Global taxes now an is­sue for the board­room

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

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.

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