The outlook for global tax policy in 2013

May 31, 2013

The high volume of tax changes in response to the global financial crisis continues to give way to more targeted, selective and nuanced tax policymaking in many countries around the world in 2013, even as most developed economies continue to wrestle with high debts and austere budgets.

While many countries including the United States still aspire to wide-scale tax reform, others such as Australia and the Netherlands have stretched their tax bases as far as they believe to be competitively or politically prudent.

And whatever the sovereign status, there is little doubt that the respite of sorts in the pace of policy change will be temporary in nature, as countries wait to see what recommendations come from the Organisation of Economic Co-operation and Development (OECD) and other supranational bodies in 2013.

Ernst & Young´s review of tax policy in 60 countries in 2013 finds countries belong in one of three camps. The first group can actively pursue or achieve significant tax reform, largely without hindrance.

The second group can actively pursue or achieve significant tax reform but is seen to be taking a greater risk against a backdrop of annual deficit and gross debt. Countries in the third group wish to pursue or achieve significant tax reform but cannot, either as a result of their economic and/or political situation.

No matter how well-positioned or ill-positioned countries are to effect structural change, we see near-universal commitment to the stronger enforcement of existing tax laws, giving rise to more controversy and disputes around the world. Newspapers too are filled with stories about how governments that once competed primarily to reduce corporate tax rates in a bid to attract investment are now taking coordinated action to combat perceived tax abuse that has arisen as a result of divergences in national tax systems.

The rhetoric has not (yet) been matched with widespread legislative proposals; that said, more countries are pursuing general anti-avoidance rules (GAAR), demanding greater public disclosure of company tax affairs and, in some cases, tying the ability to secure government contracts to an unblemished tax compliance history.

Supranational influence on the rise in 2013

Increasingly, many countries are supporting focus on crossborder taxation by supranational organizations. The rapid pace of globalization, the rise in connectivity caused by innovations in technology and communications, and the growing importance of intangibles all mean that models differ significantly from those that were the norm when long-standing international tax concepts were developed.

The OECD’s February 2013 report titled “Addressing Base Erosion and Profit Shifting” said, “The international common principles drawn from national experiences to share tax jurisdiction may not have kept pace with the changing business environment.”

This concern about the tax treatment of global businesses, taken in parallel with broader fiscal pressures that show only reasonable amelioration over the coming five years, means that there is both public and political focus on cross-border taxation. With the OECD set to release in July its initial “action plan” for work going forward in this area, there is little doubt that development in the cross-border taxation landscape will continue to unfold in the months and years to come.

Broadly speaking, the OECD work will cover three key areas:

  • Transfer pricing
  • Jurisdiction to tax
  • Measures for countering base erosion

The establishment of separate workstreams in each of these areas with country delegates chairing for each — the United Kingdom for transfer pricing, France and the United States for jurisdiction to tax, and Germany for measures for countering base erosion — underscores the keen interest of the OECD member countries in the Base Erosion and Profit Sharing project and its outcomes.

The results of the OECD work are ultimately expected to be reflected in a variety of forms, including changes to the OECD transfer pricing guidelines, changes to the OECD model tax treaty for countries to consider incorporating through amendments to their bilateral agreements, and recommendations for changes in tax law and administration.

As part of this project, the OECD has also called on the Forum on Tax Administration, which brings together the heads of the revenue authorities of OECD member countries and non-member countries, to continue its focus on improving tax compliance.

Within its December 2012 Action Plan, the European Commission (EC) recommended ways for Member States to tackle double non-taxation, asking them to ensure that, in the context of their double tax conventions, income may only remain untaxed in a contracting state if it is subject to tax in the other contracting state, which may be either another Member State or a third country.

The recommendation also asks Member States to include a new provision in their double tax conventions that ensures income covered by the treaty is taxed by at least one of the countries and suggests countries adopt a GAAR provision, the language of which will be provided by the Commission. Of course, these are not the only activities at the European level that readers will need to monitor in 2013; an important consultation has been opened on a Taxpayer Code for the European Union, while the Common Consolidated Corporate Tax Base discussions also continue.

Preparatory activity related to the implementation of the Financial Transaction Tax on 1 January 2014 will increase, and VAT discussions (primarily around place of service and vouchers) will no doubt continue, even as the hope seems to have been abandoned on the possibility of reaching any compromise on the proposal to amend provisions concerning VAT on financial services. Other supranational initiatives will also attract attention this year.

The United Nations’ publication of the draft text of the Transfer Pricing Practical Manual for Developing Countries in October 2012 shows the increased activity of the UN Tax Committee, for example. It is also possible that innovative approaches to perceived tax abuse may be developed at the national level. The United Kingdom’s recent government procurement regulations are an example.

All this activity focusing on multinational companies aligns in a timely manner with the OECD’s planned refreshment of the “enhanced relationships” approach in May of this year, likely to be replaced with a new program of efforts by countries to increase levels of “cooperative compliance.”

The corporate tax burden in 2013

While this ream of supranational recommendations, guidelines and proposals will undoubtedly have an impact on future national tax legislation, sovereign tax policy in 2013 will continue to take new directions.

Our report finds that sovereign gross debt and annual deficit situations are demonstrating a strong influence on tax policy, notwithstanding the relatively small number of countries continuing to bet that a strongly stimulatory set of tax policies will result in either a rise in the number of companies calling them home or stimulating domestic growth and inbound foreign direct investment.

Overall, our data shows that after rapid and profound policy measures in previous years, the pace of change has slowed but has certainly not stopped. Of the 59 jurisdictions in this report that CIT, 13 anticipate an increase in CIT burden during 2013, 18 anticipate a decrease in burden, and 28 anticipate no overall change.

That would seem to demonstrate that many countries have continued to pivot away from fierce austerity measures (at least, where those countries have any fiscal room to maneuver) and instead have chosen to use their available resources in a far more effective, targeted manner. As a result, business incentives of all types continue to experience a real sense of recalibration, improvement and tighter focus on those activities given rise to the greatest gains over the long run.

It remains to be seen whether the so-called “race to the bottom” for reducing CIT rates is over or the runners have just taken a short water break. The data suggest that rapid and regular cuts in headline CIT rates have slowed considerably; only a small group of countries, mostly in Asia, continue to move in this direction.

It has been common to see a decrease in headline CIT rates coupled with base-broadening that offsets, at least in the short term, the cost of such a rate reduction. This steady and consistent pruning away of various exemptions and deductions is a widespread trend that our respondents report will likely continue in 2013.

Popular base-broadeners include limitations on interest deductions and financial expense benefits; more restrictive use of losses; and in a more limited number of jurisdictions, the introduction of minimum taxation regimes. Companies operating globally ignore VAT at their peril.

This mantra, increasingly being adopted by business, looks to be particularly true in 2013. Countries anticipating an increase in the VAT/GST/sales tax burden in 2013 outnumber those anticipating a reduction in burden by a factor of 5 to 1.

Finally, but by no means a footnote, almost all countries report the growing use of tax enforcement — including new or strengthened GAAR, specific anti-avoidance rules (SAAR) and tax disclosure requirements — as a method of further expanding the tax base.

In the area of GAAR, many multinational companies increasingly fear that countries that once used GAAR only reluctantly, and in the most extreme circumstances, are beginning to use it more extensively than it was originally designed to be used. This is but one area of policy development meriting close monitoring in 2013.

Leading practice for managing tax policy change

By identifying trends and anticipating changes in policy, legislation and enforcement, business can plan for adverse impacts, take proactive steps to adapt to changes and even engage with policymakers to contribute their perspective to the legislative process.

Companies today are beginning to take this opportunity to get ahead of the curve on tax changes very seriously. The integration of this knowledge and awareness into business planning will lead decisions to be made with potential future outcomes in mind.

Close monitoring of individual countries in your global footprint, combined with the insights of experienced policy specialists and the integration of a country mindset with a global framework, is important to anticipating potential tax changes and their effects on the global enterprise.

In that vein, we set out a six-point action plan that may help you manage change in 2013:

  • Integrate all major tax areas for potential tax policy and regulatory changes in key jurisdictions into tax risk planning
  • Understand the local dynamics of the potential tax changes, alternative policy designs and ways in which the changes link to global tax policy trends
  • Assess the implications of the potential change on your business operations
  • Develop clear lines of responsibility, lines of communication and some form of knowledge sharing among all those who are responsible for monitoring and anticipating tax policy and legislative change
  • Fully leverage the tax information, and consider insights provided by outside providers
  • Consider active engagement with policymakers over sources of future controversy

Read more: The outlook for global tax policy in 2013

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