Strategizing Multinational Tax Risks

As a Tax Policy is recognized as a basic tool for the foundations of a Tax Risk Framework, documented tax strategies are becoming the new norm.

The UK had previously published requests for comments re: publishing a UK tax strategy by UK and non-UK multinationals (MNEs), followed by the EU Anti Tax Avoidance Package with a communique on the subject.

Highlights of EU Communication to the European Parliament:

• A coordinated EU external strategy on tax good governance is essential for Member States’ to tackle tax avoidance, ensure effective taxation and create a stable business environment.
• In 2012, the Commission issued a Recommendation encouraging Member States to use transparency, information exchange and fair tax competition to assess third countries’ tax regimes and to possibly apply common counter-measures.  However, this attempt is now recognized as a failed measure.
• Annex 1 of the Communication sets forth new good governance criteria, which it invites the Council to endorse, as well as provide a basis for all EU external policies on tax matters and promotion of good governance.
• Annex 2 provide elements forming the basis for negotiating future tax good governance clauses that are recommended for endorsement.
• A tax good governance standard responds to the EU’s future development commitments and prevents international tax weaknesses that create opportunities for base erosion and profit shifting.
• The EU seeks to lead by example re: tax good governance.
• A pan-EU list to identify outliers of tax transparency and tax good governance will be an interim solution until a common EU system is developed. “Once a jurisdiction has been added to the EU list, all Member States should apply common counter-measures against it.”  The defensive measures should be a top-up to other EU Directives, including withholding taxes and non-deductibility of costs for company transactions.

The Communication and Annexes are required reading, as it sets the tone for ensuing battles between the EU Member States’ and other jurisdictions.  Unilateral actions by other countries will probably closely follow, as each country seeks to assert their rights while avoiding the possibility to lose a piece of the tax pie for which everyone is seeking.

It is becoming very clear that MNEs will face a documentation and tax risk framework action to document country/regional/global strategies that will form an element of the post-BEPS transparency world that many are seeking.