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Country Competition Poses Further 'Hurdle' for Tax Harmonisation

Country Competition Poses Further 'Hurdle' for Tax Harmonisation
17 Jan 2013
The debate around the taxation of multinational companies across their global markets has shown no signs of ceasing as the New Year gets underway, with politicians continuing to wake up to consumer sentiment on taxation of large corporates in their jurisdiction.

2012 saw responses at each end of the spectrum from some of the targeted multinationals, with Starbucks opting to agree annual tax payments with the UK authorities, whilst Google vehemently defended their global tax positions, emphasizing the fact that they act legally within the tax structures set-up by those countries in which they operate.

Taxand's recent survey of multinational CFOs found that, globally, 72% of respondents felt that public exposure to tax planning could be detrimental to a company's reputation, increasing from 53% in 2011.

Particularly in the run-up to the G8 meeting being hosted in London in June, we are likely to see a continuing flow of deliberation on cross-border taxation, as leaders look to establish their positions and steer the debate in advance.

Conversation is likely to focus on the issue of 'harmonisation' and whether a more joined-up tax system is the best solution to the problem of establishing where company profits are taxed. The location of taxable profits, or 'permanent establishment' is an extremely complex area, and one made even more complicated for companies with intangible assets, whose profits are essentially global in nature.

Still, harmonisation looks a long way off. In fact, the trend of late seems to have been in the opposite direction, and tax legislation is becoming increasingly complex and increasingly diverse, with jurisdictions continually tinkering with their tax regimes in order to demonstrably close perceived 'loopholes'. Taxand's global survey also indicated that whilst multinationals have a desire for harmonisation, only 42% feel it is achievable over the next 5-10 years.

Competition for inward investment between countries is creating another hurdle for harmonisation and internet companies in particular have been targets for public criticism, having been attracted to tax regimes where their large numbers of intangible assets are taxed in a much more accommodating manner. This has meant jurisdictions such as Ireland and Belgium have become hubs for companies in this sector to base their businesses.

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Taxand's Take

There remains a necessity to strike the right balance between understanding the role of multinational companies, and the roles of their finance and tax departments to contribute to shareholder value, alongside the need to manage their tax responsibilities across a number of jurisdictions.

There would no doubt be considerable interest from multinationals in increasing their dialogue with the relevant tax authorities in the early stages of a project in order to obtain prior agreements for a particular initiative or investment. It is this, as opposed to a futile pursuit of harmonisation, that perhaps poses the best way forward.

Taxand's Take Author