) has said that it will implement its own digital levy from 2023, commenting that: “The EU needs a modern, stable regulatory and tax framework to respond to the developments and challenges of the digital economy. While we should promote and encourage digitalisation as it can increase productivity and benefit consumers, digital companies should also contribute their fair share to society.”

The EU has since said that it would put its plan on hold, in order to prioritize the OECD’s approach. The OECD says that a multilateral agreement will be of more value than individual arrangements, stating that: “The result of nearly a century of multilateral efforts to create a clear, consistent, and co-ordinated tax system lies in the balance. Failure to deliver, however, will ultimately lead to a patchwork of unilateral actions, which in a fragile global economy, would harm investment and economic growth hampering the ability of governments to collect revenues and invest in programmes.”

Finance leaders from the G-20 countries endorsed the OECD’s two pillar plan in Summer 2021, and the aim is for national leaders to give it a final blessing at an October G-20 summit in Rome. It is likely that the agreement will include a standard global tax rate of 15%.

How to Prepare for Change

The need to prepare for eventual change, whether it emerges from regional or global initiatives, means that MNEs should be focused on what it will mean for their tax planning and forecasting processes.

Recent research from Deloitte with global senior tax professionals shows that there is increasing awareness about the impact of the transparency agenda. Three quarters (74%) of respondents said that they “agree” or “strongly agree” that their group is concerned about the continuing high interest of media, political and activist groups in corporate taxation.

Just over half (53%) ‘agree” or “strongly agree” that their organization has implemented additional corporate policies and procedures in response to the increased scrutiny related to corporate taxation.

While just 26% said their tax group has secured additional resources/headcount as a result of changes arising due to the OECD’s BEPS project, the majority (82%) said they intend to increase their investment in tax-related technologies for a wide range of reasons.

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With so much uncertainty on the horizon, tax-related technology enables MNEs to centralize and automate data gathering for tax planning, forecasting and reporting. It helps tax teams to provide the near real-time data that senior leaders need to ensure they are fully compliant with regulation and avoiding the risks introduced by greater scrutiny on corporate taxation.

It also releases tax teams’ time to be spent on more valuable efforts: comparing tax data across reporting cycles, considering the implications of different scenarios, and feeding insights into future tax planning and forecasting.

If a tax team continues to be dependent on static spreadsheets and manual processes to make all the frequent updates we’re witnessing today, there will never be enough time or resources to see everything through. A tax software platform provides transparency, and is now the only logical way for corporations to address the current and future challenges they face.

Whatever happens with the tax initiatives that are under development today, flexibility and agility are the key attributes for teams to nurture. For tax professionals, there are huge opportunities to take a more strategic approach, helping to steer their organizations through the unpredictable and choppy waters that lie ahead.

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