Rachel Russell, Head of Client Service, writes on industry
The OECD’s proposed BEPS (Base Erosion and Profit Shifting) tax rationalising initiative, which is to be presented to international finance ministers this week, has not made the front pages of many newspapers. But, for international businesses, it represents a fundamental change in their environment. A PwC partner, quoted in the London Independent concluded that ‘most multinationals are likely to be affected in some way’, and this seems accurate. The OECD’s estimate of a 4-10% increase in country’s corporate tax take will not be spread equally across companies, but it will nevertheless represent a significant impact on the costs faced by most.
Corporate tax has become a politically fraught issue in recent years and, if nothing else, it must be hoped that the new initiative will bring some clarity to the international tax system. The elimination of some of the most confusing grey areas will hopefully make it easier for companies to show that they are acting within the rules, and perhaps ameliorate the kind of reputational issues that some companies have faced in the UK and other countries over the last few years. In addition, it will provide the best companies with an opportunity to shine a spotlight on the efficiency of their structures, operations and models.
With the IMF’s warning this week that the growth of the world economy is at a six year low, a de facto tax rise across the developed world might actually seem a rather alarming prospect. In truth though, the changes are not so radical as to offer a challenge to any really well founded business model, and the actual impact is likely to be at the lower end of the OECD’s estimate.
What may be challenging, however, is the task of unwinding tax arrangements that are found to be outside the new rules. Some tax structures are so complex, and have such a large influence on the actual hierarchies of the business, that they have the effect of obscuring the true drivers of value in the organisation. Changing them will not just alter tax liabilities, but also the effectiveness of strategy and planning at a more fundamental level.
This means that minimising the negative effects of BEPS will not just be a matter of optimising tax structures according to the new rules. Instead, the organisations that cope best with these changes will be those that are able to define and measure the drivers of value across different dimensions of the business, including divisions, sectors and national business units. Where structures or strategies have been chosen with a primary aim of tax efficiency under rules which may now be inapplicable, this must be identified. An effective strategy can then be put in place to realign the company’s systems with the new environment.