G8 tax: Be careful what you wish for
International Taxation System
Multinationals have endured months of media furore over tax liabilities, yet the basic principle that tax is levied on a company’s profits, not its revenues or where its customers are located continues to be disregarded. Governments want to attract inward investment and generate growth to counter the negative effects of the downturn, so they create tax incentives which unsurprisingly are taken advantage of by businesses.
There is much criticism of current tax laws, as politicians focus on their negative effects; but no-one has yet presented any credible alternatives. In a truly global economy where countries are evolving at a different pace, what are the options?
- A unitary taxation system? This proposal certainly hasn’t been very popular to-date.
- A Common Consolidated Corporate Tax Base (CCCTB) in the EU? This introduces a level of uncertainty into tax receipts.
- Enhanced Controlled Foreign Company (CFC) rules? These could lead to headquarters moving.
- Turnover based taxes? They already exist in the form of VAT in most countries.
There are many choices, but not many will feasibly work. What is clear is that any reform needs to be carefully thought out and subjected to a rigorous tax benefit analysis before implementation. The global economy can ill afford yet another set of changes which will divert multinationals’ resources from investing in the parts of the business that employ people and produce goods and services. Companies have invested heavily in following the rules set by governments across multiple borders. The prospect of a radically new international tax system will cause further uncertainty as well as huge compliance obligations and financial implications.
The argument for transparency appears a sound principle, but the consequences need to be carefully considered. The first countries to adopt full transparency are likely to suffer a competitive disadvantage. Multinationals could leave in droves for jurisdictions like China or Singapore that are under less pressure to sign up to information exchange agreements. We could also see a rise in retrospective investigations and fines as G8 countries struggle to process huge volumes of data. Newer financial centres may continue to suck business from G8 countries shifting economic power from West to East.
Frédéric Donnedieu de Vabres, Chairman of Taxand.
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After so much talk at the G8, there appears to be little tangible action. A general consensus on a central register of company ownership and the ten point declaration may have been agreed in principle, but where does the issue go from here?
Fundamentally this isn’t a topic which the G8 can tackle alone. The involvement of the G20 and OECD will be the bare minimum required to truly effect global change. Seismic changes of this kind intrinsically move at glacial speed. But the consequences of these proposals could have a dramatic effect on business and economies alike. We should be careful what we wish for.