By Kash Mansori
Posted: October 29, 2015
It seems that we’ve more or less reached the end of the first chapter of the BEPS saga. Earlier this month the OECD released the final set of BEPS reports, capping off two years of work to remake the world’s ad-hoc system of international corporate taxation. Over the coming months some of the recommendations in these reports will be incorporated into official OECD documents, and then individual countries will likely start enacting BEPS-inspired changes to their administrative practices and tax codes. (Actually, some already have.)
Much has already been written about the specifics of the BEPS reports. For example, Quantera Global’s Richard Slimmen provides an excellent summary of the various action items, while a more detailed run-through is provided by Renata Ardous. So rather than delve into the specific changes that we are likely to see to international tax and transfer pricing rules as a result of BEPS, I’d like to take a step back and consider what this means for the future of corporate taxation at a very high level.
The BEPS project builds on political trends in international corporate taxation that have been gathering steam for some time. But its results have convinced me that by the end of this decade, the tax landscape confronting multinational companies will look very different than it did at the start of it. Here is what I see as being the key developments over the coming years.
The international tax landscape will be much more hostile to aggressive tax planners. The BEPS action items recommend a number of specific technical changes to make it harder for companies to use clever tax planning to shelter income. Perhaps more importantly, though, BEPS has crystalized a simple and powerful directive for the world’s tax authorities to focus on: companies should be taxed where they create value. This means that tax authorities will increasingly feel free to not respect tax planning arrangements that result in violations of this rule, whether they are legal or not.
The most defensible tax strategy will be aligning taxable income with value creation. As a corollary to the previous point, companies that want to have a stronger defense against aggressive and revenue-hungry tax authorities should work hard to ensure that they are reporting income in each country in line with the amount of value creation that takes place in that country. From a transfer pricing perspective, this means that the residual profit split approach will be more and more likely to provide the strongest or safest defense of a company’s worldwide tax position.
Corporate tax structures will increasingly become a PR issue. In the very near future multinationals will have to reveal to tax authorities exactly where around the world they are reporting income and paying taxes. But it’s not difficult to see how this will likely lead to more and more cases where the details of a company’s tax planning become public information, whether through litigation or as the result of unilateral actions by individual tax authorities. Starbucks, Amazon, Fiat, and most recently Facebook are only the tip of the iceberg. As a result, corporate tax strategy will increasingly become a PR issue for many companies, with a substantial potential impact on brand and reputation.
Tax compliance costs will rise for multinational companies. As tax authorities around the world are emboldened in the post-BEPS world to aggressively seek what they consider to be their fair share of multinational tax revenue, companies will either find that they have to devote more resources to developing robustly defensible tax structures (see Point 2 above), more resources actively defending themselves from scrutiny by tax authorities, or both. Unfortunately, this will probably apply to both the cautious tax planners of the world as well as the aggressive ones.
Add it all up, and I think it’s likely that we’ll look back on this decade as one in which the international taxation landscape underwent a fundamental transformation.