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All change please: Global tax reform takes centre stage in 2014/2015

All change please: Global tax reform takes centre stage in 2014/2015
Global
1 Nov 2014

Also published in Global Tax Weekly, December 2014

2014 started with big claims from the G20 host, Australian Prime Minister Tony Abbott, who accused the G20 as merely being a “talkfest” on the issue of tax. During his presidency he vowed to keep international tax reform on the G20’s agenda, and he has so far succeeded.  

Tangible global tax change is underway, albeit slow in progress. The largest international development was the OECD’s base erosion and profit shifting (BEPS) initiative, which remains “on track”, after its first set of recommendations were published in September 2014. Although in its infancy, the OECD’s BEPS initiative demonstrates a clear desire to establish new country by country reporting requirements to enable effective targeting of tax audits. How global implementation will work in practice has yet to be prescribed (see 'UK becomes first OECD nation to formally commit to country by country reporting'). The next stage of OECD recommendations is scheduled for announcement in September 2015 – to include promised guidance around this implementation. 

The cross-border automatic exchange of information initiative that will be adopted by 44 countries by 2017 is another example of a multi-jurisdictional initiative awaiting prescription to implement. While both this and the BEPS initiative are designed to ultimately help the fight against unlawful tax structures, they are also fuelling an escalating burden of compliance costs for multinationals who continue to fulfil their tax obligations.

At a regional level, in July, the European Commission (EC) announced measures to investigate the tax affairs of Starbucks, Amazon and Apple, following accusations of the violation of state aid. The EC declared a focus on the companies involved, rather than the countries in which they operate, calling into question the legitimacy of the multinationals themselves. In September, the preliminary findings from the EC’s investigation claimed Apple had benefited from illicit state aid in Ireland. The results of these investigations are likely to have far-reaching consequences, not just for the multinationals or EU countries such as Ireland, Luxembourg and the Netherlands, but more generally for EU-US relations. 

On top of heightened scrutiny at an international and regional level, this year national tax authorities have increasingly and aggressively investigated resident businesses’ tax structures. In April, the UK’s HM Revenue & Customs claimed that its crackdown on corporate tax avoidance had recouped nearly GBP 2 billion in the last year. In China, following a similar public outcry, the State Administration of Taxation reported that they had brought in CNY 46.9 billion of additional taxes in 2012 - 38 times more than 2008.

In the US, the debate around multinationals holding cash offshore in low-tax jurisdictions such as Luxembourg and Ireland, came to the fore again this year. The response of US regulators has been to push for further transparency around offshore cash. The antiquated nature of US tax policy is further highlighted by the growing trend of tax inversions, where companies seek to re-domicile overseas to reduce their tax obligations. This was exemplified this year by Burger King’s acquisition of Tim Horton’s in Canada and most notably, in the pharmaceutical industry, AbbVie’s acquisition of Shire. 

One country which is slowly rebuilding its reputation on tax issues is India. Narendra Modi, the newly elected Indian Prime Minster, has suggested big changes to rebuild its reputation amongst the international business community. After recent cases involving multinationals such as Nokia and Vodafone, others will wait to see how quickly Modi’s government can offer a fair and stable tax regime.  

As we approach 2015, progress continues to be made on international tax reform but uncertainty remains. While it is not yet clear how the BEPS measures will be implemented, the initiative has already impacted multinationals. With public discussions focusing on tax driven structures, authorities are obligated to threaten taxpayers with aggressive consequences. More updates relating to BEPS will be published in 2015. 

The area of indirect tax will see change in both Europe and Asia, too. On 1 January 2015, the EU value added tax (VAT) place of supply of services rules involving business to consumer (B2C) supplies of broadcasting, telecommunications and e-services (digital services) will be enforced. In Asia, goods and services tax (GST) of 6% will be adopted in Malaysia from 1 April 2015 to replace the current sales and services tax regime. China and India are also likely to continue their VAT pilot programmes. Japan is still yet to decide on its mooted 10% sales tax hike, scheduled for November 2015. 

As the world emerges slowly from economic recession, governments will be looking to evolve national tax policy for a changing world. But not all changes will be to the detriment of multinationals. In September 2014, Canada started offering businesses tax cuts, thanks to its first budgetary surplus since the global economic slump. A number of other governments announced plans to reduce corporation tax rates: Spain claimed that they will go from 30% to 25%; the UK will reduce its rate to 20% in 2015; and both Greece and Japan are pursuing a similar agenda. As more western markets show signs of a fragile recovery, the race to the bottom on corporate tax rates looks set to continue. 


Your Taxand contact for further queries is:
Barnaby Fry, MHP
T. +44 (0)203 128 8215
E. taxand@mhpc.com

Taxand's Take

When planning ahead for 2015 multinationals should:

  • Take note that tax has remained high on the agenda this year, due to G20 tax reform pledges and continued media scrutiny; multinationals should expect this trend to continue 
  • Start preparations with regards to the OECD recommendations launched in September 2014. These are currently in the ‘middle of the road’, with draft guidance around what the new global tax environment will look like to be implemented post September 2015
  • Monitor the world of indirect tax, particularly in the EU where VAT place of supply of services rules will come into play. Multinationals should ascertain if and how these new rules will affect their business
  • Expect an increase in competition for tax cuts, as governments encourage early signs of positive economic growth through lowering overall rates to encourage investment and job growth

 

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