"What Is Your Substance, Whereof Are You Made"? Is Tax Planning Truly On Your Board's Agenda?
Full commentary published as an article in Global Banking & Finance Review
As the OECD begins developing its 'Action Plan' to tackle tax avoidance and profit shifting, it is essential that multinationals' Boards align tax structure and their business operations closely to avoid scrutiny and reduce tax risks. This topic was discussed today at the Taxand global conference 2013, hosted by Alvarez & Marsal Taxand US in New York.
Frederic Donnedieu de Vabres, Chairman of Taxand, provides an overview of the session:
"Given how much the world has evolved it's remarkable that the laws that govern tax residency have seen little change since they were formulated in the early 1900s. The paradigm shift in technology, travel and international markets makes it almost impossible to apply these laws to modern business. Companies run the risk of heightened scrutiny, increased investigations, the potential of double taxation scenarios and huge financial penalties imposed by tax authorities for not abiding to rules around residency, beneficial ownership and permanent establishment.
The location of taxable profits, or 'permanent establishment', is increasingly complex for multinationals particularly those with intangible assets. Most companies will maintain that they are controlled through their board meetings, with these meetings taking place where both central management and the company itself reside for tax purposes. But is that always the case?
With the prevalence of flexible and remote working, companies are running the risk of violating residency rules by making crucial business decisions remotely. In the context of a board meeting, where a key participant is joining by telephone or video conference, it might be that their exact location at the time will become critical in determining where a key business decision was taken."
Robert N. Lowe, CEO, Alvarez & Marsal Taxand US and conference host said:
"As the public's attention to fiscal issues has increased worldwide, there is a real need to reconsider the role of the board in the tax planning process to a greater degree than ever before. While historically, tax procedures have been viewed as part of the financial function, tax executives are increasingly engaging the board, which signals a shift in the tone of organisations."
This article is based on the The Board's Agenda: Tax Risks Plenary session at the Taxand Global Conference 2013: view the plenary film and presentation here.
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"More than ever, companies need to be comfortable with the entire structure of their business activities to show sufficient substance at all levels. With decision making processes increasingly under scrutiny, Director liability is on the rise. And with political and public scrutiny heightened and influencing corporate reputations, letterbox and conduit companies are no longer a viable option. More than ever tax planning must be on the Board's agenda as an integral part of commercial decision making. Having a considered strategy in place with the right people, the right location, the right documents, at the right time is crucial to ensure multinationals can pass increasingly challenging substance requirements, worldwide."