Businesses trading internationally are no doubt aware that the G20 nations have been co-operating more closely on issues such as taxation since the financial crisis.
Efficient tax planning has always been essential for businesses obliged to act in the best interest of their shareholders and this has not fundamentally changed. The means to do so however, have received much greater scrutiny since the financial crisis as countries have been left dealing with large deficits and diminishing means with which to tackle them.
The practices of certain large multinationals such as Amazon, Google and Starbucks drew sharp criticism from politicians in the UK due to their ability to create legal tax efficiencies that left them with little apparent profit despite otherwise rude financial health.
The international nature of these firms and the aggressive nature of their tax strategies have led to a remarkable degree of co-operation between wealthy nations. The Organisation for Economic Co-operation and Development (OECD) is spearheading a drive by the G20 to reduce the damaging effects of more aggressive practices.
What is being done in this new era of co-operation?
There are a variety of factors that affect how businesses operating internationally organise their tax affairs, from technical accounting practices such as transfer pricing, macroeconomic issues such as exchange rates and jurisdictional issues governed by treaties between nations.
The OECD is in the process of reviewing how global companies pay tax with a particular focus on the interaction of international tax treaties. This is being done under the BEPS project which refers to the issue of base erosion and profit shifting – literally the shifting of profits by multinationals to low cost tax jurisdictions and costs to high tax jurisdictions.
The OECD believes companies avoiding paying tax where business actually takes place is damaging because it disadvantages local businesses, distorts local markets and deprives countries of tax revenues.
What does this mean in practice?
Rapid globalisation accelerated by digital communication and opportunities created by the internet has meant treaties designed for the pre-digital economy are ill equipped to regulate the activities of modern multinationals. Tax treaties originally intended to prevent double taxation have been exploited to virtually eliminate taxation in some cases.
The OECD’s BEPS project aims to restore a degree of fairness and integrity to the international tax system by reviewing the treatment of international businesses by its member nations. In simple terms it means the largest economies are looking at closing some of the loopholes that currently enable companies to avoid tax.
To drive forward change the OECD has implemented an action plan which is due to complete in 2015.
Modern communications and the internet mean that even start-up businesses are launching with an international outlook in today’s world. It is tempting to think that these types of high-level reforms are only likely to affect the largest multinational businesses but new legislation may well affect any business that trades across borders.
To keep abreast of tax developments affecting your business contact our corporate tax expert Meeten Nathwani