Across the globe, base erosion and profit shifting (BEPS) is making headlines and drawing the attention of not only governments and tax authorities but also non-government organizations, activists, lobbyists and the general public. As the public debate has spread to the Gulf Cooperation Council (GCC) countries, the focus now centers on whether global companies and wealthy individuals are paying their ‘fair share of tax’ to the countries in which they earn profits.
Mohaned Arichi, a international tax lawyer with KPMG in Qatar and Bahrain, says Qatar outbound investors need to prepare for international tax changes being made in response to the debate and position their companies to prosper in the years ahead.
BEPS refers to strategies employed by parent companies and their subsidiaries to artificially shift profits across borders in order to benefit from low or no tax rates through tax treaties and EU Directives. Although the Organisation for Economic Co-operation and Development (OECD) characterizes BEPS primarily as strategies that exploit loopholes in international tax law, certain aspects of it are illegal. As globalization evolved, international tax laws have failed to keep up with the emergence of global business. To address BEPS, the OECD constructed a strategic action plan to be completed by December 2015, as requested by the G20.
Taking a step back from the debate, what does paying a ‘fair share of tax’ actually mean? According to Mr. Arichi, there is no standard definition. “Paying fair tax is governed by values of the society in which one lives. There is no benchmark for ‘fair tax’, but what cannot be denied is that, in the public eye, a taxpayer’s willingness to pay taxes is now considered a reflection of their ethics and morality.”
Rightly or wrongly, the media and some politicians have branded some household corporate names as poor citizens because of tax structures they have employed for years, says Mr. Arichi. “In many cases, the structures merely result in profits appropriate to the functions and risks in a jurisdiction being reflected in that jurisdiction. However, the media and a significant section of society now consider many of these structures to be unacceptable.”
How can companies change public perceptions that they are not fully contributing to society? Mr. Arichi says, “Reputation management has always been important for companies. The company’s stated tax policy is a key to managing reputational risk. To withstand tax authority and public scrutiny, companies should be prepared to articulate their tax strategy and how it supports their broader business strategy.”
To this end, the company’s documented tax policy should specify its tax corporate governance and include a tax code of conduct. The tax policy should be not only incorporated in the corporate social responsibility section but also transparent to avoid, or in some cases control, any perception of artificial tax planning.
The G20-OECD BEPS project is expected to spur the largest wave of international tax reforms in the past 100 years. Mr. Arichi says that it’s vital for businesses to recognize that BEPS will revolutionize the way international business is done, especially in enhancing the transparency and accountability of companies regarding their businesses and the taxes they contribute.
The BEPS project’s outcome is expected to significantly affect developing countries that depend heavily on corporate tax revenue. For example, in November 2015, the OECD’s Task Force on Tax and Development met to review progress on tax and development made in the past year in relation to the UN Sustainable Development Goals and the BEPS project. Participants from governments, international and regional organizations, civil society and business noted how the Task Force is helping developing countries to raise revenues efficiently and fairly in support of the UN’s Sustainable Development Goals. One aim of these goals is to address the practicalities of building the social-fiscal contract in developing countries and connecting taxpayers’ expectations with the delivery of public services.
In addition, as a sign of the OECD’s willingness to strengthen the involvement of developing countries in its projects, the African Tax Administration Forum and OECD signed a memorandum of understanding renewing their co-operation on taxation for three years. The agreement recognizes the achievements of this cooperation so far and the role of this partnership in ensuring that African voices will be heard in the global tax debate.
The Action Plan indicates that proposals to address BEPS will restore both source and residence taxation in a number of cases where cross-border income would be otherwise untaxed or taxed at very low rates. However, these actions do not directly aim to change the existing international standards on the allocation of taxing rights on cross-border income. While many countries took part in the OECD’s anti-BEPS work in order to influence how international tax laws will be modified, countries also need to recognize the importance of altering their own domestic tax laws to ensure the work succeeds.
Mr. Arichi says it is essential for companies that are active primarily outside Qatar to anticipate changes of tax law and tax treaties. Some Action Plan items demand immediate attention. Treaty abuse seems to be one of the pressing concerns. Nations are being urged to alter treaty arrangements to abolish double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. As many as 89 countries are expected to sign the OECD’s multilateral instrument that will allow countries to update all their bilateral tax treaties in line with the OECD proposals, leaving room for other interested countries to sign up in 2016. At the same time, the definition of permanent establishment is widened but lacks precision, creating uncertainty for businesses about how different countries will apply the new definition.
Qatar companies doing business internationally should also consider the Action Plan items relating to mandatory disclosure, transfer pricing documentation and country-by-country reporting. Multinational companies with consolidated turnover of more than 750 million euros (EUR) will be required to file a country-by-country report. This report will disclose information by country on revenues, profit before income tax, corporate income tax paid, corporate income tax as included in the annual accounts, stated capital, accumulated earnings, number of employees, and tangible assets other than cash and cash equivalents.
The ultimate parent company is the reporting entity. However, if the parent is located in a non-OECD country, any lower-tier companies located in an OECD country that adopts country-by-country reporting will have to take over the reporting role.
Is your company ready? In summary, BEPS will profoundly companies operating in a global economy. As countries begin to implement the OECD’s proposals through their domestic tax laws, bilateral tax treaties and multilateral arrangements, GCC companies and their investors should review and monitor the implications for their current and planned tax arrangements so they can take any action necessary to thrive in the new tax reality.