T R A NS P A RE N T

#betransparent

T H E

I M P E R A T I V E

2

INTRODUCTION The amount of tax paid by multinational corporations (MNCs) is regularly in the news media.

This is hardly surprising given the Organisation for Economic Cooperation and Development (OECD) estimates the practice of base erosion and profit shifting (BEPS) results in governments losing tax revenue of between US$100 billion to US$240 billion annually.

At a time when many governments are grappling with significant budget deficits, such tax avoidance strategies have drawn the scrutiny of global regulators and taxation agencies, and have become a topic of fierce public debate.

In Australia and the UK, there has been a public backlash against companies that are perceived to be avoiding their tax obligations. Several high profile local and international companies have been targeted on social media by activist groups calling for product boycotts, demanding explanations from elected officials and calling for corporate tax reports to be made public.

Taxation agencies in some countries, including Australia, have taken to ‘naming and shaming’ MNCs perceived to have abused the system and avoided reasonable tax obligations. Therefore, taxation has become a matter of reputational risk.

Moreover, the level of political motivation and public will for change is manifest in how swiftly OECD nations have moved on the issue. For instance, in January 2016, 30 countries signed the Multinational Competent Authority Agreement, signalling their intent to cooperate on implementation of new OECD guidelines on this topic.

The transparency imperative

Taxation has become a matter of reputational risk.

3

The transparency imperative

2013

GAINING MOMENTUMThe OECD started a working project on the issue of profit shifting in 2013, with the aim of evolving international tax law to improve the way MNCs report revenue.

The BEPS project resulted in a 15-point action plan, which was released late last year, along with guidelines for implementation. Then, in February, G20 ministers met in Shanghai to ratify the first three elements that will be the foundation for ongoing work to end the practice of profit shifting.

Australia and other jurisdictions are presently cooperating to ensure BEPS recommendations are implemented effectively, consistently and by as many jurisdictions as possible.

Locally, the Australian Taxation Office (ATO) is assessing how changes to tax rules will affect businesses domiciled here, but Australia as a nation is already BEPS compliant. For instance, on 1 January stronger anti-avoidance rules and higher penalties for tax avoidance were introduced, targeted at large multinationals with an annual turnover in excess of $1 billion.

2013 20152014 2016

The OECD started a working project on the issue of profit shifting

30 countries signed the Multinational Competent Authority Agreement

BEPS 15-action plan released

G20 ministers met in Shanghai

The first three elements are:

• A mandate to launch negotiations on a multilateral instrument to streamline implementation of tax treaty-related BEPS measures.

• An implementation package for country-by-country reporting and a related government-to-government exchange mechanism to start in 2017.

• Criteria to assess whether preferential treatment regimes for intellectual property (patent boxes) are harmful.

4

The transparency imperative

IMPLICATIONS BEYOND TAXATIONOne of the likely changes will be the introduction of country-by-country reporting. This will require MNCs to disclose more information than they presently do about their tax structures. Businesses that voluntarily disclose tax information will put themselves at an advantage in this circumstance.

Additionally, the outcome of the OECD’s process has implications for many levels of a business.Country-by-country reporting has the potential to impact business models and operating structures. If companies are forced to pay more tax, this may affect their revenue and shareholder returns.

Businesses may need to invest in additional skills and resources to manage projects to implement changes required by regulators. Asset valuations for strategic transactions could be affected. Corporate affairs and investor relations teams may also need to be prepared should country-by-country reports be made public.

Country-by-country reporting has the potential to impact business models and operating structures.

5

The transparency imperative

EXAMINING THE PLAUSIBLEConsequently, there is much for MNCs to consider as they prepare their response to this issue and global companies are right now considering the risks and opportunities the OECD’s BEPS program delivers.

According to Dr Shumi Akhtar, an expert in the finance discipline from Sydney University’s Business School, the OECD is well on the way to addressing the crux of the BEPS issue.

For instance, one of its recommendations is to limit the amount of interest MNCs can deduct from their revenue to lower their taxable income to between 10 per cent and 20 per cent of their earnings before interest, tax, depreciation and amortisation (EBITDA).

In her view the issue is how workable the OECDs plans are for MNCs: “the question is whether jurisdictions are prepared to act consistently.”

She says MNCs have on average a good compliance record. But they need a set of rules that are aligned across all jurisdictions given many operate in dozens of countries, all with different tax structures.

If each jurisdiction has its own take on the OECD’s requirements, it will be almost impossible for MNCs to manage compliance across such a vast array of regulatory structures. As Akhtar suggests “it‘s better to have a set of rules that are consistently applied than country-by-country rules.”

Peter Collins, PwC partner, says the challenge for the OECD and businesses will be moving from a theoretical to a practical perspective.

“Balancing national with global interests will be a challenge,” he says, adding that it’s questionable whether a one-size-fits-all approach will be able to be applied to every country.

It will be almost impossible for MNCs to manage compliance across such a vast array of regulatory structures. Dr. Shumi Akhtar Sydney University’s Business School

6

The transparency imperative

For instance, low-tax jurisdictions such as Ireland and Luxembourg are unlikely to want to increase tax rates, as their position in the global economy is in part based on their more relaxed tax rules, which allow these countries to encourage multinational corporations to operate within them.

The US’s approach is likely to be a sticking point. It will balk at any rules that will be disadvantageous to the many major MNCs that operate within its borders. It is also unlikely to agree to anything that reduces its tax base.

However, no doubt many companies do wish for a resolution on this issue. For instance, Apple has, according to a CNN report, US$203 billion in cash sitting on its balance sheet it cannot repatriate without incurring tax liabilities.

Collins notes BEPS is about ensuring MNCs pay tax in the jurisdiction in which income is earned but notes this can be a grey area.

For instance, let’s say a smart phone is sold for $1,000 in Australia. The simplistic argument is that tax would then be paid here. Yet Collins suggests this approach does not account for the fact the phone was designed in California from intellectual property developed in Ireland and manufactured in China. As a result, the US, Ireland, China and also Australia, believe the profit was generated in their country and therefore the tax should be paid in their jurisdictions.

He says in a worst-case scenario, changes to tax laws as a result of the OECD’s work will result in further complexity and, worryingly, the propensity for double taxation.

In Australia, the issue is complicated by the imputation credit regime, which allows listed businesses to pass on tax credits to shareholders. A study by ANZ, Winning the Away Game: Australia-based Global Companies and the Economy, argues this discourages Australian businesses from expanding offshore.

This finding will no doubt be taken into consideration by the ATO as it prepares its response to BEPS.

Balancing national with global interests will be a challenge Peter Collins - PwC partner

7

The transparency imperative

TAKING A CLEARLY CONFIDENT POSITIONThe onus is on MNCs to be prepared to abide by new tax rules. Leadership teams must be reviewing potential impacts on the business now and ensuring the organisation has the appropriate resources to respond when final rules are released.

Finance professionals and taxation specialists must ensure they have robust revenue recognition processes in place. This is the best way to prepare for the changes ahead.

Organisations that have invested in technology that collects data, provides oversight of compliance and automates accurate reporting of income earned and tax paid country-by-country will be at an early advantage when the new rules are introduced.

Businesses that do this will be in the best position to maintain consumer and investor confidence in the organisation, leadership team and strategy.

For additional informationCall AU: 1800 074 333 or NZ: 0800 785 483 Or email info.anz@thomsonreuters.com

tax.thomsonreuters.com.au