World: Rethinking tax for a new era
09 December 2014
Posted by: Author: EY Tax Insights
Author: EY Tax Insights
Ready or not, greater demands for increased visibility on corporate tax affairs are coming. While it remains unclear what exact form these requirements will ultimately take, companies need to start preparing to adapt.
Tax transparency, perhaps ironically, lacks a clear definition. It is a catchall term to cover several distinct, albeit overlapping, trends. What these developments have in common is that businesses operating internationally are under pressure to reveal more about their financial affairs to a wider audience. What varies more widely, and what is still unclear in several of the most important initiatives, is precisely what information taxpayers will need to reveal, and to whom.
Barbara Angus, who was formerly the lead international tax official at the US Department of the Treasury before joining EY in Washington, DC, notes that in many ways, demands for transparency are nothing new. "Governments have always been interested in and had access to relevant information. In countries around the world, many corporations are under continual examination by tax authorities,” she explains.
Various tax authorities have long worked to expand bilateral and multilateral cooperation around the sharing of tax information. An important player in this effort has been the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, established in 2000 to benchmark how
well countries comply with their tax information exchange agreements (TIEA). This tests countries’ responses to data requests relating to specific taxpayers by foreign revenue officials.
"The US Foreign Account Tax Compliance Act (FATCA) and revisions to the EU Savings Directive have helped set the stage for more advanced multilateral arrangements, led by the Global Forum on Taxation. The OECD’s Common Reporting Standard (CRS), issued in July 2014 and drawing extensively on the intergovernmental approach to implementing FATCA, is one example. Beginning in 2017, more than 50 jurisdictions applying the CRS — including major financial centers — will begin the automatic sharing of certain financial information between tax authorities rather than waiting for a request. This follows endorsement by representatives of these jurisdictions at the annual meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes in Berlin on October 29. Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, says that "in this area of transparency, progress has been unbelievable. All countries are changing extremely fast. Five years ago, bank secrecy was the rule; today bank secrecy is over”. Under developments such as FATCA and the CRS, governments will leverage global financial institutions to collect data on their behalf, rather than relying solely on their own resources.”
An important driver of enhanced information exchange is technological advances that allow authorities to gather, exchange and analyze this data, in a way that would have previously been too costly and time consuming. Just as important, however, has been the desire of governments to combat tax avoidance. The push for greater intergovernmental information sharing was a direct response to growing concerns about the use of offshore financial centers and tax havens.
The push for disclosure
The link between perceptions of fairness and tax has driven another element of the tax transparency picture: the push for greater public disclosure. The earliest example is the Extractive Industries Transparency Initiative (EITI), launched in 2003 in response to complaints of civil society organizations about the secrecy surrounding tax and other payments from natural resources companies to governments. While a primary goal of the EITI was to make governments receiving these payments increasingly accountable for how these monies were spent, it also made businesses operating in the sector more transparent. EITI is a multistakeholder organization — including government, corporate, NGO and investor representatives — which sets standards for the publication of tax and other payments to countries related to oil, gas and mining activity. Various governments have passed rules to effect greater compulsory disclosure too, notably America’s
Dodd-Frank Act and the EU’s Accounting Directive.
Furthermore, country-based reporting requirements have spread from the extractives to the financial industry. As Philip Kermode, Director of the European Commission’s Directorate-General for Taxation
and Customs Union, argues, in his view this has been in large part to alleviate public mistrust of that sector. For example, the European Union’s Capital Requirements Directive IV (CRD IV) stipulates large financial institutions provide country-by-country reports on activities, employee numbers, turnover, income, taxes paid and subsidies received.
More broadly, Denmark has joined its Scandinavian neighbors in making certain details from corporate tax filings publicly available, and Australia is doing the same for all large companies. National and multinational initiatives to date, however, have been far from coordinated. The most talked-about current transparency initiative is the effort under the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) to develop a template for corporate country-by-country reporting. This will require companies to report, for every country in which they operate, figures for turnover, profit, taxes paid and accrued, employees and assets — data that will either be provided to, or automatically shared between,
all relevant national tax authorities.
This focus on transparency is happening in the context of widespread public concern at what is seen as the inappropriate use of legal strategies to reduce tax payable through shifting profits to low or no tax jurisdictions. Such concerns have grown more pronounced since the early 2000s. David Dietz, Head of Compliance — North America at Rabobank, notes the striking change in the public mood: "Tax avoidance by corporations is now automatically front page news. ” He is not alone. A recent EY survey, Bridging the divide, which polled over 800 executives from leading global companies, found that 89% are concerned about media coverage of corporate tax positions and potential misrepresentations.
Under the OECD’s proposal for country-by-country reporting, the recipients of the data will be tax authorities rather than the public. This may not ultimately satisfy demands for broader transparency from
a public that sometimes distrusts tax authorities almost as much as companies themselves. EY’s Barbara Angus, while expecting the OECD to remain focused on reporting to tax authorities, says that the potential for expansion remains a concern. "There may be pressure to have what now is a report to tax authorities to be made more public” says Barbara Angus. A major concern for multinationals is that even the high level, aggregate information being contemplated for inclusion in the BEPS template would be commercially sensitive. The OECD is aware of this issue and is continuing to consider how to best address it. Pascal Saint-Amans expects one of the challenges under the new reporting regime will be protecting the confidentiality of shared data.
Even if the data is not made public, though, past experience from the US states does not bode well for those hoping that the reporting element of the BEPS project will lead to a coherent international reporting environment.
Andrew Phillips, of EY’s Quantitative Economics and Statistics Group in Washington, DC, notes that, after state income tax receipts dropped markedly in the wake of the 2002 recession, state-by-state reporting requirements became increasingly common. The main impetus was for state governments to determine whether they were receiving an appropriate share of tax revenue from companies operating across the country. But even with a federal US coordinating body attempting to create a common reporting method, the process led to a wide range of different state requirements.
"You don’t see consistent information being requested,” says Phillips. "Nobody is sure exactly what question they are trying to ask or what the answer is. In the US states, the question was, ‘Are companies
paying their fair share?’ but nobody knew what the answer was.” Instead, different states took different approaches, some relying on revenue realized in-state and others on various measures of operational activity such as employee or production figures. Based on this experience, Phillips concludes that keeping the OECD reporting template unaltered and consistent may be challenging.
What companies should do
Transparency has already reshaped the tax world. Tobias Brauner, Head of Corporate Finance and Tax at Daiichi Sankyo Europe, says: "Hiding things doesn’t make sense. You can’t. That is not the role of a modern tax function, nor has it ever been.”
Most companies are not yet prepared for broad new reporting requirements. According to a Thomson Reuters survey published early in 2014, only 35% of global firms have a tax transparency strategy. Given the global focus on greater disclosure requirements, this presents risks; but given uncertainty about proposals may evolve as they are implemented by countries, what should firms be doing?
Barbara Angus explains that tax transparency is something to think about on many levels. Probably the most basic level is in that of data infrastructure and software. Rabobank’s David Dietz notes that FATCA alone involved an 18-month period of significant investment in systems and redesigning processes for his organization. Looking ahead, he notes that companies will need to anticipate the needs of providing specific information to officials when putting systems in place.
Getting necessary data — which is by no means easy — is only the first step. A strategic decision is required to determine whether and how, a broader explanatory context to data may be provided to tax authorities and, possibly, wider stakeholders.
Barbara Angus expresses concern that the data requested in the OECD country-by-country template are high-level and rough. "The data requested could be prone to misinterpretation and misunderstanding for a variety of reasons. For example, a company may be running very different businesses in different countries so that comparison across countries would be meaningless,” she says.
The risk of misinterpretation is even greater in the context of public disclosure where information would be in the hands of persons who are not tax specialists. This is probably the biggest concern for companies. "We are all for disclosing information to the tax authorities, but have reservations about having to disclose what is essentially ‘raw state’ information to the public. There are many lawful reasons why a tax payable might differ from say 30% of your accounting profit, but without tax specialist knowledge the information is open to misinterpretation,” says Dana Moscaliov, Senior Tax Advisor at DOF Subsea Australia, an engineering company in the oil and gas industry.
Addressing this aspect of transparency will require reconsideration of how businesses discuss tax. For example, Rio Tinto and Vodafone, in order to give a more holistic view of their societal contribution, have issued public reports. These include country-by-country information not just on corporate income tax but also on royalties and payroll taxes of employees. Doing this is not a simple matter of releasing data — it requires a cultural change.
Such a voluntary report may not be the optimum strategy for other companies, says Barbara Angus. "It is
something that companies need to think about strategically — to think about what the information will show, and about where they will need to be able to tell the full story beyond the particular data points.”
Finally, in an atmosphere of greater transparency, firms need to be certain that if their tax affairs become public, they will pass increasingly stringent regulatory and public scrutiny. George Trollope, Vice President Tax at Sasol, a South African energy firm, explains that the shift toward tax transparency has swung the balance in favor of tax planning developed within the business context. "As in the past, our focus today, and very much the driving principle of our approach to tax is a tax policy that is aligned with the group’s business strategy,” says Trollope.
A more transparent world is on the horizon. This will require not just the release of information but new ways of thinking about how tax data is gathered and presented.
This article first appeared on taxinsights.ey.com.