The Australian Tax Office (ATO) has recently released a consultation paper re: implementation of a Diverted Profits Tax (DPT); comments are due by 17 June 2016. Although Australia has taken a long look at the DPT in concert with UK’s quickly enacted provisions, it took a breather while the OECD urged restraint on a far-reaching “tax” that may go beyond the intent of the OECD’s Guidelines. A link to the paper is provided for reference:
The focus of the paper is summarized in the first sentence: “The Government is strongly committed to ensuring that multinationals pay their fair share of tax in Australia.”
Highlights of the proposal:
- 40% penalty tax (non-deductible) rate, not offset by another jurisdiction’s tax (30% tax rate if an amended tax return is filed)
- Subjective determination (i.e. reasonable to conclude)
- Will not operate on a self-assessment basis
- Pay first, discuss later philosophy, copying UK’s direction (12-month review period and a right to appeal)
- Effective for years commencing on or after 1 July, 2017
- Flow chart appendix
- Efective for transactions that have an effective tax mismatch test (objective test) and insufficient economic substance (subjective test)
- Draft guidance will be developed in consultation with stakeholders.
All interested parties should review this consultation paper, and provide comments to the ATO for potential changes. It is interesting to see that transactions failing the effective mismatch test will be left exclusively with subjective determinations for possible assessments by the ATO without the benefit of dual transparency. Additionally, the philosophy of assess now and discuss later will not be a mechanism to effectively provide more trust by taxpayers as UK, Australia and other jurisdictions are creating unilateral laws to capture taxes payable on income in other jurisdictions, potentially without the right to access treaties, claim an offset in the other jurisdictions and have access to the full process of appeals prior to payment. As a result, the incidence of double taxation will increase.
It is hopeful the ATO will consider the comments received, and include changes to the current proposal to enhance transparency and mutuality by all parties.
The EU Parliament’s resolutions were passed by a vote of 508 to 108, with 85 abstentions. The proposals call for mandatory country-by-country (CbC) reporting, a common consolidated corporate tax base (CCCTB), defined tax terms and transparency / exchange of tax rulings. A summary press release and the full report are provided for reference:
- Welcomes the EU Parent-Subsidiary Directive amendments, effective at year-end 2015, for a general anti-abuse rule and hybrid mismatches.
- EU Commission has breached its obligations under Article 108 of the Lisbon Treaty by not launching state aid investigations previously.
- EU Member States should respect the principle of profits taxation where they are generated.
- Promote good practices on transfer pricing and the pricing of loans and finance fees in intra-group transactions.
- Commission to further investigate restrictions of deductions for intercompany royalty payments (i.e. counter profit shifting).
- All rulings that have an impact on other Member States to be presented in the CbC report, and shared with the Commission and tax administrations. Rulings to be publicly disclosed in accordance with confidentiality requirements.
- Mandatory CCCTB, with a deadline for the consolidation element and without any further impact assessments.
- Develop measures to tackle cross-border VAT fraud.
- Reform of the Code of Conduct on business taxation.
- New State Aid guidelines by mid-2017.
- EU to be a global leader in tax transparency.
- More extensive CbC report, with intra-group transactions.
- Accelerate European Tax Identification Number project.
- Aggressive tax planning is incompatible with Corporate Social Responsibility (CSR).
- Outgoing financial flows from EU are taxed at least once (i.e. withholding tax).
- Transition period for developing countries to align with Global Standard on Automatic Information Exchange.
This report is compelling, far-reaching and a resource that will be used worldwide, as most non-EU countries will attempt to follow the ever-increasing EU intensity and propensity for changes in the international tax arena. Thereby, it is a must read and a learning tool for non-tax executives in multinational organisations, as well as tax advisors, tax administrations and other interested parties.
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.
Principles for Responsible Investment (PRI), a UN sponsored initiative, published a report entitled “Engagement Guidance on Corporate Tax Responsibility.” The guidance is investor oriented addressing the conduct of corporate tax responsibility, disclosure, transparency and good tax risk governance. Therefore, this report is a valuable reference to understand today’s trend of tax disclosure and transparency from an investor’s perspective, and how multinationals may be queried in the new world of international tax transparency.
A link is attached for reference:
- Earnings that rely on tax planning vs. economic activity are vulnerable to tax regulatory changes, earnings risk via strategies are increasing, and some Boards may be unaware of the effect that incentives have on tax planning.
- Corporate sustainability officers should understand tax decisions and their impact on financial results and stakeholders, with alignment between tax strategies and sustainability commitments.
- ” Companies should be able to defend how they allocate profit to each country both to tax authorities and the general public to avoid reputational risk and investor backlash.”
- Before engaging with companies on tax practices, investors should understand various strategies, including IP transfers, financing, marketing service arrangements, principal structures, tax havens, shell companies and tax incentives, that are summarily explained.
- A step plan to engage companies:
- Identify red flags, including a formula to measure tax gap
- Questions for Senior Management/Board re: tax policy, tax governance, managing tax-related risk, effective tax rate, tax planning strategies including structure and IP rights, and country-by-country (CbC) reporting.
Appendices are provided for additional reference of the OECD BEPS project, examples of good tax practices re: disclosures, summary of findings from discussions with Heads of Tax in eight multinational organisations, and a Glossary / Resources.
The report, in providing formulas and explanations, includes educational material for the investor community re: tax strategies and governance, while also providing examples of tax queries and good tax governance by many multinationals.
The report should be used as a metric to assess readiness and alignment for these important topics that may be raised by stakeholders, both internal and external. To the extent such questions have not been a primary focus, this report is an impetus to raise the priority threshold in addressing tax policies, strategies and governance in a very transparent world. Additionally, it is also worthy to review the names of multinationals cited in the report for awareness and recognition.
Global mobility will face, directly and indirectly, various challenges resulting from OECD’s BEPS proposals. PwC’s Insights provide a concise summary of these proposals, included for reference:
- Treaty changes, either bilaterally or via the Multilateral Instrument, will affect key issues and risks, including permanent establishment (PE).
- Unilateral changes, several of which have been enacted, should be reviewed with a focus on global mobility functions.
- The transparency initiative will encourage tax authorities to aggressively pursue PE and treaty based rules.
- What is the impact of the change for PE dependent/independent test.
- Responsibilities of senior executives, sales representatives and regionally based employees will need to be reviewed for the new rules.
- People functions re: controlling risk should receive separate review.
- Intercompany agreements (i.e. legal form) should be compared to practical substance responsibilities to evidence conformity, as analyses will use legal agreements as only a first step to understand the transactions and potential consequences.
Post BEPS, it is imperative that global mobility’s function and responsibilities should be reviewed, from a tax risk awareness perspective as well as internal governance controls. To the extent that global mobility is not closely collaborated with the tax function, the ways of working and reporting should be reviewed to address this new world of international tax transparency and the emphasis on multinationals paying their fair share of tax, however construed.
EY’s publication discussing tax reputation readiness and transparency provides suggestions for increasing readiness with good processes, robust documentation/audit trail and class-leading data management. The publication is very timely, noting the recent European Parliament’s unanimous vote for public reporting of country-by-country (CbC) and beneficial ownership information.
- More than 60% of companies believe that engaging with the media is a “no-win” situation.
- Excellent timeline/events of transparency initiatives commencing from 2003 until present, and future, state.
- 65% of respondents have developed a more structured approach to managing their public tax profile in the previous 2 years.
- 94% of respondents expect increased growth in global disclosure and transparency initiatives.
- “Business can do more and be more proactive to prepare for new reporting obligations and, as one proposed step, either proactively or defensively, Whatever choices a business makes, developing and sustaining the ability to source accurate data, in the right format and in a timely manner will be a critical factor for all large businesses in the years ahead.”
- Multiple transparency initiatives are succinctly depicted in a table on page 9.
- Transparency will be the new normal.
- Quality information requires quality data.
- Transparency readiness is a significant and underestimated need of companies.
- Transparency readiness assessment questions are posed for consideration.
- Detecting risk anomalies in the data is an important consideration; thoughtful questions are posed for review.
- Companies that can quickly and clearly explain their tax transactions and strategies are best positioned to manage reputation risks.
- Six proactive actions to consider:
- Actively monitor the changing landscape
- Assess readiness, and desire, to respond
- Enhance communication with internal and external stakeholders
- Develop steps to prepare the total tax picture
- Decide with whom the company wishes to communicate
- Embed reputation risk thinking into core business strategy
This survey provides an excellent approach and proactive roadmap in addressing the challenges, readiness and complex actions required to develop transparency readiness and engage reputation risk proactively. Accordingly, this should be required reading for all MNE’s as a primer and self test mechanism to address the new era of international tax transparency and potential angles of attack for reputation risk.
The European Parliament approved the maintenance of public registers listing ultimate ownership of EU companies, as part of the 4th Anti-Money Laundering Directive. The new rules must be introduced in all EU Member States within the next 2 years.
A KPMG Euro Tax Flash outlines details of this proposal:
- Beneficial ownership is broadly defined, covering individuals who ultimately (directly or indirectly) control the entity. The control threshold is premised on a 25% ownership criterion although Member States may adopt lower percentages.
- Information accessible by: competent authorities, financial intelligence units, “obliged entities” and persons/organisations that can demonstrate a “legitimate interest” (not a defined term).
- Member States have 2 years from adoption to implement its provisions into their domestic legislation.
In an ever-increasing quest for transparency, this Directive will fulfill EU’s obligation to meet that objective.