Global taxes now an issue for the boardroom
THE tax environment has become a critical factor in deciding the quantum and location of investment as global trade and economic activity increase.
Increased global trade and an increase in cross-border taxing rights have seen tax evasion and avoidance becoming boardroom issues, which highlights the need for careful and effective tax planning. Tax management of international business has, as a result, become a business imperative.
Profits should be taxed in accordance with the laws and regulatory requirements that apply in the specific country, the ethical framework applying to the tax profession, and the tax professional’s stated purpose, values and codes of conduct. Tax advice should aim to develop and operate in a tax system that is fit for purpose and clearly understood. Tax advice should play an important and appropriate role in assisting the fiscus to develop a clear and transparent fiscal regime.
Tax advisers should therefore seek to assist companies and their people to make informed and considered decisions on tax and related matters. Such assistance should also seek to enhance understanding of the broader stakeholder context.
Where governments introduce tax incentives, tax advisers assist their clients in fully understanding and responding to these incentives. An international tax system that supports global economic growth has certain key characteristics. As global trade is often positively correlated to economic prosperity, certainty and clarity on how activities and/or profits are taxed are important factors at both country and international level. Tax certainty and clarity removes obstacles to and ensures the continued growth of global trade.
Countries will continue to compete for foreign direct investment, and with tax being a cost of doing business, it will play an important role in the decision where to invest. As a result, tax incentives play a very important role in attracting foreign direct investment. As countries have, and will continue to have, fiscal sovereignty they have the ability to choose what and how much (base and rate) will be taxed.
It is reasonable to expect that a tax system that supports global trade should subject profits to tax no more than once. The tax system should also be clear where and when trading profits will be subject to tax. The allocation of profits will generally follow the location of the activity, risk or capital. This is in line with the substance principles laid down by the Organisation for Economic Cooperation and Development’s (OECD’s) base erosion and profit shifting (Beps) action plan.
A sound international tax system should endeavour to avoid double taxation. A tax system should also be transparent. Where governments are clear on how their tax systems work, they afford other governments the understanding of their fiscal policies and approaches adopted and the potential impact on their respective countries.
Certainty at country level of what the tax system intends to tax and how the tax will be imposed enables multinational companies to make long-term investment decisions and contribute in the manner in which governments intend.
Sound tax systems should also include effective mechanisms to resolve uncertainties or disputes as easily and as soon as possible. Compliance with the tax system should be efficient, and disputes resolved as quickly as possible.
Efficient processes for agreement with and between tax authorities on profits attributable to specific tax jurisdictions should also follow clear and consistent principles as these processes are imperative to sound taxation.
Efficient and secure processes for the sharing of information between tax authorities are of critical importance.
A sound tax administration should also provide the opportunity for active co-operation between the fiscus and the taxpayer, to avoid disputes, drive efficiency and deliver an effective tax system with minimal negative distortions.
Continuation of the work currently being undertaken by the OECD and Group of 20 (G-20) countries, with commitment by all tax jurisdictions, should be welcomed since it has the capacity, if concluded and implemented effectively, to create an environment of greater mutual co-operation, transparency and understanding. This should also assist countries to develop tax policies that meet their own economic needs based on principles that are harmonised to promote global trade.
On April 16 the OECD released a discussion draft for comment which deals with Action 11 (Improving the analysis of Beps) of the OECD’s Beps Action Plan. In July 2013, 15 actions were designed to ensure the coherence of corporate income taxation at the international level.
The first seven of these actions were presented to G-20 leaders at a Brisbane summit in November last year. Action 11 of the Beps Action Plan deals with improving the availability and analysis of data on Beps, including monitoring of the implementation of the action plan and the evaluation of the effectiveness and economic effect of actions to address Beps on a continuous basis.
The April 2015 draft deals with the establishment of methodologies to collect and analyse data on Beps and the actions to address it. The discussion draft deals with the development of indicators of the scale and economic effect of Beps to ensure that tools are available to monitor and evaluate the effectiveness and economic effect of the actions taken to address Beps on a continuous basis. These tools will involve developing an economic analysis of the scale and effect of Beps and actions to address it. It will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on aggregate (such as foreign direct investment and balance of payments data) and microlevel data (such as those derived from financial statements and tax returns), taking into account the need to respect taxpayer confidentiality.
Tax jurisdictions should avoid introducing unilateral legislation that is not consistent with the OECD/G-20 recommendations.
Tax incentives play a very important role in attracting foreign direct investment as worldwide trade grows Profits should be taxed in accordance with laws and regulatory requirements … in the specific country
Ferdie Schneider is head of tax at BDO South Africa.