Remember the days when there was only one way to file a tax return, inquiries were made through the U.S. mail, and the tax library was filled with shelves of books? It sounds antiquated, but wasn’t the tax world just a bit simpler back then? The re-energized and heightened momentum on a worldwide scale for global tax reform over the past few months and most recently with a sweeping overhaul agreement reached on Oct. 8 setting a global minimum tax, has given us all (tax professionals and beyond) quite a lot to talk about.
Beginning back in 2015 with the Organization for Economic Cooperation and Development base erosion and profit shifting (BEPS) initiative, there have been persistent concerns around the shifting of profits to low-tax jurisdictions in an effort to minimize corporate tax liabilities.
The new blueprint outlining two pillars is ever evolving. Pillar One pertains to new nexus and profit allocation rules, which is a shift in focus after being borne from what was an effort to establish a digital tax.
Pillar Two calls for a global minimum tax with a commitment of 15%, which has been agreed upon by 136 countries. The interconnection of the Biden administration’s legislative efforts and congressional views with Pillar Two adds more fuel to this fire.
With an agreement reached at the G7 and G20 in the early summer—and most recently with the international community coming together with 136 (out of 140 members of the OECD/G20 Inclusive Framework on BEPS) joining the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy—
this is an unprecedented era for the international tax community. It is time to lobby and come together for the larger scale refresh that the tax landscape needs.
Most would say technology has simplified things, but has it? The ever-connected world has us clinging to our laptops and enables instantaneous sharing of records and concerns to colleagues and advisors’ miles away. The irony for many tax professionals is that the tax world is still playing catch-up. In this landscape every transaction in a business big or small has a tax implication.
While we would never want to stifle innovation and move away from calculated risk—as the Covid-19 pandemic has given us the opportunity to rethink and reprioritize our everyday lives, it has also provided a perfect opportunity for the tax world to do the same and get back to basics on a unified universal scale.
There is something to be said about a consistent set of rules. Black and white, with little room for interpretation or gray area. As like anything in life, there will always be outliers, and in this case, nuances in tax law on a country-by-country basis, but if we don’t make the change now, things will only get more complicated and intertwined. Digging us all into a deeper hole, shying away from a core problem. Problems never age well.
While the solution is no small feat and will most definitely not happen overnight, the answer is not artificially allocating significant profits with a haphazard governance process in place to monitor that there is in fact “substance” in that jurisdiction. This is not only a risky and costly endeavor, but one that is not sustainable. With the implementation of a global minimum tax, we strongly move away from this model and allow for consistency globally.
The days of establishing headquarters in low tax jurisdictions, moving head count and intellectual property, and monitoring employees in tax havens should be something we are looking to get away from. Not only is there a high cost to the business, as most of these countries (Singapore, Switzerland, etc.) have a much higher cost of living, investment made to establish a strong presence in such a country is a long-term investment for the business as a whole and establishes a presence that is hard to reverse.
Furthermore, the situation affects the operations of the business and creates extreme complexities in the supply chain. This becomes cumbersome for the entire business to operate and puts even a heavier burden on tax departments to monitor and control in a robust manner, receiving heavy scrutiny from auditors and tax authorities, and ultimately requiring additional support of tax department personnel and external third parties. Standardized and reputable processes create scale and perhaps are the real tax-efficient supply chain.
In the digital economy era, the answer needs to be that we need something more consistent and sustainable to stand the test of time. Generational priorities have shifted a great deal, and although there are concerns with how the nuances of local legislation would ultimately get passed into law and implemented, it is a step in the right direction.
There are several other areas of growth and strategic planning opportunities in tax—such as preserving and maximizing R&D incentives—that like-minded professionals can focus on. As skills among employees continue to evolve with technology at unprecedented rates, it is only fair to assume tax will need to as well. Standardization and optimization in compliance and process, data, and technology will become increasingly relevant and require focused attention. In addition, as newer areas of tax such as crypto tax or carbon tax begin to take shape, having a simpler foundation will allow for a more seamless implementation of these new tax regimes.
A more simplistic set of rules and guidelines will also naturally foster closer alignment and relationships with taxing authorities and government bodies. While we have reached historic agreement, we still have a long way to go and will need to rely on the bigger countries to come together in the implementation efforts.
If you think back to the basics of entrepreneurship, entrepreneurs aspire to scale with investors expecting it. Most businesses won’t survive unless they can scale quickly to dominate their market. If excess fails, and simplicity scales, we need to go back to the basics in a unified manner in the global tax arena. The days of the tax library and hard copies sound even more pleasing.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Shannon R. Connaghan is Strategic Tax Projects Manager at GlaxoSmithKline.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.