The Shifting Sands of International Taxation

The shifting sands of the global tax landscape are shaking the foundations of the traditional business plans and models of companies and multinationals worldwide. The changes, set in motion by globalization and the advances brought about by digitalization, span countries and international regions, leaving none untouched.

If you are in process of planning your tax strategies for the short and medium term, below are some trends that you need to be aware of.

Global Minimum Tax Rate

By the end of 2021 the news had broken: Large companies—those with consolidated revenues above 750 million euros ($848 million)—will pay a minimum tax rate of 15% as of 2023. Thus, decades of tax competition between governments to attract foreign investment will come to an end.

The agreement on the global minimum tax rate comes with many additional questions, and the answers to these questions will further impact the tax policies and strategies of companies affected by the changes:

• How will governments where the tax rate is now below 15% react? Will they enforce a 15% tax rate across the board, or will they enforce a “hybrid” system, where only a selected number of companies will be subject to 15%? Although at first glance the minimum tax rate seems to impact only large multinationals, the response of local governments could have a wider impact if the decision is simply to alter the local corporate income tax rate.
• What will happen with tax incentives? Tax incentives have been used to lower effective tax rates. But with the imposition of a minimum rate, that will be less effective in attracting foreign investment, and governments might need to focus on other incentives, such as subsidies or special economic zones. For businesses, this could signal a change in their business models or investment plans, because some of the tax incentives they counted on might not be available any longer, or because they will need to meet certain criteria to be eligible for the new subsidies or grants.
• How will the tax base be determined? Although the Organization for Economic Cooperation and Development (OECD) Pillar Two is not about harmonizing the tax base, the ultimate outcome could be that governments become more aligned in terms of what would be taxed and how.
• What will happen with the accumulated losses? The question is whether local tax losses will still be recognized for the purpose of the global tax rate or will the top-up apply regardless. If the latter, then the benefit of the accumulated tax losses will need to be forgone and companies might think of strategies to maximize the use of the accumulated tax losses in 2022.

As we can see, there are plenty of unknowns and still only 12 months left until 2023. As such, tax departments should already start working on:

• Reviewing global operations to identify whether the global minimum tax rate would apply and whether there are changes that need to take place in legal structures, operations, business models, transfer pricing policies. For example, multinational companies that have significant user or customer bases in countries where they currently do not have a physical presence could be impacted by the rules.
• Modeling tax costs and cash flow impacts. Multinational companies will also need to understand whether they can obtain foreign tax credits under the new proposed rules based on local country laws.
• Monitoring the legal changes enforced by low-rate jurisdictions.

Corporate income tax departments will have to give thought to the changes that need to be implemented, given the fact that they will impact systems and data, tax organization and governance.

Digital Tax Administration

Tax authorities are focusing on digitizing their interactions with taxpayers, and they continue to drive changes in the way in which tax information is filed (68% of tax administrations require tax returns to be submitted online), in the level of tax detail (30% of tax administrations require tax information at transaction level) and in terms of real-time information (40% of tax administrations require real-time invoicing information). Usually, real-time information is the next step after detailed transactional reporting is mandated.

Poland is a good example of a tax jurisdiction where detailed transactional reporting is required. The deadline for presenting such reports is usually three to seven days. Such a tight deadline can be achieved only with the right process and technology in place. And to prove the previous point, the next step in the digitization journey of the Polish tax authorities is providing real-time invoicing information. E-invoicing will be optional in 2022 and mandatory in 2023.

Ten other countries have announced their intention to introduce in 2022–2023 either e-invoicing (e.g., Greece, Bulgaria, Vietnam) or detailed transactional reporting (e.g., Romania).

Why are these trends important for the tax departments? Almost 90% of tax personnel say that digital tax administration will have a significant impact on tax operations and tax resources.

What should tax departments do to stay on top of the changes?

• Closely monitor tax changes in the countries in which they operate and assess the impact on the cost of compliance. Transactional or real-time reporting usually requires significant changes in processes and technology.
• Assess the talent needed to adapt to the tax authorities’ new ways of working. Implementing transactional or real-time reporting usually requires tax analytical skills and good knowledge of tax technology.
• Assess the cost of the resources needed. Transactional or real-time reporting requires better data management and better tax determination skills. Both data management and tax determination could be improved by a mix of automation and uplift of resources. As such, tax leadership should assess whether the overall cost of ownership (automation, technology, and resources uplift) is lower by using an in-house model or an outsourced model.

Changes in tax administration should be closely monitored and should be reflected in data management and technology adoption strategies. The tax department should be one of the main stakeholders of internal digitization and automation strategies because of the tax impact that such decisions could have.

Tax Audits and Tax Control

A direct consequence of the digitalization of tax administration is the way in which tax audits are being conducted. There are two major trends that we can easily identify: Tax administrations work closely with taxpayers and help them comply with the rules and regulations (52% of world tax administrations provide online guidance, help lines or consultative support); and tax administrations take a tax–risk approach in managing tax audits.

Both the OECD and the EU have implemented cooperative tax compliance programs for large businesses whereby tax administrations and companies partner to manage tax risks, improve tax control frameworks, and better understand the challenges of applying various tax rules. Such programs have been piloted in the Netherlands, U.K., and U.S., and have slowly been extended to other countries, such as Austria.

The benefit of such programs is that both taxpayers and tax authorities spend less time on tax controversy, on tax audits, and on explaining their tax positions.

Tax administrations have also used the transactional data collected from taxpayers to improve the tax risk assessment process. For example, Chinese tax authorities use big data to match the data communicated by taxpayers to various authorities (Statistics, State Welfare Administration, Customs Bureau, Administration for Market Regulation, etc.) and perform ratio analysis by industry to identify contradictory information or outliers that will trigger tax audits.

The methodology applied by the Chinese tax authorities is not unique. In many countries where transactional reporting is required, data from various sources is correlated to identify discrepancies and trigger tax investigations.

While tax authorities are looking at working closely with taxpayers, they are also making better use of the data to maximize revenue collection.

As such, companies should work on improving their internal control processes to ensure that reported data is accurate. More robust internal controls would also help prove solid internal governance, and reduce tax risk.

Looking Ahead

The immediate future appears quite challenging for the international tax world. It looks like no single tax will remain unaffected by change.

Corporate income tax will move into the new and unexplored territories of a global minimum tax rate.

Indirect taxes and transaction taxes will continue to be scrutinized because they are a major source of tax revenue.

Tax authorities will continue to improve the collection mechanism for indirect and transaction taxes, and the journey to detailed transactional reporting will continue, as will the journey towards placing tax liability at more central levels (e.g., making digital platforms responsible for tax reporting and tax payments).

Tax authorities will also continue to ask for a faster turnaround in terms of tax reporting, and will most likely continue to reduce tax deadlines, getting closer and closer to near- or real-time reporting.

With so many moving parts, the role of the tax department needs to shift towards being a more strategic business partner, having a seat at the decision-making table and advising business partners on business models and supply chain models. For internal departments to be able to fulfill this role, tax data management and tax compliance processes need to be smooth and straightforward, which is why companies increasingly rely on outsourcing to achieve these objectives.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Emine Constantin is Global Head of Accounting and Tax with TMF Group.

The author may be contacted at: emine.constantin@tmf-group.com