International tax: trends and developments in 2020 and beyond

May 2020  |  FEATURE  |  CORPORATE TAX

Financier Worldwide Magazine

May 2020 Issue

International tax is a complex beast, subject to seemingly endless rules, regulations, statutes, guidelines and directives, all of which serve to portray global tax matters as somewhat technical and opaque.

Despite this opacity and technicality, tax practitioners who closely monitor trends and developments across the global tax landscape can furnish their companies and clients with early risk management and proactive decision-making support, ultimately mitigating the impact of unexpected occurrences.

In recent times, there has certainly been much to engage the attuned tax practitioner, with a series of plans, proposals and initiatives materialising to disrupt the international tax landscape throughout the last decade.

In ‘2020: An inflection point in global corporate tax?’, Deutsche Bank notes that: (i) corporate tax rates have almost halved over several decades, with prominent US and European politicians making higher corporate taxes a key part of their election platforms; and (ii) over 135 countries are working on Organisation for Economic Co-operation and Development (OECD) proposals for a globally coordinated model of corporate taxation, wherein corporates may have to pay tax in each country where there is active and sustained engagement in the market, regardless of physical presence (the OECD is now considering the impact COVID-19 may have on the proposals, but is still working towards this timeline that it has set).

Perhaps the most significant development is the OECD’s proposals in relation to the taxation of the digital economy, also known as its second wave of base erosion and profit shifting (BEPS). This G20/OECD initiative is aimed at identifying multinational enterprises (MNEs) that exploit gaps and mismatches in tax rules to avoid paying tax.

“The OECD’s initiative seeks to address tax challenges arising from the digitalisation of the economy and contains a number of proposals that are grouped into two pillars, nexus and profit allocation, and ensuring a minimum level of taxation,” explains Eduardo Gracia, a partner at Ashurst LLP. “If the proposals are finally agreed, they will entail the most relevant overhaul of the international tax environment since the establishment of the OECD.”

One jurisdiction that is taking its own, particular measures to tackle the issue is Spain. “Following the financial crisis and the Spanish budgetary crisis, which caused the implementation of a number of longstanding austerity policies and a huge increase in the country’s public indebtedness, the Spanish government is sponsoring a new wave of public expenditure, which will need new tax collections to fund them,” says Mr Gracia. “In this sense, the government intends to establish a minimum taxation for large companies and is setting higher tax collection goals for the Spanish tax authority.

“Hence the number of enforcements and the amounts reassessed are at record levels,” he continues. “Regarding new Spanish tax legislation, new bills regulating taxes on digital services and financial transactions have just been submitted to parliament.”

TP: top of the tax agenda

Among the plethora of international tax issues is that of transfer pricing (TP), the highly complex nature of which makes it challenging to handle by MNEs. If mishandled, TP can be costly for stakeholders, resulting in audits, adjustments, penalties and double taxation, not to mention litigation.

According to the KPMG report ‘Transfer Pricing Developments around Europe: What to expect in 2020’, global trends and developments in TP reflect ongoing priorities in international tax. Furthermore, notes the report, proposed changes to policies and OECD proposals are having a significant impact on current regulations, guidelines and case law – developments which increase the complexity of the TP landscape for companies doing business in an international environment.

“TP is at the top of the agenda of all MNEs and tax authorities and enforcement agencies,” says Mr Gracia. “BEPS has triggered fundamental changes to the approach taken by taxpayers, making it essential for in-house tax advisers to review the assignment of assets and risks within the value chain as construed by the OECD after BEPS, in order to check the group’s TP policy is aligned with OECD guidelines. Country-by-country reporting (CbCR) obligations guarantee that this exercise will be assessed by concerned tax authorities from now on.”

With TP a key challenge for MNEs and an area of focus for global tax authorities, companies are unlikely to underestimate the importance of TP compliance and documentation.

“Many are taking a risk-based approach to documentation by focusing their resources on high-risk countries and entities,” observes Tomoko Ikawa, a partner at Simmons & Simmons. “It is, however, important for companies to not only focus on documentation as a way to manage their TP risks, but to take a proactive approach to TP risk management overall. TP documentation will generally serve as the first line of defence, but being proactive by preparing supporting documents and analysis in advance of tax enquiries is increasingly important in the current environment.”

Furthermore, given the increase in both the complexity and the number of TP enquiries, in Europe in particular, the KPMG report suggests that an increase in scrutiny will result in complex TP disputes, with countries sometimes applying divergent approaches, a trend that is expected to continue in 2020.

Tax avoidance or tax structures involving offshore jurisdictions

While initiatives in the field of international taxation are doing much to influence domestic tax laws and their relationship with foreign entities, additionally, many countries are making a concerted effort to tackle issues such as offshore tax jurisdictions.

“Spain is leading the attack against offshore tax jurisdictions – those which are still on the much amended Spanish blacklist, set in the early 1990s,” says Mr Gracia. “Civil and criminal courts have supported and endorsed that exercise, siding frequently with tax authorities when offshore entities have been involved in shifting income out of the Spanish jurisdiction. A good example is the criminal cases against football stars, most of which have ended with court settlements and mitigated sentences. EU case law in Danish cases will also encourage tax authorities in Spain to challenge the substance of certain lending and licensing structures.”

In the UK, HM Revenue and Customs is spearheading global action against multinationals that are perceived to be avoiding tax in the UK. “HMRC has been introducing its own tax laws to crack down on MNEs perceived to be diverting profits to offshore tax jurisdictions,” explains Ms Ikawa. “Diverted profits tax (DPT), hybrid and other mismatches and offshore receipts of intangible property (ORIP) are all relatively new tax laws in the UK, which really reflect HMRC’s current stance and focused approach to tackling profit diversion.”

Further afield, reforms have recently been introduced in the US to combat tax avoidance, while Australia has introduced its own DPT and multinational anti-avoidance law (MAAL) legislation aimed at tackling tax avoidance cases.

Audit strategies

In the event that a company, in whatever jurisdiction, finds itself the subject of a tax-related investigation, an awareness of the steps that should be taken to manage the process, as well as safeguard its ongoing relationship with tax authorities, is key.

“In Spain, companies are aware that investigative powers granted by law to the Spanish tax authority are vast and probably more extensive than those seen in many Western jurisdictions,” says Mr Gracia. “In addition, tax audit procedures are thoroughly regulated and time-prescribed, setting specific deadlines for taxpayers to deliver requested information, under threat of penalties for non-compliance. Furthermore, tax audits in Spain do not involve settlements as in other Western jurisdictions.”

As an alternative, tax auditors earn incentives based on the amounts reassessed, even if payment of the tax due is put on hold, for example if a bank guarantee is offered to tax authorities during the time the matter is reviewed by a court, and even if the case is lost.

“Hence, retaining a tax adviser with litigation skills from the outset of an investigation is key to mitigate damage, as a court will only review what the audit file contains, unless it accepts additional evidence suggested by taxpayers,” continues Mr Gracia. “In the event of a treaty dispute, taxpayers should not rule out using the mutual agreement procedure (MAP) and arbitration as alternative dispute resolution (ADR) mechanisms, to guarantee the elimination of international double taxation.”

In some cases, says Ms Ikawa, MNEs may find themselves ‘firefighting’ multiple tax enquiries across regions, due to the increase of tax audits generally in the market. “Best practice would therefore be to prepare in advance to avoid this, by collating a central repository of analysis and responses that are commonly used in tax enquiries,” she suggests. “Regardless of how prepared MNEs may be, it is important to understand the local enquiry process and strategically consider how to engage with case workers at each stage.”

International tax: 2020 and beyond

Effective tax planning is a boon for companies operating in an increasingly complex international tax environment, with tax-efficient structures, improved internal functions and company-wide processes essential components of a winning plan.

“Tax planning has never been more important as far as cross-border investments to secure efficient taxation are concerned, including payment of a fair share of tax without incurring reputational risks,” believes Mr Gracia. “However, by the same token, tax authorities, particularly in Europe, regard it as a suspicious practice. More than ever, tax planning must be based on sound business reasons and on a substantive presence in each jurisdiction, in order to benefit from EU and tax treaty benefits. Furthermore, boards of directors must monitor tax strategies set by the chief financial officer (CFO) and in-house tax advisers to avoid reputational risks.”

The existing international tax system faces significant pressures in 2020 and beyond. Amid a rapid societal evolution, taxation has to adapt to the pace of change, with a raft of legislative, regulatory and administrative changes, the OECD’s BEPS initiative chief among them, the result. In turn, prudent companies need to be prepared to embrace changes, assess the numerous tax implications and opportunities available to them and optimise operating models to realise growth, capture efficiencies and control risks.

© Financier Worldwide

BY

Fraser Tennant