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Corporate Tax Review


By Tax-News.com Editorial
January 21, 2014


Since PwC, the World Bank and the International Finance Corporation first launched their Paying Taxes report nine years ago, corporate income taxes have consistently fallen, while labour taxes borne by companies have been more stable and now represent the largest component of total tax obligations. Lately though, economies around the world are adopting a range of policies as they strive to strike a balance between raising tax revenues and encouraging growth.

The latest version of Paying Taxes, released in November 2013, suggests that 14 countries significantly increased their total tax obligations or the amount of tax a case study company has to pay, while 14 others lowered theirs. In most regions around the world, the rate of decline in the total amount the firm has to pay in taxes continues to slow.

However, the report found that many more countries, 32 of them in this year's study, continued to take steps during the period from June 2012 through June 2013 to make it easier to pay taxes. The study of tax regimes in 189 economies found that for the third consecutive year the most common tax reform was the introduction or improvement of online filing and payment systems for tax compliance. The compliance burden (the time to comply with tax obligations and the number of payments) has continued to fall in 2012, but the rate of decline has slowed.

"Revenue authorities around the world are taking steps to streamline and modernise payment systems," said Augusto Lopez Claros, Director, Global Indicators and Analysis, World Bank Group. "Taxpayers in 76 economies can now file tax returns electronically from virtually anywhere on the planet. The use of the latest technologies to enhance the quality of public services boosts transparency and, for many tax authorities, it is also allowing a broadening of the tax base, a development with beneficial macroeconomic implications."

The 2014 report finds that on average a medium-sized company has a total tax obligation of 43.1% of profits, making 26.7 payments and needing 268 hours to comply with its tax requirements.

"Reforming the tax system is essential and this study shows that it is not just corporate income tax that is important. It is also a case of making decisions around who needs to be taxed, how they will be taxed, and by how much," said Andrew Packman, leader for Tax Transparency and Total Tax Contribution at PwC. "Trends in the international tax environment such as the globalisation of business, increasing competition among countries for tax revenues, and the increasing proportion of company assets that are made up of intangibles such as brand names, software and know-how, require tax systems around the world to be updated to meet modern needs."

In the remainder of this feature, we review some of the major jurisdictional and international corporate tax developments.


United States: Tax Reform On Hold?

Hope springs eternal for businesses and tax reform advocates in the United States that members of Congress will finally bang their collective heads together and work to pass a comprehensive tax reform bill in 2014 that will cut a lot of the "pork" from the US tax code and leave room for a corporate tax cut; with Japan having trimmed its corporate tax in 2012, the US has the highest statutory rate of corporate tax in the OECD. Unfortunately, politics is likely to get in the way.

Much of the legwork has already been done by Congressmen Max Baucus (D - Montana) and Dave Camp (R - Michigan), chairmen of the Senate and House tax-writing committees respectively. Indeed, Baucus released four tax reform discussion drafts towards the end of 2013, including a controversial proposal for United States international tax reform, which immediately ran up against opposition from Republican leaders in Congress, as well as from the corporate sector, and a package of proposals that focuses on streamlining energy tax incentives.

However, President Barack Obama's intention to nominate Baucus as United States Ambassador to China has put into doubt the possibility of achieving federal tax reform in 2014. Baucus's imminent departure from the Senate Finance Committee has led to obvious concern being expressed as to whether tax reform will be at all possible in the short term, especially as Camp was also unable to fulfil his promise to introduce a US tax reform bill into the House by the end of 2013, following a meeting in November with other Republican House leaders.

Camp has vowed to keep fighting for his most cherished cause however, and he is talking up the possibility of a tax reform bill materialising in the House of Representatives early in 2014. The trouble is however, it is highly unlikely to pass a Democratic Senate unless it raises revenue, and the vast majority of Republicans would sooner wait for hell to freeze over than raise taxes. So tax reform remains a distant prospect at the moment, although a shift in Congressional power after November's mid-term elections could alter the landscape.


France: Hollande Now On The Side Of Business?

After almost two years of tax hikes on an unprecedented scale, President Hollande has been making vague noises about cutting taxes for businesses as his government desperately attempts to create jobs and spark economic growth. So while welcoming Hollande's announcement in January 2014 of plans to lower the fiscal burden on companies in France within the framework of a "responsibility pact," Pierre Gattaz, President of French employers' federation Medef, has nevertheless demanded clarification as to the precise scale of the envisaged tax cuts.

The change in emphasis in France's tax policy comes as French macroeconomics research institute Coe-Rexecode says that the painful "fiscal shock," meted out by the Socialist Government in 2013, merely served to stifle any signs of economic growth in France.

Unsurprisingly, business groups have long been calling for some relief from taxation, including Geoffroy Roux de Bézieux, Vice President of the French employers' union Medef, who in November 2013 underlined the need for the Government to urgently lower the tax burden on businesses in France to enable companies to reinvest.

It's a shame then that French taxpayers will have to wait another year before experiencing the government's promised tax "pause."


India: Vodafone and Retrospection

Cultural differences and bureaucracy have always made India a challenging place to do business for foreign investors. But since the government rejected a verdict from the highest court in the land in a case involving Vodafone, tax can be added to the list of challenges.

Reports from India suggest that Vodafone has responded to an approach from the Finance Minister by agreeing to conciliation talks at the Ministry in an attempt to resolve one or more of the outstanding tax issues between the parties, and that the talks are to take place in January - two years after the Supreme Court was supposed to have a settled a USD2bn tax dispute relating to Vodafone's acquisition of Hutchinson Essar in favour of the British company.

However, the Indian Government has yet to accept recommendations on retrospective taxation, the economic adviser Parthasarathi Shome has confirmed.

Shome has played an active role in numerous high profile initiatives launched by the Government in an effort to improve the country's much-criticized tax system. However, his recommendation that the government not proceed with a retrospective change to taxation seems to have fallen on deaf ears. He warned that implementing a retrospective, source-based approach to taxation "will send wrong signals to investors and cause uncertainty. It should be in the rarest of rare cases."

Adding to the confusion, in January 2014, India's Income Tax Department challenged a court order to freeze one of its many demands on Vodafone. The telecoms giant was accused last February of undervaluing shares transferred between Vodafone India and Vodafone Teleservices Mauritius in 2007-08. Vodafone challenged the Transfer Pricing Order in the Bombay High Court, arguing that the Order had "no base in law," because share subscriptions do not fall under the remit of India's transfer pricing rules.

Nevertheless, after a blip in 2012, foreign direct investment figures seem to be holding up well. The Vodafone case and the government's clumsy attempt to legislate around it have undoubtedly damaged India's image, however.


Mexico: Gets Long Awaited Tax Reform

Mexico's much-anticipated tax reform bill, which includes measures affecting the direct and indirect taxation of corporate taxpayers, has been published in the country's Official Gazette, completing the enactment procedures.

The reforms, passed by Congress in October 2013, cancel a phased cut in corporate income tax enacted under previous legislation. This would have cut corporate tax by 1 percent to 29 percent in 2014 and by a further 1 percent to 28 percent in 2015. However, as a result of the new bill, corporate tax will remain at 30 percent in 2014 and subsequent years. 

There are also important changes to the taxation of dividends, the maquiladora tax incentive regime and value-added tax, while the alternative minimum tax, also known as the "flat tax," or IETU, has been abolished.

The reforms have received a mixed reception from investors, with many observers suggesting that they fall well short of the sort of changes needed to unleash the country's full economic potential. Nevertheless, Standard and Poor's Ratings Services has raised the country's investment-grade long-term credit rating on the strength of the tax and energy sector reforms which it believes "bolsters Mexico's growth prospects and fiscal flexibility in the medium term." However, S&P concluded that as, in the past, Mexican Governments "have had difficulty in realizing projected increases on the tax base following tax reforms."


UK: The Carrot And The Stick

The United Kingdom Government has succeeded in sending out a "very clear message that the UK is open for business," accountancy firm EY has said.

EY claims that more than 60 multinational companies are currently looking to complete global and regional headquarter relocations to the UK during the next 18 months. One year ago, EY was working with 40 such businesses, with 20 having now completed the transition. The firm estimates that the UK could expect to reap over GBP1bn in additional annual corporation tax revenues if all of the moves are successful.

The UK has backed its words with deeds by cutting the rate of corporate tax to 20% (by 2015) and reforming its foreign profit legislation.

On the other hand, hardening attitudes towards corporate tax avoidance in parliament give the impression that the UK welcomes big business on the one hand, but then publically rebukes them on the other. For example, HM Revenue and Customs (HMRC) has said that it "does not hesitate to take large businesses to court if necessary to secure the tax they owe," hitting back at the Public Accounts Committee's (PAC) accusation that it "seems to lose its nerve" in such cases.


Switzerland: Eternal Tax Reform

The matter of corporate tax reform seems to have been on the agenda in Switzerland for what feels like an eternity.

Now in their third stage, the reforms are designed to enable Switzerland to maintain its tax appeal, strengthen its ability to innovate, and give a boost to the country as a business location. They are based on solutions that ensure legal certainty, are accepted internationally and are balanced from a fiscal policy viewpoint.

Tax reforms, although often well-intended, can often have the negative side-effect of creating uncertainty. But these latest proposals appear to have the full support of the business community as represented by Swiss business federation Economiesuisse

Based on the results of a consultation with the cantons, the Federal Council will decide how to proceed and instruct the FDF to prepare a consultation draft.


Brazil: A Tax Minefield

Brazil is another country which professes to welcome foreign investors with open arms, yet its tax system and the attitude of government at times seems anything but welcoming.

It is said that it takes a business on average 2,600 hours a year to comply with Brazil's taxes, so the potential traps and pitfalls of doing business in Brazil are clear to see. Yet the government has been very keen to apprehend those taxpayers which fall short of its challenging compliance standards.

About BRL20bn (USD8.6bn) in back taxes was collected in November alone through Brazil's corporate tax settlement program known as Refis, according to Federal Tax Secretary Carlos Alberto Barreto on December 6, 2013, bringing the total amount of extraordinary tax revenue gathered for the year to more than BRL24bn. Barreto attributed the large collection in November partly to the offer of a discount for companies which made a full repayment of overdue taxes.

An estimated 30,000 companies took part in the program, including at least 75 financial institutions and 55 multinationals, Barreto said. Mining giant Vale and pulpmaker Fibria Celulose were among the participating companies.

The cash will help the Brazilian government meet its 2013 targeted primary budget surplus of BRL73bn, which would ease fears of a sovereign debt rating downgrade in 2014.

Brazilian mining giant Vale was one of the companies which took part in the scheme, with the company announcing in on November 27, 2013 that it had agreed to pay BRL22.33bn in back taxes, to bring to an end a decade-long dispute with the government over the taxes. It will spread the payments over 15 years, with a first payment of BRL5.97bn, 27 percent of the total, made in December 2013.

On the plus side, the Brazilian government has decided to eliminate a 1.5 percent tax on companies issuing local shares linked to overseas depositary receipts (DRs), interim Deputy Finance Minister Dyogo Oliviera said on December 24, 2013. It is hoped that the removal of the tax, which is known as IOF, will do away with a discrepancy between the share price in Brazil and the price of a DR abroad, Oliviera said to reporters.


EU: Exceeding Its Tax Jurisdiction?

The European Commission has been at the forefront of international campaigns to reduce tax avoidance, and its latest legislative move in this area has been close loopholes in its Parent-Subsidy Directive, allegedly used by some companies to escape taxation. Under the changes, firms will no longer be able to exploit disparities in the way that intra-group payments are taxed across the European Union. The Commission hopes that the Directive will then be able to provide a level-playing field for "honest" businesses.

Tax Commissioner Algirdas Å emeta said of the reforms: "EU tax policy is heavily focussed on creating a better environment for businesses in the EU. This means breaking down tax barriers and tackling cross-border problems such as double taxation. But when our rules are abused to avoid paying any tax at all, then we need to adjust them. [The] proposal[s] will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses."

However, reacting to the Commission's announcement, Cormac Marum, head of tax advisory at UK200 Group member firm Harwood Hutton, raised concerns about the reach of the Commission's plans, noting in particular that the Commission does not have jurisdiction over the corporation tax policies of individual Member States. 

David Ingall, past president of the UK200 Group, was more strident in his criticism of Å emeta, remarking that the initiative offered "a good example of an EU Commissioner jumping on the bandwagon to justify their existence."


BEPS: The Digital Economy, Transfer Pricing And Intangibles

The Organization for Economic Cooperation and Development (OECD) has launched a public consultation seeking input from businesses concerning the taxation of the digital economy as part of its Base Erosion and Profit Shifting (BEPS) work.

The consultation in particular asks businesses how the Internet and new technologies have impacted their business models; the location in which value is created or monetized; what challenges are encountered when attempting to establish the location and extent of tax liability; and lastly, asks businesses their opinion on how business models and supply chains may evolve in the future due to advances in information technology.

In publishing an update for G20 leaders in July 2013, the OECD earlier identified that, in order to provide recommendations by September 2014 to enhance nations' ability to levy value-added taxes and income taxes on online sales of goods and services, and their suppliers, "it will require a thorough analysis of the different business models, the ever-changing business landscape and a better understanding of the generation of value in this sector."

The OECD explained: "Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the characterization of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services."

In January 2014, the OECD published feedback received from a total of seventeen stakeholders in response to its consultation.

The following stakeholders have contributed to the consultation:

  • The Association for Financial Markets in Europe & the British Bankers' Association;
  • Bates White Economic;
  • BEPS Monitoring Group;
  • The Chartered Institute of Taxation;
  • The Consultative Committee of Accountancy Bodies - Ireland;
  • Deloitte LLP;
  • Digital Economy Group: Baker & McKenzie LLP;
  • The European Banking Federation;
  • Greenwich for FFTélécoms;
  • The GSM Association;
  • Informa Group plc;
  • The International Bar Association;
  • The International Bureau of Fiscal Documentation;
  • Solocal Group;
  • Swiss Banking; and
  • WTS Tax Legal Consulting.

November 2013 also saw the OECD hold a public consultation on transfer pricing at its Conference Centre in Paris, focusing on the transfer pricing of intangibles and on aspects of the BEPS Action Plan such as documentation and country-by-country reporting.

The event was organized by the OECD's Business and Industry Advisory Committee (BIAC), and attracted 150 business, academia, civil society and press representatives from more than 35 countries. It was also broadcast live via the internet.

Will Morris, who chairs BIAC's tax and fiscal policy committee, said during closing remarks that BIAC's principal concern was to design a system that would be useful without creating an additional information-gathering burden, and he was "hopeful" that this would be achieved. However, he added that more work had to be done on standardizing transfer pricing documentation, observing that "smarter" information was needed rather than more information.

As regards intangibles, Morris added that although transfer pricing works in many areas and should be the starting point, there may be good reasons for diverging from it, and that this should be acknowledged. Rather than classifying a different approach as just another arm's length standard method, the alternative tax principle being used should be articulated clearly and transparently.

Morris described BEPS and the intangibles project as a clash "between a high-level political project on a short time fuse, and a profoundly technical multi-year project," and he said he welcomed the opportunity to re-examine principles in a way that would reunite the OECD with the BRICS countries while also taking account of less developed nations.

Michelle Levac, who chairs Working Party No. 6 of the OECD Committee on Fiscal Affairs, explained that the consultation built on previous public consultations held since 2010 and on input from developing countries received through the Global Forum on Transfer Pricing and regional events. 

She confirmed that the Working Party would now be able to finalize the OECD guidance by September next year, in accordance with the BEPS Action Plan.

BEPS is a key area of concern for the G20. The declaration signed by participants at the G20 Summit in St Petersburg last September claims that this practice, if left unchecked, can "undermine the fairness and integrity of our tax systems [and] fundamentally distort competition, because businesses that engage in cross-border BEPS strategies gain a competitive advantage compared with enterprises that operate mostly at the domestic level."

The need to address BEPS was stressed at the G20's Los Cabos Summit in 2012, and the OECD was asked to report on what action can be taken in this area. All non-OECD G20 countries have now signed up to a BEPS project, through which they will develop proposals and recommendations for tackling the issues identified by the OECD.


And Finally: Vodafone Has Nothing To Hide

With the OECD and the G20 preoccupied with BEPS, and with the issue of corporate tax avoidance causing such a public stir all around the world, Vodafone's voluntary release of details of its tax affairs on a country-by-country basis made interesting reading.

The publication, issued in December 2013, relates to the year ended March, 2013, and updates data first made public in June. It provides an overview of the telecoms group's total contribution to the public finances in each of its countries of operation, including direct and indirect cash taxes paid, as well as non-taxation based government revenue contributions.

In the 2012-13 financial year, the UK-based firm's global businesses paid more than GBP4.2bn (USD6.9bn) in direct taxes and over GBP3.2bn in other non-taxation related fees and levies. GBP6.1bn was contributed to national governments through indirect taxes.

Vodafone's effective tax rate for the 2012 financial year was 25.3%, slightly above the global average corporate tax rate and probably more than people might expect.

Although these figures are for Vodafone's global operations, it is interesting to note that the total tax paid by the group would fund the US federal government for a little more than a day. So it seems that the tax avoidance issue is as much to do with spendthrift governments as it is with BEPS. But while companies are now expected as never before to act as ethical global citizens when it comes to taxation, the requirement that governments spend their taxpayers' dollars wisely does not seem to be part of the bargain.

 

Tags: tax | Tax | business | India | tax reform | Brazil | France | G20 | Mexico | services | transfer pricing | United States | Finance | Europe | tax avoidance | Switzerland | Transfer Pricing | compliance | court | legislation | fiscal policy

 

 

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