The road ahead for tax in 2006
Ralph Cunningham asks five leading tax figures about what they expect to be the international tax trends and priorities in 2006
In 2005, the European Court of Justice produced its verdict in Marks & Spencer as the European Commission talked some more about harmonizing tax rules in the EU. President Bush's advisory panel on federal tax reform reported, which may introduce wholescale changes to the Internal Revenue Code this year. Towards the end of the year, China clarified how advance pricing agreements are meant to work in that country and promised extensive international tax reform in 2006. India looked to tax incentives to attract more foreign investment by enacting legislation to set up special economic zones and Mexico reformed its thin-capitalization rules.
The EU Joint Transfer Pricing Forum produced a code of conduct on documentation, which is set to reduce taxpayers' compliance costs dramatically throughout the 25 member states, if it works as hoped. Germany's new right-left coalition government began to get to grips with a corporate tax system that many commentators have said is hindering any attempts to inject extra pace into the EU's biggest economy. And in his budget in December, the Irish minister for finance repeated his government's belief in the importance to the economy of low taxes. This statement came after some adverse publicity for US companies with investments in Ireland. It was revealed that companies, such as Microsoft and Google, had used the country's favourable corporate tax rates to cut their tax bills substantially.
Jeffrey Levenstam, partner, international tax services group, Ernst & Young, San Francisco; (until January 2006) senior director, international tax and customs, Cisco Systems
The biggest challenge facing US SEC registrants is the combination of evolving accounting rules and Sarbanes-Oxley requirements. Other country regulators are also becoming more demanding, and many will have somewhat similar demands as the US SEC registrants. These changes will put a large demand on the tax department for a degree of precision each quarter that will far exceed prior year requirements. A multinational tax group now has to complete a very detailed global provision calculation each quarter to meet the new requirements. This will put a strain on already overworked multinational tax groups. The need for instant information from the field will increase, as will the need for more FAS (Financial Accounting Standards) 109 and IFRS (International Financial Reporting Standards) skills both at headquarters and in the field.
The need for greater insight into non-home country tax provisions is a requirement that most multinational tax departments are not staffed for as yet. Finding people with a proper skillset is difficult for the home office location, and next to impossible for the regional offices outside the home country. The need for certainty to avoid potential deficiencies under section 404 creates a pressure for precision in the information flow and accounting processes. Now, there is also more pressure around potential restatements, as the accounting rules make an unprecedented attempt to avoid management of earnings but perhaps are reaching too far in this objective. The new rules around what is an estimate and what is an error will now require a thorough review as the standards seem to require an incredible level of additional detail and precision in the quarterly tax provision work. The threat of either restatements or the need to release old reserves back through the income statement creates a new level of pressure around the determination of the effective tax rates and the entire management of the tax accounting process.
Tax departments have not really been given the necessary resources to handle these new responsibilities as businesses are not keen to add headcount to finance groups as cost controls are so critical to managing the bottom line at most companies. Tax departments will need to hire more staff in response to these new demands. Not all of this additional work can be carried out effectively from the home office so a careful balance is required between staffing the home office compliance and accounting team and staffing the field operations teams. Having great communication between the field and home office as well as a mastery of accounting standards and processes at all locations is imperative.
And all of this must be done at the same time the tax department is trying to gain better certainty around new tax developments and an increasing burden from transfer pricing and permanent establishment issues in many jurisdictions. The rapid global changes include the trend towards the ECJ and OECD playing a more important role. Also, there is a need to look hard at obtaining advance pricing agreements in problematic tax regimes to minimize tax uncertainty which is now an important tax provision matter as well as tax management issue. This is in addition to the continuing move in many countries towards major new legislation or regulation. We have seen this in many countries, the developing as well as the developed economies. The emerging importance of more remote operations in places like China, India, Israel and Eastern Europe make the whole process an increasingly challenging matter. All of this is in addition to increasingly complex business transactions as more bundled solutions are sold rather than discrete products or services, and more complex relationships in both the supply chain and distribution chain are created in response to increasingly more sophisticated markets demanding more flexible and creative approaches by companies that want to stay at the forefront of their industries. Finally, more finance departments are filing 10-Ks and 10-Qs more rapidly in order to demonstrate the efficiencies of their processes. This further increases the need for speed in communications and in doing the quarterly tax provision calculations and overall tax compliance.
All in all, multinational tax departments are in a radical transition period in terms of the demands placed on them and the need for better accounting and compliance management and systems to enable instant processes and communications.
Ian Brimicombe, head of tax, AstraZeneca, London
AstraZeneca's tax group will be focusing on three key areas. In the face of increasingly aggressive government action we will spend increasing time and resource mitigating and hopefully eliminating potential double taxation on cross-border transactions between many different countries. Ethical pharmaceuticals is a dynamic, competitive business environment and the tax group will be supporting business change throughout the organization. In an uncertain UK and EU tax environment we will also focus on communicating AstraZeneca's views on tax reform particularly in the UK. Generally, we communicate our views directly to HM Revenue and Customs, Treasury and and ministers but also through the Hundred Group [the finance directors of the UK's 100 biggest companies] and more indirectly through the work of the Oxford Centre for Business Taxation, which is an organization funded and supported by 70% of the FTSE 100.
The international tax community will be focusing closely on developments in EU case law to see if the current softening toward national tax systems is maintained. Cadburys is clearly a key decision as Marks & Spencer was in 2005. The EU Commission initiatives concerning transfer pricing and a common consolidated tax base will also be closely followed.
A great deal of emphasis has been placed on anti-avoidance legislation in the UK and I would hope that the balance can be somewhat redressed with equal attention being focused on the development of policies for a more competitive tax regime notwithstanding the short-term cash needs.
Hal Hicks, international tax counsel, US Department of Treasury, Washington, DC
There are three key priorities that the Office of the International Tax Counsel will be focusing on this year. The first is supporting the Administration's legislative agenda. This would include work related to the Budget and making the tax cuts permanent. It also will include tax reform. From an international standpoint, tax reform could be broad, such as adoption of a territorial tax system, or it could be more targeted, such as further reforms of the subpart F and tax credit rules.
The second priority is to push forward our treaty agenda and our involvement in the OECD, particularly on the discussions on the attribution of profits to permanent establishments. We have a very active treaty agenda. There are a number of treaties on the Hill, a number close to being agreed to, and others in active negotiations. These include, among others, income and estate tax protocols to the French treaty, protocols to the German and Canadian treaties, and a treaty with Iceland. In treaty negotiations, we want to expand and modernize our limitation-on-benefits provisions and exchange of information provisions, and we want to focus on achieving reduced or 0% withholding tax.
The third priority is administrative guidance, such as regulation, notices, and the like. There is still a considerable amount to be done with guidance on the American Jobs Creation Act. We spent a lot of time last year on section 965 on the repatriation guidance, but there are a number of other issues that need to be addressed.
There should be additional guidance on international M&A and restructuring, and additional guidance on section 7874, which deals with inversions. On transfer pricing, there should be guidance on global dealing, cost sharing and the treatment of services. And, there will be guidance on foreign tax credits, such as the "technical taxpayer" rule, which deals with who should be entitled to a foreign tax credit. We also will focus on withholding tax guidance.
There is a very good working relationship between Steve Musher, my acting successor, and the office of the associate chief counsel (international), so there is a real opportunity for published guidance in the coming months. The danger is we will have to deal with a number of competing claims. But, I'm an optimist by nature. I think we will get substantial guidance out this year.
We not only have good relationships with the folks at Chief Counsel, but we have good relationships with the Internal Revenue Service and our colleagues at the Hill. We also have good relationships with the tax community. We listen to them, we find out what they have to say, and then we make the calls we think are necessary. Getting out there and meeting folks is an important part of this job and I will be as visible as appropriate.
The folks on the President's tax reform panel worked extremely hard and did an incredibly good job. The Treasury Department is now reviewing these issues and the Secretary will make recommendations to the Administration. We want to make proposals that make sense and can get accomplished. Tax reform will be a major part of the tax agenda this year and international tax will play a substantial role in that.
Henning Lauritsen, head of tax, Carlsberg Breweries, Copenhagen
Transfer pricing is an issue. Globalization will be a challenge. Aligning Eastern Europe with the rest of EU legislation will be a challenge. Asia, especially China, is a changing environment. Everyday I receive new information about changes in the Chinese tax system. It is difficult to keep up.
I have criticized the introduction of transfer pricing documentation in Denmark before. It was brought in so we could comply with EU legislation, so that we do not have any differences between Danish and foreign companies. But then the government introduces fiscal unity. What purpose does it serve to document things in a fiscal unity?
As regards the brewing industry, there is pressure on excise duty systems, especially in Muslim countries. Italy will increase excise duties. Russia, where there has been a lot of lobbying by the vodka industry against beer, can expect excise duties. Also in Asia, for example, Malaysia, there will be an increase in excise duties. It is a challenge for the brewing industry.
Joop Wijn, State Secretary for Finance of the Netherlands, The Hague
Our aim is to set the trend in Europe by creating a competitive business climate. I refer to the recent cutback of corporate tax rates and the abolition of capital duty.
Other measures to improve the tax climate in the Netherlands lie ahead. Alongside further corporate tax cuts the Netherlands are considering a proactive run-down of the dividend withholding tax. Eventually leading to abolition in the future, the first step might be taken before the upcoming elections in the first half of 2007, for example, by starting to reduce the tax rate.
Furthermore I would like to mention the celebrated Dutch policy on advance pricing agreements and advance tax rulings. The Dutch government recognizes the call of the international business world for clarity and certainty. It is in our joint interests to eliminate uncertainty whenever possible. APAs provide advance certainty on transfer prices used within multinationals, while ATRs provide advance certainty on tax structures. Our approach will enable the Netherlands to maintain its leading position in the world of international business.