Globally, multi-jurisdictive tax planning is becoming more and more difficult for corporates and organisations, which engage in cross-border business, trade and enterprises. As nations shake off the shackles of COVID, and economic impact thereof is being assessed, the challenge is the sharing of the tax bases between countries.
Corporates and enterprises are continuously encouraged to timeously engage with the correct international business, tax and economic experts, to identify, evaluate and assess the cross-border risks which may exist for a given business, or industry, such those found in a ratified double tax treaty (DTT), and planning accordingly.
Many businesses, corporates and enterprises are so eager to engage in trade with partners in foreign countries, that they have not fully evaluate or developed an entire business model, which needs to not only the commence of business, but must also to address the continuation of business in subsequent years, as well as an exit strategy should that day ever arise. This can be developed in the business feasibility study as the ENTRY, DOING BUSINESS, EXIT.
The abovementioned country evaluation and planning model is imperative, so that the company or corporate, stays compliant with the business and tax laws and regulations within each country wherein they trade, operate. It must be appreciated that laws and regulations are complex at the best of times, with the risk further compounded by the fact that the majority of countries change and amend their laws annually. Furthermore, many countries’ regulatory authorities have embraced technology, and taxpayers are required to meet the tax compliance through digital means, such as e-filing.
Notwithstanding the foregoing, the Organization for Economic Cooperation and Development (OECD) has actively been engaging to facilitate and promote changes to international tax standards, that could result in massive repercussions for multinational corporates, organisations and companies. One of the proposed changes is a global minimum tax rate. Another proposed change is more comprehensive and supportive documentation requirements for transfer pricing, especially in light of developing countries perceived prejudice to the risk of tax base erosion and profit shifting (BEPS).
Based on the above, it is recommended that multinationals implement a strong, sustainable, scalable and agile tax strategy. This team must be augmented with the right external expert, who collaborate and ensure, independently, that the tax structures implemented are valid accurate and complete.
It must be appreciated, that a corporate tax team shoulders the significant responsibility of ensuring best practice and compliance with international tax requirements and compliance for the corporation — a responsibility that is required to be more aware of the impending changes proposed by the OECD as well as other regulatory bodies. Accordingly, based on the research completed, the following international tax planning strategies may be recommended:
- Become Internationally Tax agile - prepare for proposed international regulatory changes
Continuous engagement with regulatory authorities and proposed international tax and regulatory changes will definitely burden international tax management teams, multiple tax planning challenges. Some of the proposed regulatory changes include the following:
- The OECD’s aggressive stance on Base Erosion and Profit Shifting (BEPS) initiatives is driving policies for taxation,
- The OECD as well as other regulatory authorities are pushing for countries to embrace the digital economy and introduces a global minimum tax.
- Trade federations including the EU is proposing country-by-country (CbC) reporting requirements, a Mandatory Disclosure Regime (MDR), as well as a requirement for a directive for the reporting of cross-border arrangements.
- The United States, is seeing the implications of Tax Cuts and Jobs Act of 2017 (TCJA) on multinational corporations, which are still uncertain, which is not helped by the IRS and Department of the Treasury introducing new rules and guidance regularly.
Awareness of the continuously changing tax landscape is imperative for corporates and organisations. The risk is that where a corporate or company does not have the agility to stay complaint with the changing laws and regulations. To be compliant with these changing regulations, standards and tax regimes will require more investments by corporates and the adoptions of greater transparency.
2. Be aware of the new MLI and BEPS rules
The OECD has presented a BEPS framework, that includes 15 actions which a tax management advisory teams must consider when attending to international business transactions and complying with regulations.
The proposed actions equip governments and regulatory authorities with possible domestic and international rules and instruments which will assist against tax avoidance, as well as protecting in-country profits, and ensuring that they are taxed where economic activities generating the profits are performed and where value is created. This is to address the “dividend leak” so prevalent in international transactions. The proposed actions include adoption of digitization to MDRs, as well as mechanisms to avoid and protect against tax treaty abuse. The biggest obstacles which may be faced by tax management teams is attending and complying with of the MDR and master file, local file, and country-by-country requirements, which may international and in-country tax compliance and assessment.
3. Prepare for the proposed minimum international tax rate of 15%
The OECD’s proposed BEPS initiative comprises of two pillars as follows:
- Pillar 1 outlines the proposed rules regarding large corporates and companies;
- Pillar 2 introduces the proposed minimum international tax rate of 15%.
In addition to the above, Pillar 2 proposes to include three rules, which will apply to corporates, companies and organisations with revenue greater than €750 million. The rules may be summarised
Rule #1: This rule, referred to as the “income inclusion rule,” is meant to determine the circumstances whereby a corporate’s or company’s foreign source income should be included as taxable income of the parent company.
Rule #2: This rule, referred to as the “under-taxed payments rule,” allows corporates and companies to structure and manage cross-border payments and the taxation thereof.
Rule #3: This rule, referred to as the “subject to tax rule”, is intended as a support to double tax treaties, which would permit affected countries to tax payments, which may be otherwise subject to a lower rate of tax. The designated or implied tax rate under this rule is 9%.
An area of concern for both internal and external tax management teams is the fact that BEPS and the global minimum tax rules are not finalised and ratified, and still very much under negotiations, with expected changes during the process. As can be seen, the rules are complex, with different the risk of differing interpretations across jurisdictions, which will require corporates and companies to adopt and implement careful coordination and planning in reporting across jurisdictions.
Corporates and companies, must consider utilising prescribed and dedicated CbC tax compliance, reporting and analytics software. This must be supplemented and complimented by persons with in-depth and wide-ranging global corporate tax exposure, experience and expertise.
4. Consider and plan for worst-case scenarios in respect of compliance failure
Corporate group decision, due to the eagerness to benefit from opportunities, may sometimes result in decision being made in haste. Accordingly, decisions, can have result in consequences which business leaders may not anticipate, especially in a global environment that is witnessing a fluid and complex and frequently changing world of international tax law. Therefore, it is imperative that every cross-border business decision must consider its effects and exposure to its international tax obligations. These exposures may include non-compliance penalties, interest, fines, and fees.
Notwithstanding the ever-changing macro, micro and socio-economic environments that businesses are expected to navigate on the international level, with the right systems and structures, supported by the best equipped executive management team, companies can implement ideal business model, which is conducive to making money, scalable and agile for continuous growth, and tax efficient.