The OECD’s base erosion and profit shifting (BEPS) project, with an overall goal of reducing global loss of tax revenues due to double non-taxation, has created the need for careful monitoring of developments in international tax law.
Universal revenue needs are fueling an unprecedented period of international cooperation on taxation, marked by the implementation of new information-exchange protocols between countries and stringent national and international anti-tax-avoidance rules. Like it or not, the playing field is being redesigned to switch focus from whether income will be taxed, to where it will be taxed.
Understanding how taxing authorities will implement new rules and regulations is critical for CFOs in the countries where their companies are based, as well as those where they have significant operations.
Mere compliance with new rules is no longer sufficient. For example, proactively adapting supply chain strategies to changed conditions and recognizing when to abandon existing strategies in favor of new approaches is imperative. Every change in the law creates new opportunities for CFOs who know how to leverage them.
Here is a sampling of recent developments to illustrate how the world of tax planning is undergoing revolutionary change:
- As of July 6, 2017, 102 jurisdictions — more than half from outside the OECD — had committed themselves to the BEPS package of 15 actions and to its consistent implementation.
- In May 2017, the EU approved its Revised Anti-Tax Avoidance Directive (ATAD II), which is designed to prevent the use of hybrid mismatches between EU countries and third countries to avoid tax. Member states must implement ATAD II by Jan. 1, 2020.
- Automatic exchange of information (AEOI) agreements between governments are proliferating, in anticipation of the commencement of country-by-country (CbC) report exchanges beginning in 2017 and 2018. CbC reporting is part of BEPS Action 13, Transfer Pricing and Country-by-Country Reporting. This affects companies with consolidated revenues of at least €750 million or $850 million.
- Countries are imposing stricter limitations on corporate interest deductions, such as those recently announced in the UK.
- The BEPS Multilateral Instrument, short for the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS,” was signed by more than 70 countries in June 2017. Its purpose is to create a mechanism for amending numerous bilateral tax treaties to incorporate BEPS principles without the need to renegotiate each treaty separately. This should exponentially accelerate the spread of BEPS principles through the world’s treaty networks.
Thus, dealmakers and tax planners around the world face an ever-tightening fiscal net around the structure and financing of cross-border acquisitions. The era in which each country’s tax authorities kept mostly to themselves is over.
Here are some recommendations for CFOs learning to cope with the new global tax planning environment:
- Think holistically: focus less on specific tax-planning strategies and more on overall profit allocation in relation to tax burdens. Future tax liabilities will be tied much more closely to economic reality.
- Be open to physically locating profit drivers in lower-tax jurisdictions. Shifting taxable profits will not occur in a vacuum.
- Consider effective tax burdens, not just marginal income tax rates; include VAT and similar taxes, social security, and property taxes in the planning matrix. As corporate income tax rates drop, other taxes acquire more significance in relation to the total.
- Build tax costs into planning models up front, not as an afterthought. Tax is an interactive part of the economic environment, not an external factor.
- Assume transparency. Tax authorities, if not the public at large, will have access to much more information about where profits are earned and where they are being taxed.
These are some of the observations our global M&A team made when working on the 2017 Global Guide to M&A Tax, which offers more information on how the recent global tax policy developments will affect M&A.
Christopher Howe is a managing director and Alan Cathcart a senior director with Alvarez & Marsal Taxand.