Climate breakdown poses an existential threat to humanity, and world leaders are coming together in Glasgow, UK, to try and decide on clear goals to decarbonise the global economy.
Also this weekend, G20 finance ministers will be meeting in Rome to discuss international tax reform. The OECD has managed to forge an unprecedented agreement between 136 countries. The next step will secure reform for the future, but many details have yet to be settled.
Multinational companies can expect more tax initiatives targeting carbon emissions and a reformed tax framework for the digital economy. Tax planning without taking both of these factors into account would be reckless.
ITR will be following up with more articles as the talks play out. Here you can read what taxpayers should expect from COP26.
Why taxpayers can expect an increase in disputes following the pandemic
Tax authorities are looking to close the significant fiscal gap resulting from emergency spending during the pandemic, while taxpayers prepare to deal with the knock-on effects.
COVID-19 has created a greater need for tax authorities to cover the cost of the pandemic by increasing tax revenue. Normally, VAT is not the preferred option because of the detrimental impact on consumer spending at a time of rising inflation.
So, it must come from either corporate tax, personal income tax or other indirect taxes such as customs, duties and withholding taxes.
“We'll see an increase of disputes in those areas. I fear that the atmosphere of those discussions will not be as nuanced as well,” said the head of tax at a multinational clothing company, speaking at ITR’s Global Transfer Pricing Forum.
Tax authorities understand that 2020 has been a difficult and an atypical tax year and are focused on understanding the business from the information provided by the taxpayer, either electronically or by paper.
“Tax administrations have started to analyse the matrix of risks to identify the main points where the company is not matching figures. So, they are looking at the variables and asking questions specifically about that,” said the head of TP at an energy company.
Tax advisors are expecting the audits and are preparing to provide evidence and documentation to explain their position to the tax authorities.
“When a taxpayer explains their business from the beginning, that helps the tax authority to understand because there is probably a misunderstanding,” said the energy company’s TP head.
MNEs revise TP policies as part of IP relocation
Tax directors at ITR’s Global TP Forum say relocation of IP has driven transfer pricing (TP) challenges that must be addressed depending on the business and its end-to-end value chain.
Corporations have experienced a growing need to relocate IP, particularly following the COVID-19 pandemic. Tax directors will need to ensure the onshoring of intangibles aligns with their TP model, according to speakers at ITR’s Global TP Forum – Europe 2021. The health crisis has also made old TP problems worse as talent moved abroad.
“The nature of IP is changing; it is much more unstable than it was before. We now have something called soft IP,” said a partner tax at a consulting firm in Germany.
Soft IP refers to intangibles that are often more difficult to categorise as compared to works including copyrights, patents or trademarks.
“In the last year we have seen a lot of onshoring and relocation of IP, and very often they are to escape the rather artificial structures that the company had in place. Most multinationals are done with that. We have seen a trend to onshoring IP, meaning bringing it back to the headquarter level – relocating it to where IP is being used,” said the tax partner.
However, corporations encountering the offshoring of IP must ensure it remains in line with their TP model – a difficult process that many are now carrying out. A significant number of multinationals are moving away from the traditional TP system, according to the tax partner.
Next week in ITR
ITR will be covering COP26 over the course of the coming weeks. The UN conference may set out climate goals for the most powerful countries in the world, and tax policy will be a crucial part of any plan to decarbonise.
For this reason, ITR will be revisiting topics such as carbon taxation and trading schemes. We will sharing the perspective of tax directors on what their companies are doing in response to such measures.
Readers can also expect ITR to review the most important indirect tax disputes of Q3 2021. It has been a big year for disputes and there is a lot for taxpayers to learn from the precedents that have been established.
Meanwhile, the long-awaited G20 meeting will be taking place in Rome this weekend. The OECD-brokered agreement on pillar one and pillar two has come a long way since it was first drafted, but this may be the decisive moment for global tax reform.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.
