LIKE INDIVIDUALS, multinationals do not always want to answer questions about how much (or little) tax they are paying, and where they are paying it. But new tax rules, set to take effect from next year, will overhaul how multinationals report on tax in each jurisdiction in which they operate.
The implications for how companies structure their corporate operations is huge, as scrutiny from tax authorities is expected to increase and they hope with it, tax due.
Tax leaks like the so-called LuxLeaks — in which a former PwC whistleblower working with investigative journalists exposed hundreds of controversial tax agreements between Luxembourg’s tax office dating from 2002 to 2010 with Burberry, Pepsi, Ikea, Heinz and others – invoked the ire of a public that has endured austerity measures and is urging governments to work together to stamp out abusive tax avoidance.
Such collective international efforts, encouraged by G20 governments, led to the OECD’s BEPS (base erosion and profit shifting) project. One of BEPS’ core proposals to curb the ability of multinationals to shift profits around their operations to low tax jurisdictions like Luxembourg is country-by-country reporting – known as BEPS action point 13.
Multinationals already report on their profits, revenue, taxes paid, numbers of employees for all their subsidiaries on a global basis but with the information bundled together tax officials struggle to untangle it to determine if companies are paying the ‘right’ amount of tax in each country.
CbC reporting will require multinationals to break down these global figures for each respective jurisdiction in which they operate, providing governments with a less ambiguous picture of where profits are made and where taxes ought to be paid.
Shared services centre – a subsidiary?
One of the issues that has cropped up is the effect that CbC will have on corporate centres of excellence and shared services centres, designed in a way to artificially reduce a company’s tax bill. SSCs can be designed as a standalone subsidiary or a business unit within a subsidiary. These are the types of arrangement that tax authorities will be keen to uncover. CbC will now provide the tools to do so.
Most companies set up an SSC for clear commercial reasons – to create a large-scale, efficient function that reduces costs, increases quality and improves control in areas such as HR, finance or procurement, and not with the sole intention to reduce tax – although a tax reduction is often a consideration in an SSC design.
Matthew Rose, vice president, tax at Seadrill Management, believes such structures will receive greater scrutiny from their auditors and tax authorities: “BEPS will affect the way a multinational organisation with a shared service centre supporting a number of countries needs to collect, classify and report information. Many organisations have sought to centralise sales, procurement or other management processes and often that has been done taking tax into consideration – personal or other taxes – but not necessarily corporate taxes.
“Many centralise for good commercial reasons and in many cases these services will magnify the level of intragroup charges.”
Tax collectors will look for unusual patterns in business, such as companies in locations reporting huge profits but having few employees or much business activity. Of course, SSCs’ activities will only stand out if it is a multinational’s sole business unit in a particular country. The new laws are country-by-country reporting – and not business-by-business reporting, so tax authorities will be able to see large aggregated data broken down by country.
“The real goal of country-by-country reporting is to flush out a situation where you have the intellectual property of a company sitting in a low tax jurisdiction or tax haven like the Cayman Islands and it has no employees or profit,” says Glyn Fullelove, chair of the technical committee at the CIoT, and group tax director at publishing and events company Informa.
The US Treasury has also introduced CbC reporting from 1 January this year, so all US-headquartered companies will begin reporting from next year. European Union countries are also due to adopt CbC reporting soon. Some 50 countries are implementing BEPS reporting legislation, including Australia, Spain, Mexico, the Netherlands, Poland, South Korea and China. Many more expected to follow.
It is possible that had CbC reporting already been a requirement by EU governments, Apple may not have found itself facing a €13bn (£11.6bn) tax bill in Ireland, because other European tax authorities might have realised sooner that they were potentially missing out on some tax. The tax case between Apple and Ireland will be watched with great interest by multinationals as well as tax authorities around the world, because at stake is whether Apple’s complex corporate structure artificially allowed it to root all profit from European sales through Ireland – a low tax jurisdiction – thereby permitting the company to artificially reduce its tax bill. European tax authorities will be reviewing how Apple’s business activities were treated.
It is important to point out that such concerns of over-aggressive tax avoidance are not representative of many businesses. The CBI, which represents over 250,000 UK businesses, puts their tax contribution at £185bn for the UK, a not insignificant 29% of the total tax take.
“We recognise that tax transparency is rightly of significant concern to the public, and we back OECD recommendations for country-by-country reporting to tax authorities to help stamp out illicit activity and abusive arrangements,” Carolyn Fairbairn, CBI director-general, said last month following a speech by shadow chancellor John McDonnell.
Despite the potential impact of BEPS, preparation is not as accelerated as might be imagined. The percentage of companies who are proactively taking steps in response to BEPS has increased by 12 percentage points year-on-year, from 54% to 66% among all countries, according to a Thomson Reuters study. Most respondents say that transfer pricing documentation and CbC reporting are the biggest challenges among all of the BEPS actions.
“Following CBC reporting filings due to start in 2017, this means it is likely that from 2018 other countries will be in a position to make requests from parent country tax authorities, and therefore by 2019 tax authorities will have a wealth of data to consider as part of their information from a variety of sources,” adds Matthew Rose.
“That’s a further consequence for organisations setting up or that already have a SSC to the degree that compliance will be greater down the line when tax authorities start to make enquiries to get additional information that they may now be better able to request. For such organisations ensuring that such data is available for responding to multi-territory enquiries will be especially key.”
Click image to view PwC’s overview of country-by-country reporting requirements
What CbC reporting will undoubtedly affect is the amount of work for tax teams in compliance and reporting. But the real aim of governments behind the measures is to influence the behaviour of multinationals that are manipulating the outdated global tax system to reduce their overall tax charge, in some cases by less than 1%.
The next few years will prove interesting for tax teams and tax collectors alike. Although the UK government has said it hopes to raise an extra £5m in tax take in the first two years following the introduction of the new tax rule and an extra £10m in the years thereafter, unless the economy improves and business activity remains buoyant post-Brexit it may have to revise those figures. This is a watching brief.