Attack on avoidance
Public outrage and international cooperation have turned 2013 into a watershed year for corporate taxes. Many CFOs have taken a very cautious approach to tax reduction. But their conversion may be short-lived.
Politicians are keen to demonstrate an iron fist. “We can no longer afford freeloaders who reap huge profits in the EU without contributing to the public purse,” European Commissioner for taxes, Algirdas Semeta, declared in late November. He was unveiling a new EU directive aimed at curbing aggressive tax planning by multinationals. The announcement is the regulatory culmination of a year-long international effort, unprecedented in scale, to catch up with multinational tax practices. Initially triggered in the UK, the wave of public outrage has continued to swell for over a year.
Two corporate practices have drawn particular fire: transfer pricing of intangible assets and intracompany loans. The companies who have become most notorious internationally for their tax strategies – Amazon, Google and Starbucks – have all been accused of either paying overpriced royalty fees or expensive interest rates to subsidiaries in other countries, therefore allegedly shifting profits from high-tax countries to low-tax jurisdictions.
Tax law is likely to undergo radical change.
But it is not just legislation that is changing the way CFOs think about taxes; for many, the reputational risks are the stronger motive. CFOs have realised that they need to be prepared to answer questions about their tax arrangements to the authorities, the press, their shareholders and the board.
“A lot of our work has involved educating C-suite executives who are a step removed from the tax planning process, so that they are able to articulate their company’s approach to tax,” says Kevin Hindley, Alvarez & Marsal Taxand UK.
First published in CFO Insight, December 2013
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The international campaign against tax avoidance is now beginning to bear regulatory fruit. In addition to the EU initiative, which aims to change the way intracompany loans are taxed, national Governments have also adopted important changes to their tax codes. Alongside the OECD's BEPS Action Plan, substantive changes to the taxation have taken place in France and the UK, with changes possible in Ireland and the Netherlands – which could potentially reshape the framework for international tax arrangements.