Simon Henry identifies three significant trends relating to taxes paid by international companies including Shell. He argues that the length and scope of audits is increasing; there is a growing risk of more than one government taxing a company’s profits on a single transaction; and that a rising demand for companies to communicate their tax affairs is resulting in an increased compliance burden.
Looking forward, Simon says there are three key ingredients which will encourage companies to invest in countries in the long term. He favours efficient, predictable and stable tax systems; paying tax once in the country where a company creates value; and ensuring a level playing field.
Ladies and Gentlemen, good afternoon.
Every year I think the debate about big businesses paying their fair share of tax has peaked. And every year I’m proved wrong, as it intensifies even more. That certainly makes for a lively tax conference.
Over the next few minutes I’ll give my take on the lay of the land. I’ll talk about what I want to see happen. And I’ll propose a way forward.
Current state of play
So where do we stand? There are three significant trends, which have emerged in the past few years.
The first is that the length and scope of audits is increasing. Take transfer pricing. It involves more auditors, data and time than ever before.
The second trend is the growing risk of more than one government taxing a company’s profits on a single transaction. To prevent double taxation, we’re going to see many more disputes, possibly resulting in Mutual Agreement Procedures during the Base Erosion and Profit Sharing implementation process.
Thirdly, there’s rising demand to communicate a company’s tax affairs, which is resulting in an increased compliance burden. Transparency regulation is a prime example.
Of course it’s a good thing for companies to be transparent about the amount of tax they pay. But I’m far from convinced of the need for the huge number of transparency regulations, each of which requires slightly different data. This is confusing for the general public. If all governments used the same definitions, it would save time and the same result would be achieved.
Unilateral actions and differing interpretations
Beyond these trends, unilateral actions are being taken, like diverted profit taxation in the UK.
There are also efforts like the EU’s Anti-Tax Avoidance Package, which go above and beyond the G20/BEPS consensus.
Some points which are seen as best practice in the BEPS project will be a minimum standard for EU-based businesses if this Package is approved in May.
One final thought on the status quo. Governments are interpreting some BEPS measures in different ways in their respective jurisdictions.
Just look across the pond, where the US Congress has said that US tax laws are decided in Washington and not by the OECD.
Also look at what happens when it comes to taxing profits where the economic activities take place and the value is created. This is well and good as a high level principle. But dig a little deeper, and it is clear there are sometimes contrasting views on where the value is created.
Vision for the future
That’s where we are now. As for what I’d like to see happen, it’s about ensuring efficient, predictable and stable tax systems. It’s about paying tax once in the country where a company creates value. And it’s about having a level playing field. These key ingredients encourage long-term investment.
Ultimately, it’s about tax certainty. Companies like Shell have a heck of a lot of risks they need to calculate already, such as working in Russia’s Far East where the winter season lasts up to 240 days and there is ice for most of the year. Uncertainty over the tax implications of making a long-term investment in a country needn’t be one.
This future can’t become a reality unless two things are done.
First and foremost, governments must implement the actions identified in the BEPS report in a co-ordinated way. The OECD must take centre stage in ensuring this happens.
And second, I always call for more ‘co-operative compliance’ between the tax authorities and major corporate taxpayers, as highlighted by the 2013 OECD report of the same name.
Co-operative compliance improves transparency about tax affairs, gets rid of the need for long and pricey audits, improves trust, and ensures greater stability and certainty.
There you have it. A whistle-stop tour of the present, the potential future, and how we get there. In the end, it’s down to moving forward in unison.
When I look around the globalised world we live in, there are countless examples of increased interconnectivity. But with tax, there’s a danger of moving in the opposite direction, where more and more unilateral decisions are taken. This won’t benefit companies, countries or their citizens in the long run.