Potential Change Muddles Already Uncertain Tax Outlook
A Conversation With James Ross, McDermott Will & Emery
As a partner with McDermott Will & Emery in London, James Ross advises a wide range of U.S.- and European-based multinationals on tax strategy and related matters. He shares some insights on the most pressing issues likely to be raised by the OECD and other country actions on the tax front.
From an international tax perspective, what are the primary issues that keep you and/or your clients up at night?
The sheer pace and volume of change in the international tax arena can leave us all struggling to keep up, which itself is sufficient to keep one up at night. However, this is accentuated by the sense that the changes are incoherent, lack any underlying principles, and therefore are likely to be counterproductive. DAC6 and the OECD project relating to the digitization of the economy are both cases in point.
DAC6 is an understandable response to concern about cross-border tax planning but was drafted in an extremely vague way. One can see what arrangements it intended to target, but if read literally, it would require disclosing all manner of innocuous group reorganizations, deluging tax authorities with irrelevant information.
The OECD project, meanwhile, still lacks any clear theoretical underpinning as to what profits should be taxable where. The two pillars risk conflicting with each other, and with the outcomes of the original BEPS project. The risk is an outcome that lacks any clarity of purpose, implemented inconsistently by different countries in line with their own interests, thus risking breakdown of the international tax system as we know it, and making compliance even more difficult.
What are some of the challenges faced by multinationals with respect to the increase in tax transparency and disclosure, e.g., U.K.’s Making Tax Digital initiative, Common Reporting Standard, Country-by-Country Reporting, Mandatory Disclosure Requirement (including DAC6), and so forth?
These regimes involve significant upfront costs for implementing systems to ensure compliance (both financial and in terms of staff time). In many cases, however, the scope of the transparency requirement and the fact the requested information is inherently subjective mean a significant ongoing compliance cost. In the U.K., the numerous requirements introduced in recent years have included that for senior accounting officers to certify the efficacy of tax accounting systems, the required publication of a tax strategy, DAC6, and, coming down the track, the notification of uncertain tax treatments. It is often questionable whether these regimes provide HMRC much in the way of useful information, but they all impose significant expense on multinationals (including professional advice) to ensure they are compliant.
How optimistic are you that the OECD will achieve a consensus-based solution to the challenges arising from digitization of the economy by the end of 2020?
“Optimistic” is perhaps not quite the word, but I think there is a reasonable chance of an agreement being reached, because most participants regard the alternative – lots of countries introducing unilateral measures – as highly undesirable, particularly with the world economy significantly weakened by the coronavirus pandemic. But what sort of agreement might that be? There is clearly a risk that any solution will be in the nature of a lowest common denominator, thus allowing different tax authorities to implement and interpret it in different ways. This may be little better than having no agreement at all.
What do you anticipate will be the significant international tax issues resulting from the coronavirus pandemic?
In the short term, we are already seeing clients worried about inadvertent permanent establishment exposure because critical employees are locked down in the “wrong” jurisdiction. Some tax authorities have issued helpful guidance on this point, but it remains to be seen if others will take a similar approach.
In the longer term, it will be interesting to see if the crisis will change the attitude of government authorities toward the current OECD proposals for reallocating taxing rights. Many governments that were keen to gain taxing rights over profits deriving from users or market presence in their jurisdiction may be rather less so if the current economic situation means in practice they will not be taxing profits but needing to give relief for losses attributable to those activities.
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