OECD BEPS DRAFT GETS A REACTION

As predicted It hasn't taken long for the  self serving "discussion" over the BEPS strategy to start . 

There is a fear in the US  that the initiative  will be a catalyst for  US businesses to relocate to other jurisdictions to avoid the outcome of double taxation  and rising compliance costs . The concerns are varied and include country by country reporting requirements . In addition to the reporting aspects the prospect of shifting the point of taxation may have a major impact on the US tax take. Interestingly , various surveys have shown that business acknowledge that the current rules are no longer fit for purpose .

The cooperation of some 90 plus jurisdictions , to implement the entire plan is likely to require a time frame of 5 years + according to the Australian Taxation Office response yesterday .The Australian position is to keep engaging with overseas investors to encourage economic activity while being mindful of the entire picture . i.e Australia is aware that everyone needs to be able to preserve their own tax base based on the economic activity .While it sounds positive , and there appears to be the political appetite to address the global tax problem  the question will always be , which part of the economic  activity is ( more ) relevant . The customers location, the producers location etc .and what will it cost "us" in revenue dollars without shredding the revenue base in favor of  other locations. A real concern is that of unilateral actions taken by jurisdictions which could very well undermine and slow down the project on a multi lateral level .While various jurisdictions may not act unilaterally , the pace of change will mean that there is a risk of a compromised outcome in the next few years . 

What is clear despite the uncertainty , which is considerable at the moment , the world has changed and the rules as we knew them , have been consigned to history. Based on this new landscape larger businesses need to consider their current models  .This includes likely reporting requirements  and what transparency of data means to the business world and competition . Who will see the data  . There is also the issue of the reality that tax compliance costs  will increase  considerably .

Critically , what will increase , is the tax take  which will impact on the profit levels previously enjoyed by business. The challenge therefore is to ensure that under the new world order that is emerging , the strategy will be focused on minimizing  double taxation . What we will see is that existing operations are likely to face  considerable rearrangement and management must start now to get a handle on these issues. 

Apple, Ireland and the European Commission

The EU Commission is suggesting that Apple should have been paying more tax and that Ireland aided them in achieving that outcome. If Apple was compliant with legislation/regulation at the time they should not be thrown under the bus of inappropriate transfer pricing practices and being a poor global (corporate) citizen.

It has been noted by many in the tax industry, that every company (large and small) seeks ways to (legally) minimize their taxation outlay. If Apple adopted transfer pricing strategies that were in keeping with the law at the time then they should not be taken to task.

The G20 approach to a multi-lateral rather than a bilateral treaty environment combined with other OECD strategies is likely to result in different outcomes in the future. However looking back must be done through the lens of what the law and guidelines were at the time. The reality is that taxation law has not and is unlikely to evolve as fast as the ongoing and rapid change in the global business environment.

Both Apple and the EU Commission present their positions in the press with quiet confidence and no doubt there will be many companies awaiting the outcome but it will be quite some time before this issue is resolved.

Australian tax office audits of multi-nationals

In the wake of the G20 meeting in Australia last month and the Tax Office Compliance in Focus 2013-2014 publication of July 2013, it is no surprise that tax audit activity is on the rise.  As part of the global initiative to prevent BEPS the Australian Taxation Office has commenced audit activity on 86 multi national businesses. No doubt the usual names are considered to be on this list but the ATO are being somewhat guarded as to the targets .

The question that comes to mind is whether audit activity is the answer. It seems that the problem lies with the current law, as in many cases the multinationals (that have received press coverage about their tax payments)  have acted within the framework of what is the law.

The law it seems is what is out of sync with current business operations and dynamics. The forming of a global set of robust rules is where the attention is required but equally very challenging as evidenced by the recent response to the OECD transfer pricing recommendations).  It is relevant to note, as highlighted by the ATO , transfer pricing is not suggesting illegal activity unlike profit shifting.

What somehow seems to have gotten lost in translation, is that financial engineering does not mean that something has been done incorrectly. Inappropriate practices will get caught by these audits but it will be interesting to see if in fact the outcome will be matched by the ATO view that lower taxation has arisen due to inappropriate practices .

A significant part of the problem is determining how to tax online business, the digital economy. The business economists face a challenge in working through the modelling as to how to determine what revenues and costs are to be attributed to the various locations.

Into this mix comes the added dimension of different jurisdictions wanting to attract business and offering tax based incentives. How difficult will it be for all locations wanting to be pulled in the same direction while endeavouring to be more attractive than their global neighbours? In many cases, such jurisdiction based benefits have been the catalyst for corporations moving location.

Going back some 13 years, James Hardie Industries (unashamedly) moved to the Netherlands due to the change in global operations and tax inefficiencies. As cited on their website

“In summary, the establishment of a Dutch-based parent company and the restructure were driven by the group’s increasingly global focus and international financial tax efficiencies. .”

Such taxation considerations, including tax concessions as business drivers illustrates just how challenging these issues are. The R & D concessions are an example of how countries (appropriately) try to attract business.

Relocation of businesses and how they transact is clearly a battle zone, the rules for which shall take some time to develop. In the meantime the tax authorities continue to rely on audit activity to catch those parties that they feel have not been doing it correctly. It will be interesting to see the dollars raised against the cost of the recent audit initiative .