The global campaign by the Organisation for Economic Co-operation and Development (OECD) to address base erosion profit shifting (BEPS) continues to occupy the attention of tax leaders of multinational companies. The sweeping initiative — designed to increase transparency and fairness — is in full swing. Across the world, tax policies are evolving, scrutiny on international transactions is increasing and structures are changing.
However, when and how multinational companies should respond to specific recommendations remains uncertain and will likely vary significantly from one country to the next.
One noteworthy development adding to the complexity already surrounding BEPS reform relates to taxation of the digital economy. A core focus of BEPS is to overhaul international tax rules to better fit today’s hyper-connected, global business environment, in which masses of income is generated online. Certain BEPS provisions already attempt to tackle the tax challenges of digital businesses and business models. In fact, nearly all European Union member states have signed a multilateral instrument (MLI) to implement measures to tax digital profits “where value is created,” regardless of whether a company has a brick-and-mortar presence in that jurisdiction.
However, seeking a short-term solution, several countries have proposed an equalization tax on turnover of digital activity — a tax on all untaxed or insufficiently taxed income generated by internet-based businesses. This proposal is putting pressure on the OECD to take measures to address digital taxation more holistically.
Such a move would raise a number of questions. For one, given the fact that the MLI is itself a treaty, what will be the legal ramifications if countries try to enact their own measures? Secondly — and perhaps most importantly — what will be the scope of digital taxation laws, in individual countries or across the international tax landscape? KPMG believes rules could emerge that are much broader than regulators, governments, or companies anticipate, potentially leading to uncertainty and potentially double taxation that could drive away business investment in certain jurisdictions.
Another BEPS-related challenge is country-by-country (CbC) reporting, which requires large multinationals to file financial information by jurisdiction on their annual returns. Tax executives are struggling to understand how to craft their narrative as well as how much information to reveal. The concern is over what tax officials in foreign countries might do once information is shared. Some tax executives feel is it critical to control their story and keep their information confidential.
— As BEPS continues to unfold, how will your organization adapt to the changing legislation ahead?
— How does your organization participate in the digital economy?
— Do you understand the impact of proposed digital taxation rules on your structure and profits?
— How will you ensure sensitive information remains confidential in your tax reporting?