Last year was characterized by fundamental changes across the global tax landscape as governments looked to reform how multinational corporations are taxed, and 2015 promises more of the same.
The tax consulting firm Taxand predicts that as governments comply with new guidelines from the Organization for Economic Cooperation and Development on base erosion and profit shifting by multinational corporations, they will clamp down further on the kinds of tax strategies that have been attracting increasing scrutiny from the public and the media.
“As we move into 2015, many governments are looking to restructure their own corporate tax systems whilst simultaneously future-proofing themselves through compliance with the OECD’s BEPS initiative,” said Taxand chairman Frédéric Donnedieu de Vabres in a statement. “2014 has been another year of change in the global tax arena, with continuing negative sentiment towards multinational tax planning. At the same time, they are looking to remain competitive with other countries to secure inward investment and economic prosperity. Multinationals appear to be caught up at the center of this complex tax landscape and must ensure they have a voice in determining the future of global tax system, before they are stuck with it for many decades to come.”
In the U.S., the reaction to the wave of corporate inversion transactions, in which U.S. companies changed their tax domiciles by merging with foreign companies in lower-tax jurisdictions, prompted new regulations from the Treasury Department and the Internal Revenue Service. According to Taxand's 2014 Tax Milestone Survey, advisors in the U.S. identified the new IRS rules on inversions, issued in September, as the most significant tax development in the jurisdiction this year. The new rules impose stricter requirements for conducting an inversion deal. Many of the survey respondents indicated they see the government’s actions as creating an unfavorable environment for business.
Implementation of the Foreign Account Tax Compliance Act, or FATCA, in the U.S., had a significant impact on reporting requirements for foreign entities. In addition, the new tangible property repair regulations in the U.S. provided significant new guidance on fixed asset capitalization.
The survey asked advisors from various countries to identify the three most pertinent tax changes introduced in their countries during the year. The vast majority related to government clampdowns on multinationals, the OECD’s BEPS initiative, and reforms in the value-added-tax, or VAT.
Evidence of an increasing government crackdown on tax planning is also evident outside the U.S., the survey found. This has been particularly prevalent in transfer pricing, with advisors in France naming the strengthening of transfer pricing documentation requirements as one of the key developments during the year. In Luxembourg, transfer pricing changes included provisions that allow the tax authorities to adjust the taxable base following certain transactions.
Companies operating in Switzerland have also been prodded in the direction of greater transparency. Agreements around automatic exchange of information and joint country tax audits were cited as the most significant during 2014, although many remain concerned about unintended consequences from such requirements, particularly potential information leaks and sensitive data reaching the wrong hands.
Other regulatory demands placed on multinationals through government measures introduced last year included widespread reform of the tax system in Spain through a new Corporate Income Tax Law. There were also changes to the rules for participation exemptions and controlled foreign corporations in Spain. China conducted a review of local preferential tax treatment. The United Kingdom has also imposed some tax loss restrictions on banks.
OECD BEPS Initiative
As 2014 saw the OECD’s BEPS initiative move into its implementation phase across the globe, advisors saw these developments as among the most noteworthy. Advisors in Switzerland identified the importance of seeing how the BEPS requirements will be incorporated into the country’s Corporate Tax Reform III, while also ensuring that the country remains internationally competitive, through the lowering of corporate income tax rates.
BEPS was also identified as a key development in Spain and China, particularly the focus on cross-border transactions. Multinationals are especially looking forward to seeing how the cross-border guidelines will be incorporated at country level.
The U.K. faces a similar dilemma and also identified BEPS as a key development, particularly country-by-country reporting requirements. However, competitiveness has also been a key theme, with advisors pointing to the continued lowering of the corporate income tax rate as a way of making the U.K. attractive as a holding company location from which to base trading activity.
VAT Changes
Indirect taxes have been a focus abroad during 2014 and Taxand has seen a number of developments in the VAT arena. In China, advisors pointed to the expansion of VAT reform to include the hotel, banking and construction sectors, which will affect multinationals operating in these industries. Luxembourg also enacted VAT rate increases.
