Governments considering how multinationals should be taxed must address the erosion of public trust in tax administrations, while businesses continue to stress the importance of certainty in tax matters, panelists told a conference hosted by the Women in Tax network at Pinsent Masons’s London office November 20.
Alexandra Readhead, an international tax and extractive industries consultant, said multinationals should be taxed “in a way that creates resources for public trust.” Ongoing revelations such as the Paradise Papers, as well as tax avoidance cases continuing to come before the courts, could “erode public trust in government and, as a result, government legitimacy, which I think has massive implications,” she said. “Governments need to be thinking about ‘How would each tax fare in a publicity test?’”
A survey of G-20 citizens on Public Trust in Tax found that 67 percent of respondents “either distrusted or highly distrusted politicians” when it comes to information about the tax system, Readhead noted. The study, published in March, was prepared by the International Federation of Accountants, the Association of Chartered Certified Accountants, and Chartered Accountants Australia & New Zealand. The authors also concluded that “people want governments to put tax cooperation ahead of tax competition.”
Readhead is a technical adviser to the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development, a global body representing the governments of 60 mining countries, many of which are in Africa. The Forum is working with the OECD on “how we can take the [OECD’s base erosion and profit-shifting project] actions and adapt them to the mining sector, and to fill in the gaps where there may be gaps,” she said.
“I think we need to tax multinational enterprises as simply as possible,” Readhead added. “This is particularly the case for developing countries that lack the financial and human resources to implement complex tax rules. The more complex the legislation, the harder it is to administer and the easier it is for companies to manipulate.”
Lizzie Arnold, a senior policy adviser at HM Treasury, outlined the U.K. government's perspective on the taxation of multinationals. She described three aims, the first of which is to create a competitive corporate tax system. Reductions in the corporation tax rate since 2010 mean that "companies resident in the U.K. have more [money] available to them to increase investment, lower prices, and hire staff," Arnold said. The more territorial regime that has been created over the last 10 years focuses specifically on taxing activity in the U.K., she added.
The government's second aim is fairness, Arnold said. It intends to ensure that taxes are low, but are paid. It also seeks a level playing field between small and large businesses, and "a move away from aggressive avoidance." Earlier on November 20 Financial Secretary to the Treasury Mel Stride set out, in a parliamentary written answer, nine U.K. policy measures to counter BEPS that are expected to give rise to additional tax revenues of £2.6 billion per year by 2019-2020.
Arnold summarized several measures taken to realize the government’s third aim of increasing certainty for businesses. For example, the government is “very supportive” of BEPS action 14 to improve dispute resolution, she said.
‘A Second Type of Problem’
Giorgia Maffini, senior tax economist at the OECD, noted that the question of how to tax multinationals is still being discussed because they are “more prone to tax optimization because they are international by nature, and often their activity is based on mobile intellectual property, which can be moved to low-tax jurisdictions.”
The BEPS project has tried to address many of the problems within the established “residence-versus-source dichotomy,” Maffini said. Residence and source are the two principles that define how multinationals are taxed today, she noted.
“At the moment, especially with the work on the digitalized economy, what we are seeing is a second type of problem. . . . A lot of companies can serve a jurisdiction and can have a really substantial commercial presence there without physical presence. No physical presence — clearly no taxable presence,” Maffini said. This means that “some countries do not have the tools to levy their taxing rights anymore,” she added.
“We are trying to understand whether it’s time to think of another principle,” Maffini said, adding that this is “not a problem of avoidance — simply [that] companies are leveraging on the cost advantages of digitalization.”
There are “many proposals out there,” and it is “very early for us to start discussing them in detail,” Maffini said. Some proposals would involve the introduction of some sort of destination principle into the legislation. “This means, for example, lowering the threshold for a [permanent establishment] in order to account for the fact that there is a commercial presence somewhere,” she said. The fact that there are customers or users in the market economy could trigger a PE threshold.
“We are still very far away from specific measures that we would suggest,” Maffini said. “More revolutionary" proposals include formulary apportionment and a destination-based cash-flow income tax, she noted.
Certainty and Stability
Anna Elphick, vice president of tax for Asia and Africa at Unilever, stressed that corporate income tax should be based on profits. She recognized that there are sectors for which a profit-based tax might not be appropriate, but in the fast-moving consumer goods sector, a profit tax “recognizes the fact that different companies have different operating margins,” she said.
In the calculation of profit, Elphick noted, it is necessary to think about where value is created. “In a manufacturing context, it’s relatively easy. . . . But if you are manufacturing luxury or branded products, you have to think about where your intangibles are located,” Elphick said. “What’s the relative value of the physical product versus the intangibles that create the brand and the ‘aura’ around the product?”
It is also important to recognize that “all businesses are digital now,” Elphick said, and that profits should be taxed only once.
Finally, corporations are looking for “a bedrock of certainty” to provide stability, she said. “It’s not necessarily about where the tax rate is lowest; it’s not about whether you have pretty structure charts with boxes and arrows going everywhere; it’s about certainty. Because ultimately, that is what drives the stability in your share price,” she added.
Readhead said a particular problem in the extractive industries is that there are layers of fiscal terms. “It’s common to have a set of terms in the general income tax code, then in the mining tax regime, and then in the contracts themselves you have a whole raft of terms that might be project-specific,” Readhead explained. “So this creates a huge amount of complexity for tax administrators, who quite often in developing countries are not even privy to the contracts that have been signed by [the] central government and the taxpayer.”