“Sediakan payung sebelum hujan” runs the Malaysian proverb: “prepare the umbrella before it rains”. Taxpayers operating across borders would likely have started preparing for inclement weather some time ago – possibly during the 2008 global financial crisis which bought both adversity and opportunity to the global business community, or perhaps shortly thereafter, during a storm of new tax-focused reputation risk for large businesses.
Indeed, it is hard to argue against that period being the trigger of a fundamental recasting of the cross-border tax architecture, a transformation that continues at full pace at present. The pressure on governments in the aftermath of the global financial crisis, coupled with a growing public distrust of large multinational enterprises (MNEs) triggered a fundamental shift in how business taxation – particularly its cross-border mechanics – was viewed. This further created a wave of rapid tax policy and legislation changes globally around transparency, transfer pricing (TP) and a raft of other measures designed to better align tax law to rapidly evolving ways of conducting business. The rest is history, and the final recommendations in the OECD’s first BEPS project were issued in 2015.
Today, we await the next phase of international tax reform – the OECD’s so-called BEPS 2.0 package. The OECD on July 1 2021 published a statement confirming the agreement under the Inclusive Framework to a two-pillar solution to address the tax challenges from the digitalisation of the economy, setting out the key components of each pillar and stating that a detailed implementation plan with remaining issues to be finalised in October 2021. This project continues under intense debate among 139 jurisdictions, with 130 having signed their agreement to the OECD statement. However, discussions will continue in line with the approach of ‘nothing is agreed until everything is agreed’.
At the G7 meeting in June 2021, political weight was thrown behind the concepts underpinning the two pillars: first, that the largest MNEs should pay more tax in markets where their customers are located, and second, that there should be a global minimum tax (at an as-yet unagreed rate of at least 15%, and noting the United Nations Panel on International Financial Accountability, Transparency and Integrity recommendation for 25%-30%), applied on a jurisdictional basis.
With the US now on board and the G7 in agreement, wider momentum for consensus on both elements has been catalysed – including among the G20 meeting members in July 2021. This broader group of nations importantly includes China, India and the EU, and all hope that even though this new set of changes will likely cause significant disruption, we do not end the process with multiple simultaneous approaches occurring globally.
While the mechanisms to implement these profound changes still require further refinement and consensus building, it seems that progress is occurring, and that finality may be in sight. However, as with all multilateral negotiations, the exact details will probably not be known until the very last minute, so taxpayers will need to continue to stay vigilant on developments as things move to the finish line.
While such fundamental events during the last decade have taken the lion’s share of the tax community’s focus, it would be amiss to not consider several other key trends and developments that have, and continue to shape our world of tax today.
In this article, I would like to consider a number of significant disruptions that have occurred in taxation in recent years – which continue to play out today, and which will no doubt drive activity and direction of the tax function for the coming decade, if not longer.
A world of change
First, the world is arguably ‘flatter’ than it has ever been. This has occurred for businesses and policymakers alike. Indeed, the very cause of the issue – digitalisation and improved communication, leading to assertions that companies were achieving ‘scale without mass’ – provides a substantial part of the solution for governments, namely information exchange, electronic auditing and the use of data analytics among increasingly capable, empowered and connected tax authorities.
The standard setters among the global tax community have had to catch up with digitalisation, reposition themselves, develop consensus and implement the biggest set of global tax changes since the advent of bilateral treaties almost a century earlier. To be fair, however, they (particularly the OECD) had been explaining since the late 1990s that e-commerce would dramatically impact how taxes should be levied.
So here we are – the OECD statement in place, with, among other things a still-evolving scope and little information on the all-important mechanics on pillar one, and on pillar two, a non-mandatory global minimum tax a yet-to-be-agreed rated (“of at least 15%”). So much remains under debate, and it will be a surprise to many if we see both pillars emerge at the same time and with any resemblance to their October 2020 blueprints. Undoubtedly the finalisation of the detailed implementation plan, due to be finalised by October 2021, will fuel a lot of discussion in the process.
Of similar surprise would be a dispute resolution approach that can be truly effective in heading off the wave of disputes that many commentators expect – disputes due to a plethora of reasons, including multiple countries arguing over how much tax should be paid in their jurisdiction, MNEs having to gauge this number similarly, and the same MNEs having to deal with what we expect will be a less-than-100% consistent implementation of the new rules and laws among jurisdictions.
That last point is, I believe, a completely unavoidable compromise – the more countries that are brought together in this great consensus, the more ‘options’ countries they will demand in how to implement it and the more inconsistencies businesses will have to overcome in complying with the rules.
Whatever the outcome, it is only right and proper to acknowledge the bigger picture – that in less than a decade, the cross-border tax architecture has been turned on its head; what was once an exclusively sovereign exercise is now far more multilateral in nature, with the OECD, EU, International Monetary Fund, World Bank and United Nations all able to claim some portion of that development.
Moreover, the very mechanics of cross-border tax will be transformed, whether for better or worse. The source-residence debate is addressed, at least for the world’s largest companies. Will it all move from the ‘top end of town’ and be applied more broadly to other, smaller companies in due course? The OECD statement says “yes”, once seven years have passed and the rules are viewed as working as they should. Although, it is hoped that the transition issues will be fairly addressed, for example an MNEs’ TP approach will need to be ‘upgraded’ to a formulary apportionment-type model envisaged by pillar one.
That could be a real challenge and a real risk, and a source of new tax disputes. Will the big shift to more market jurisdiction taxation (as well as the global minimum tax) cause disputes in and of itself? Consensus seems to be “yes” – something that the OECD more than nods to among 32 pages of dispute resolution narrative in the 2020 Blueprints, not to mention their recent move to full production status for the International Compliance Assurance Programme (ICAP) and their push to make both advance pricing agreements (APAs) and mutual agreement procedures (MAPs) multilateral in their capabilities.
Where to, tax rates?
I am also keen to see how BEPS 2.0 impacts another long-term trend – that of falling corporate income tax (CIT) rates and corresponding tax base broadening. The occurrence of the COVID-19 pandemic has made it difficult to know whether corporate tax rates that have generally been falling for most of the last decade would have reversed trend in the absence of the pandemic and, indeed, pillar two of the BEPS 2.0 project.
One can only look to recent developments for insight. The US seems set to increase its CIT rate from 21% to 28% according to the Biden administration tax plan, while the UK will see an increase from 19% to 25% in 2023. Both, of course, had seen rates fall in recent times. Another example comes from Argentina, where a new progressive tax scale will top out at 35%. There has been commentary that the recent G7 agreement to a global minimum tax aims to end what US Treasury Secretary Janet Yellen has called a “30-year race to the bottom on corporate tax rates” as countries compete to lure multinationals.
It will be interesting to see how a change in CIT rate trend, coupled with a potential global minimum tax impact MNEs in the way they plan a range of issues, including supply chain, organisational model, tax strategy and tax risk management approach, in the long term.
Not the only multilateral game in town
Large taxpayers may find themselves needing to work under more than one set of international tax changes if the European Commission is successful in executing its latest set of plans.
Among the corporate tax reforms proposed in a recent Commission communication was the plan to propose (in 2023) a new framework for business taxation in the EU, the ‘Business in Europe: Framework for Income Taxation’ (or BEFIT), which aims to provide a single corporate tax rulebook for the EU, based on a common tax base and formulary apportionment of profits to member states. The proposal would replace the long-standing yet unimplemented proposal for a Common Consolidated Corporate Tax Base (CCCTB – from which the ‘consolidated’ element was later removed), which will be withdrawn.
In its communication, the Commission further comments on the EU approach to BEPS 2.0, outlining how any global agreement will be implemented in the EU. The Communication does not include details on a proposed EU digital levy – itself a completely separate EU funding tool, separate from the work of the 139-nation Inclusive Framework, and to be designed in such a way that it is wholly independent of the forthcoming global agreement at the OECD.
With agreement also reached recently on the proposed public country-by-country reporting (CbCR) directive, a proposed tax on non-recycled plastic packaging waste (potentially generating up to €6.6 billion per year) and a proposed carbon border adjustment mechanism (potentially generating €5 billion to €14 billion a year depending on the scope and design) business taxpayers – especially the largest – have a lot of new developments to work though.
Of particular concern is that many businesses may need to move from one model of paying tax (to countries, according to a well-understood set of long-standing principles) to a mixed, diverse set of models incorporating BEPs 2.0 principles and other new regional tax initiatives. How these systems interact with any level of consistency will only be found out through practical experience.
Tax administration 2.0
Lastly, some observations on the evolution of tax administration – what has occurred in recent years (and continues to play out) is nothing short of astonishing. New transparency and disclosure requirements (such as CbCR), coupled with the automatic exchange of information has effectively made company value chains visible to tax authorities. Tax audits are increasingly forensic, multi-sided and whole-of-group-focused, powered by new data pools and analytics routines that themselves are the results of intense collaboration and sharing of leading practices among tax authorities.
Dispute prevention and resolution has similarly entered the flat-world era, with the multilateral ICAP being rolled out after two pilots, bi- and multi-lateral APAs being developed, and the possibility of multilateral MAPs now under active discussion by the OECD and several countries.
An understanding of these changes and their impacts are useful to help make sense of what needs to be done in response. At their heart, I think the tax mega-trends I have touched on indicate at least three imperatives for tax leaders of their organisation.
Information is key
Information on who is doing what, where, when, and what the impact for your enterprise may be. This includes external actors (policymakers and standard setters) as well as internally (C-suite, board, audit committee, business units). It further includes your own visibility within the tax department – of evolving tax risks, the tools and processes via which such risks are managed, and where they do occur, visibility of any disputes or audits.
Data capture and use will be even more important than before
Knowing that all parties have near-instant access to your tax and financial data creates an instant need for data assurance and data consistency across the whole organisation. Information asymmetry between taxpayer and tax authority is a thing of the past. Having access to timely, accurate data and finding ways to use the data to gain predictive insights will gain much greater focus.
Early planning and preparation for tax controversy is critical
Cross-border taxpayers should start thinking more about how to stem tax controversies earlier in their lifecycle. Effective tax risk assessment can reduce the likelihood of an issue becoming a dispute, while effective tax risk management can provide better ways to manage any risks that do present themselves. Looking at controversy from the end of the lifecycle – the audit or tax litigation – is too late. A better approach is to stem the tide.
Much of what is occurring today has been achieved by standard setters and lawmakers moving away from a purely sovereign model of taxation and instead acting more multilaterally and collaboratively. For businesses to thrive in this new era, they will need to take a leaf form the same book.
Understanding the leading practices for tax risk assessment, tax risk management and tax dispute management will be imperative moving forward, as will having visibility of everything occurring both within your organisation and outside it. Those who thrive will be the companies who learn what works from others and respond the quickest.
|Eng Ping Yeo|
Kuala Lumpur, Malaysia
Eng Ping is EY’s Asia-Pacific Tax Leader. Under her leadership, the firm’s 9,000 Asia-Pacific tax, people advisory services (PAS) and legal professionals assist clients reimagine and transform their tax and finance functions to be future ready.
A lawyer by training, Eng Ping has a strong interest in the development of taxation policy and controversy. Prior to assuming her current role, she led the tax function in the Southeast Asia region, and has broad experience in advising clients on transactions across a number of sectors, including real estate and oil and gas.
Eng Ping is a graduate of Monash University. She is an advocate and solicitor of the High Court of Malaysia; and a barrister and solicitor of the Supreme Court of Victoria, Australia.
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