As year-end is approaching, many multinationals take this opportunity to review, and revise accordingly, their global tax policies/principles. Additionally, UK also has an requirement to publish the company’s UK tax principles, which is usually a subset of the global policy.
Global tax policies/principles are generally approved by the Board of Directors, although not an express requirement, however it is a Best Practice.
Examples include Unilever, Siemens Gamesa, Siemens, Shell, Mars and Starbucks, which are all in the public domain.
The public transparency of a company’s tax strategies is nearing reality with the advancement of recent updates to the UK’s Finance Bill.
The UK is continuing its leadership objectives in adopting BEPS initiatives, as shown in this latest initiative.
EY’s Global Tax Alert is provided for reference:
The legislation stipulates that the published tax strategy must cover in relevant, up-to-date detail regarding the:
• Approach of the UK group to risk management and governance arrangements in relation to UK taxation
•Attitude of the group to tax planning (so far as affecting UK taxation)
•Level of risk in relation to UK taxation that the group is prepared to accept
• Approach toward dealings with HMRC
The process of developing the public UK tax strategy should be aligned with the global policy and tax risk framework, especially as other countries look to follow the UK’s lead. Transparency is the key driver that continues to drive post-BEPS legislation, with no apparent slowdown envisaged.
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.
The European Commission has clearly announced it’s intent to be the global leader in advancing OECD’s BEPS initiatives, with some proposals exceeding the scope / intent of the OECD.
Copies of the following documents are provided for reference, with subsequent posts addressing highlights of significant initiatives. It is important to distinguish the documents between Proposals for a Council Directive, Communications, Studies and Recommendations.
- Anti Tax Avoidance Package
- Proposal for a Council Directive re: tax avoidance practices
- Proposal for a Council Directive re: automatic exchange of information
- Annex to automatic exchange of information proposal
- Communication on an External Strategy for Effective Taxation
- Annexes to the external strategy communication
- Communication re: Tax Avoidance Package
- Study on Structures of Aggressive Tax Planning & Indicators
- Recommendation on implementation of measures against tax treaty abuse
The documents are required reading for all international tax practitioners, as they highlight the complex post-BEPS world and the trend indicators for the near future. We can assume that some of these developments will proceed for action very quickly, thereby imputing a doctrine that “time is of the essence.”
EY’s recent publication takes a close-up view of transparency and disclosure trends, including a detailed analysis of several countries’ latest trends. A link to the report is provided for reference:
- Transparency issues of the future:
- Country-by-Country (CbC) implementation and inconsistency of approaches
- New transfer pricing documentation requirements
- Public access for CbC reports and tax rulings
- Growing trend to disclose a company’s planning, strategy, risk appetites and effective tax rates
- Tax codes of conduct, formal and informal
- Increased disclosure of aggressive tax positions
- Electronic data gathering
- Use of third-party data
- Direct ERP access
- Matching of data and watching for transactional trends
- EU transparency update, including proposed Directives
- Country transparency updates: Argentina, Australia, Brazil, China, Denmark, Ecuador, France, Germany, Greece, Mexico, Netherlands, Poland, Singapore, South Africa, South Korea, Spain, UK, US
The level of future transparency will continue to increase, with new and dissimilar demands by countries around the world. This report unveils the global trends and issues, with comprehensive analyses of various transparency trends of major countries. Accordingly, it is a publication that should be reviewed to better understand where the current trends are requiring future demands for transparency in a new world of international taxation.
KPMG has engaged with several UK headquartered multinationals to address how to proceed with future, and dissimilar, demands for transparency. Although focused on UK based organisations, the framework promotes valuable Best Practices that can be used globally. A link to the insightful article is provided for reference:
Five themes for a tax disclosure framework:
- Strategy/policy and approach to tax
- Tax policy
- Tax planning and risk approach
- Engagement with tax authorities
- Tax risk governance
- Link between tax strategy and governance
- Tax compliance and tax risk monitoring
- Non-compliance governance tools
- Business model
- Overview, including tax attributes for effective tax rate and cash taxes
- Transfer pricing overview
- Operations in low tax jurisdictions
- Tax contribution
- Data/narrative re: sales, profits and taxes paid
- Types of taxes paid and use of a company’s profits
- Specific information related to material issues
- Tax losses/carryovers
- Tax incentives/holidays
- Material items, such as pension contributions
The above issues exemplify the difficulty in developing a comprehensive framework, or flexible tool, to meet the varying transparency demands resulting from OECD, EU and UN guidelines and unilateral legislation efforts around the world.
The most important point is that the timing for the thought processes for a tax disclosure framework is now; there are no signs of the demand for tax transparency diminishing.
The RobecoSAM 2014 Corporate Sustainability Assessment, referenced herein, introduced tax strategy criteria in their scoring to address critiques of MNE’s tax structures, tax reporting transparency and tax risks.
The publication discusses reputational risk in its new survey questions and is very informative re: companies not yet having a tax policy, as well as asking relevant questions addressing the license to operate in a country, relationship risks with host country and economic development risks in regions where the company is operating.
Tax strategies, policies and the perception gap are increasing in importance worldwide, with a kindly reminder for the necessity of developing a comprehensive tax framework that is flexible with today’s challenging international tax environment.
The enterprise risk management analyses for a MNE should have an integrated tax risk framework, coupled with functional interface between common risks that are multi-faceted.