To manage the rapid pace of global tax legislation, businesses like Siemens and Uber are among those that are changing their tax strategies.
Globalization, digitalisation, and ESG, according to experts, are still impacting company strategy in 2022 as governments establish and rewrite legislation to meet the complicated global economy.
These three key legislative change catalysts, according to the "big four" advisors, are increasing the complexity of handling international tax for their multinational customers.
According to Kate Barton, vice chair of tax at EY in Boston, "there is an unprecedented amount of legislation coming out as a result of those drivers. It is important for all clients to take note of them."
Taxpayers claim that worldwide legislative reforms, such as the Inflation Reduction Act passed by the US Senate, are not slowing down and that such measures will refocus the efforts of key tax authorities.
The first significant factor is globalization, which has increased the interconnectedness of governments and nations, meaning that the results of policies in one one may have repercussions in another.
According to Barton, the implementation of the Inclusive Framework and the post-BEPS climate boosted the EU's influence over issues related to international tax policy. The crisis between Russia and Ukraine is the most recent event to bring attention to the bloc's international policy amid inflation and supply chain issues.
Barton continues, "There have been geopolitical shifts in policymaking, particularly in the last couple of years."
Since the dispute has brought attention to the necessity of supply chain security through tax reform, nations are debating whether to take unilateral action or join global tax efforts. Taxpayers anticipate further international initiatives involving nations outside the Inclusive Framework, like the OECD's two-pillar approach, to be implemented.
Even though the US introduced the Tax Cuts and Jobs Act of 2017 and played a key role in the OECD's pillar two negotiations in 2021, the US's influence in policy discussions has decreased as Europe has advanced a directive on pillar two and public country-by-country reports (CbCR), both of which are significant revisions to corporate tax planning.
Even without public CbCR, Europe already has one of the most sophisticated tax transparency setups in the world, according to Barton.
According to sources, reforms in Europe and North America have given tax authorities in other countries more confidence. Because of the European Council decision on guidelines to combat the exploitation of shell corporations, which was released in December 2021, Indian authorities, for instance, are more demanding of substance criteria.
In order to demonstrate the quick speed of legislative change, Vikas Garg, director and head of indirect tax at Siemens India in Mumbai, refers to developments in India's goods and services tax (GST) system from 2017.
"A sore point for many companies has been the rapid pace of compliance requirements," according to Garg.
"The government was much more accommodating to taxpayers during the first three years of the GST regulations, but tax authorities have become more aggressive in their enforcement," he says.
"The gap in compliance and the frequency of changes in tax laws creates mistrust between businesses and tax authorities, and we have seen the government issue hundreds of tax notifications and circulars to clarify their own regulations in the last five years," he argues.
The second major force for change is the digital revolution, which has given businesses with direct-to-consumer business models a number of previously unheard-of tax benefits. Due to the absence of a physical presence, the model enables enterprises to access international markets with minimal to no tax obligations.
With more tools and training programs for authorities and taxpayers in data processing, digital invoicing, and e-filing disclosures, digital changes have improved worldwide tax enforcement.
According to studies from the big four, the growth in real-time information has increased audit activities in Europe and Asia over the past five years. Taxpayers do not anticipate a slowing in this trend since CbCR and Global Anti-Base Erosion income tax returns from pillar two may increase audit activity in the majority of nations if authorities can make use of the data.
The rate of technological progress in real-time information transmission, according to one tax director at a security firm in Geneva, is a rising area of worry since it forces many internal departments to devote a lot of effort to maintaining their data management systems.
The tax director claims that "it is still not clear how all this information will be processed and used, and we have not seen many instances of CbCR-based audits yet."
""There is a big reputational risk in publicising the information for a non-technical audience," he continues, "because they can misinterpret the disclosures in ways that lead authorities to come knocking."
The abundance of additional data may be confusing to tax authorities, and some experts even believe that data from several disclosures may be too much for tax administrations in developing nations.
The tax director at the security business refers to the drawbacks of having too much data as "garbage in, garbage out."
Many corporate tax teams have also stated that due to extremely complicated laws and a lack of professionals in the market, they would not be able to budget for the accompanying tax technology expenditures and adjust to the pace of legislative changes.
Garg is seeking tax technology experts to join his team since "we have found that many off-the shelf solutions require a significant amount of customisation."
"That is usually where we encounter a challenge in finding readily available solutions that a company can simply plug in and start using."
"These challenges have made us less hesitant to develop our own in-house technology solutions in response to these difficulties," he says.
Companies are under pressure from the global upsurge in sophisticated analytics technologies to thoroughly document their tax declarations or risk being a target for upcoming desk-based audits. Even seemingly unimportant commercial considerations, like misclassifying a cross-border transaction, might result in significant penalties and reputational harm.
A K&L Gates international tax lawyer who requested anonymity said seemingly little treaty reference mistakes may result in fines of millions of dollars.
The lawyer claims that "counsel shared an agreement with the local authorities that referenced the Mauritius-China treaty incorrectly," stating that the error was to write "Republic of China" rather than "the People's Republic of China."
The emphasis on environmental, social, and corporate governance (ESG) results is the third important factor influencing international tax. Internal tax regulations are guiding the whole business's ESG activities to boost sustainable investment and reduce reputational concerns for major corporations.
Although tax incentives have played and will continue to play a significant role in promoting sustainable, ESG measures are already changing company behavior, according to Barton.
Investors are increasingly determining whether to boost capital for companies like Uber, which has a tax governance structure that promotes sustainability throughout the organization, based on tax methods connected to ESG outcomes. Investors are comparing corporate tax obligations and sustainable tax policies among companies in the same industry to identify longer-term concerns.
According to Uber's yearly 10K investor relations filings in the US, several businesses, including Uber, relate ESG outcomes to funding alternatives. Uber makes it a goal to navigate ecologically friendly tax benefits everywhere.
The policy and governance of the tax team is enhancing the ESG metrics for the entire business, which are becoming more significant to institutional investors like banks and pension funds. Even though they do not appear on financial accounts, internal tax systems can significantly affect funding.
Prior to leaving Uber in May 2021, Francois Chadwick, vice president of tax and accounting, stated on a conference call with KPMG that changing internal policies had a significant influence on business choices.
"The decision to change [in-house policies] came after key markets such as London and some German cities introduced incentives to phase in electric vehicles for a net-zero economy," according to Chadwick.
Among other information, Uber's most recent ESG report in 2022 emphasizes that fuel taxes and carbon tax credits have a significant impact on the company's effective tax rate.
Due to suggestions for a reformed emissions trading system, energy tax directive, and carbon border adjustment mechanism, the EU Green Deal is already having an impact on business changes at other firms. On the opposite side of the Atlantic, the US Inflation Reduction Act offers tax breaks for spending money on nuclear power generation, electric vehicles, and renewable energy.
In response to talks at the G20 finance ministers meetings, which will be chaired by Indonesia in 2022, nations in the Asia-Pacific region are also adopting objectives for carbon reduction.
Since most sustainability incentives are long-term and intended to spur larger organizational reforms, it is essential to strike a balance between short- and long-term strategies.
While ESG, digitization, and globalization have resulted in a record amount of legislation having an influence on business taxes, tax directors have begun to take those factors into account in their long-term strategies.
Planning must be done in accordance with these motivations and the consequent regulations, according to Barton.
The majority of taxpayers concur that change is the one constant in the demanding and complicated advances in worldwide tax administration and policy. While complying with near-term changes as well, internal tax teams have already begun planning for future trends; yet, because of a lack of resources, challenges still exist.
By fLEXI tEAM