Apple, BEPS and Brexit: Shattering the Tax World | KPMG | Malta

Apple, BEPS and Brexit: Shattering the Tax World

Apple, BEPS and Brexit: Shattering the Tax World

Dropping a sheet of glass would send shards flying all over. Where the glass represents the tax world, we could say it has just been shattered.

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Director, Tax Services

KPMG in Malta

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Dropping a sheet of glass would send shards flying all over. Where the glass represents the tax world, we could say it has just been shattered. Some of the broken pieces can be identified as BEPS, Brexit and the European Commission decision on state aid vis-à-vis Apple.

Once again, last month KPMG has provided the platform for debates in London themed ‘Fragmentation and Controversy’ where around one thousand tax advisors, company directors and high profile experts got together to discuss the (bumpy) road ahead. Never have conversations been fraught with as many question marks on possible scenarios and options.

Let us take Brexit for example, the formal UK-EU negotiations have not yet officially commenced (Article 50 is set to be triggered by end of March 2017) and yet businesses and advisors have to start brainstorming on the manner in which potential realities could affect their strategies.   What type of relationship will the UK have with the EU? Would the relationship be similar to that under the EEA, EFTA, or the customs union model? In this sense the EEA and EFTA models appear to be less realistic options given that they promote what the British seem to have voted against, namely the free movement of persons. There is also talk of a UK bespoke model – though no one seems to know what this would translate to. Let us take Brexit for example, the formal UK-EU negotiations have not yet officially commenced (Article 50 is set to be triggered by end of March 2017) and yet businesses and advisors have to start brainstorming on the manner in which potential realities could affect their strategies.   What type of relationship will the UK have with the EU? Would the relationship be similar to that under the EEA, EFTA, or the customs union model? In this sense the EEA and EFTA models appear to be less realistic options given that they promote what the British seem to have voted against, namely the free movement of persons. There is also talk of a UK bespoke model – though no one seems to know what this would translate to. 

Turning to ‘BEPS – Base Erosion and Profit Shifting’ – a project driven by the G20 and OECD, and adhered to by several non-OECD countries (including Malta) to ensure that profits are taxed in the country where the economic activity is carried out and thus prevent the artificial transfer of profits to (low or zero tax) countries.  Multinational businesses must pay particular attention to economic substance in order to ensure that profits are attributed to the country where value creation takes place.  They must also be aware that previously non-disclosed information such as turnover, assets and number of employees in each country could soon be disclosed to tax authorities and potentially to the public at large, thus subjecting themselves to the scrutiny of investigative journalists.

Unlike the ‘ATAD – Anti-Tax Avoidance Directive’ (an EU wide law set to apply across all EU Member States and thereby providing a modicum of consistency across the EU in terms of scope and interpretation), BEPS rules are more in the nature of best practice rather than hard law and consequently the rules may easily differ from country to country. Businesses need to understand how the different rules affect their cross border transactions.  One thing is certain: BEPS is expected to cause an upheaval in international tax rules and interpretation.

Related to EU law upheavals, is the EU Commission decision on Apple, forming the backdrop for yet another tax related drama. The Apple decision focuses on the notion of state aid, a concept which should ensure a level playing field by prohibiting businesses from gaining an unfair advantage through tax credits, government subsidies etc. Despite the good intentions that underpin the EU state aid concept, issues related to state aid have been and remain an obstacle for EU countries intent on attracting FDI to their country.  The perennial struggle between the notion of tax neutrality as promoted by state aid rules and tax competition is expected to remain in place for the foreseeable future.

At this point, the key question is: in what manner should international businesses react? In times of uncertainty, management should map out different potential scenarios with their advisors and understand how these could potentially impact their business. Going forward it would be useful to have sketches of step plans to implement in case a particular scenario becomes reality in the near or immediate future. 

© 2017 KPMG, a Malta civil partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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