Managers need to be ready, as governments name and shame corporations into paying their “fair share”
By Iain MacIntosh
TAX DIRECTORS are facing unprecedented challenges from a tax environment that's beginning to take shape in Canada. As tax is increasingly debated in moral rather than legal terms and world leaders begin to focus on perceived tax evasion, reputational risk will be linked directly to a company's tax contributions. Tax authorities will be seeking more regulation and disclosures from multinationals.
As this tax morality debate garners more attention by both the media and public, it's important that tax, senior accounting officers and board members in Canada not be caught off guard by what could lead to potentially the biggest change in the international tax landscape in years.
> ORIGIN OF THE MORALITY DEBATE
Following the recent financial crisis, governments across the globe suffered significant drops in tax revenue due to shrinking domestic economies. As a result, we've seen severe cuts to social programs, health care, defence and education, as well as increases in consumption-based taxes. These measures have led to increased awareness of tax issues and demands from the public, media, lobby groups and politicians that companies demonstrate they contribute their “fair share” of tax to the countries and societies in which they operate.
> OECD TAKES ACTION
Under pressure to take action, the OECD released a 15-step action plan to address tax avoidance through “base erosion and profit shifting” (BEPS) on July 19, 2013. Endorsed by the G20 in Moscow, the report aims to implement measures within two years to prevent companies from artificially segregating taxable income from the activities that generate it. The plan focuses on a number of areas, such as transfer-pricing, hybrids, permanent establishments, interest deductions, treaty abuse, digital economy, and establishing a framework for automatic information-sharing on tax. The report confirms that the international tax system has not kept up to date as cross-border trade increased, the digital economy emerged and value chains became more complex. Many countries are already taking domestic action to combat BEPS.
> MORE REPORTING EXPECTED
As the momentum for increasing tax transparency continues and the OECD further develops proposals for country-by-country reporting, the banking and extractive industries are already facing tough regulatory public disclosure requirements. Credit institutions will have to divulge additional information under the EU's Capital Requirements Directive (CRD IV), while the US Dodd-Frank Act and the EU Accounting and Transparency Directive target the oil, gas and mining industries.
In June 2013, Prime Minister Harper also announced Canada's commitment to establishing, within two years, new mandatory reporting standards for Canada's extractive companies. These regulated disclosures represent a significant financial burden for those industries due to the number of required people, changes in process and technology challenges to implement.
> BEYOND CORPORATE TAX
Many multinationals would argue that the tax morality debate is not fully informed because it lacks appreciation for the complexities of tax and its narrow focus on corporate tax, which only accounts for about 10 per cent of the total tax revenue in OECD countries. Governments should also shoulder some of the responsibility by setting tax policies that incentivize tax planning, as countries compete for international investment. A more informed debate should focus on the wider contributions that corporations make to GDP through investment, employment and other taxes.
> WHAT'S COMING NEXT
When this tax morality debate escalates, as we've seen for companies in the United Kingdom and elsewhere, it can quickly become an issue of reputational risk to the company and brand, not simply whether an organization has complied with tax law in various jurisdictions.
Tax and senior accounting officers should prepare for increased scrutiny by tax authorities and the public. They should analyze their tax planning structures and policies in light of the BEPS report and be aware of the potential risks of a public debate on their respective tax strategies. Companies should also develop a strategy around transparency and consider methods to communicate their tax contribution across all taxes.
As this debate takes shape in Canada, we believe that there is an irreversible momentum to greater tax transparency. Companies need to carefully watch developments and begin to plan for a potential dialogue with all stakeholders, including the public, on the state of their tax affairs.
Iain MacIntosh is a tax partner and tax transparency team leader at KPMG.
By Iain MacIntosh
TAX DIRECTORS are facing unprecedented challenges from a tax environment that's beginning to take shape in Canada. As tax is increasingly debated in moral rather than legal terms and world leaders begin to focus on perceived tax evasion, reputational risk will be linked directly to a company's tax contributions. Tax authorities will be seeking more regulation and disclosures from multinationals.
As this tax morality debate garners more attention by both the media and public, it's important that tax, senior accounting officers and board members in Canada not be caught off guard by what could lead to potentially the biggest change in the international tax landscape in years.
> ORIGIN OF THE MORALITY DEBATE
Following the recent financial crisis, governments across the globe suffered significant drops in tax revenue due to shrinking domestic economies. As a result, we've seen severe cuts to social programs, health care, defence and education, as well as increases in consumption-based taxes. These measures have led to increased awareness of tax issues and demands from the public, media, lobby groups and politicians that companies demonstrate they contribute their “fair share” of tax to the countries and societies in which they operate.
> OECD TAKES ACTION
Under pressure to take action, the OECD released a 15-step action plan to address tax avoidance through “base erosion and profit shifting” (BEPS) on July 19, 2013. Endorsed by the G20 in Moscow, the report aims to implement measures within two years to prevent companies from artificially segregating taxable income from the activities that generate it. The plan focuses on a number of areas, such as transfer-pricing, hybrids, permanent establishments, interest deductions, treaty abuse, digital economy, and establishing a framework for automatic information-sharing on tax. The report confirms that the international tax system has not kept up to date as cross-border trade increased, the digital economy emerged and value chains became more complex. Many countries are already taking domestic action to combat BEPS.
> MORE REPORTING EXPECTED
As the momentum for increasing tax transparency continues and the OECD further develops proposals for country-by-country reporting, the banking and extractive industries are already facing tough regulatory public disclosure requirements. Credit institutions will have to divulge additional information under the EU's Capital Requirements Directive (CRD IV), while the US Dodd-Frank Act and the EU Accounting and Transparency Directive target the oil, gas and mining industries.
In June 2013, Prime Minister Harper also announced Canada's commitment to establishing, within two years, new mandatory reporting standards for Canada's extractive companies. These regulated disclosures represent a significant financial burden for those industries due to the number of required people, changes in process and technology challenges to implement.
> BEYOND CORPORATE TAX
Many multinationals would argue that the tax morality debate is not fully informed because it lacks appreciation for the complexities of tax and its narrow focus on corporate tax, which only accounts for about 10 per cent of the total tax revenue in OECD countries. Governments should also shoulder some of the responsibility by setting tax policies that incentivize tax planning, as countries compete for international investment. A more informed debate should focus on the wider contributions that corporations make to GDP through investment, employment and other taxes.
> WHAT'S COMING NEXT
When this tax morality debate escalates, as we've seen for companies in the United Kingdom and elsewhere, it can quickly become an issue of reputational risk to the company and brand, not simply whether an organization has complied with tax law in various jurisdictions.
Tax and senior accounting officers should prepare for increased scrutiny by tax authorities and the public. They should analyze their tax planning structures and policies in light of the BEPS report and be aware of the potential risks of a public debate on their respective tax strategies. Companies should also develop a strategy around transparency and consider methods to communicate their tax contribution across all taxes.
As this debate takes shape in Canada, we believe that there is an irreversible momentum to greater tax transparency. Companies need to carefully watch developments and begin to plan for a potential dialogue with all stakeholders, including the public, on the state of their tax affairs.
Iain MacIntosh is a tax partner and tax transparency team leader at KPMG.
