Global Issues in Taxation
January 17, 2017
The tax landscape has been unsettled in many respects and this trend can be expected to increase in the next few years. It would be prudent for boards to provide clear guidance to management regarding the board’s risk tolerance in this area, and to ensure that the proper level of oversight and foresight are being exercised and sufficient resources are being dedicated to these issuers. Key developments include:
- U.S. tax reform. If enacted, U.S. tax reform likely will have a profound impact on corporations and other taxpayers. Apart from rate reduction, fundamental adjustments could be made in the rules for capital recovery, interest and other deductions, the treatment of imports and exports, and the taxation of foreign operations. There will be winners and losers. Companies should evaluate the impact that the emerging legislative proposals would have on their businesses and consider steps to optimize their position, and may wish to participate in lobbying efforts to influence the outcome.
- International tax uncertainties. The Organisation for Economic Co-operation and Development’s (OECD) base erosion and profits shifting (BEPS) project and other developments have energized foreign governments and the European Commission to more aggressively assert taxing authority over U.S.-based multinationals, through prospective changes in tax law as well as audits of prior years. Multinationals should realistically assess their exposures and consider ways to most effectively minimize tax risks from their international operations in this evolving environment.
- The European Commission’s State aid decisions. Much attention has been given to the recent investigations by the European Commission into alleged illegal State aid granted through tax rulings with the imposition of massive recovery orders to several multinational companies, including Fiat, Starbucks and Apple (for an amount of more than €13 billion). The European Commission’s expansive interpretation of State aid principles raises questions that will probably take several years to be adjudicated in appeals before the European courts. In the meantime, multinational companies with significant business in Europe should review any tax ruling they received in light of the recent European Commission decisions to confirm, for instance, that transfer pricing or internal profit allocation rulings are based on robust, documented transfer pricing studies and reflect economic reality. Tax rulings obtained through atypical ruling procedures, such as unpublished rulings, negotiated rulings, rulings granted following limited review by tax authorities or rulings granted for an extended period of time are more likely to attract the European Commission’s attention and should be reviewed with particular care.
- Increased tax information disclosure. The mandatory reporting of country-by-country tax information and the sharing of information among tax authorities are a new reality, and multinationals should expect that tax authorities around the world will use that information to audit transfer pricing and other practices. Also, proposed changes to the U.S. GAAP rules would require U.S. multinationals to disclose information regarding their non-U.S. tax and cash positions that may lead to increased scrutiny of their tax planning strategies by both governmental and non-governmental actors.
- Risks from non-traditional sources. Another troubling recent phenomenon has been the leaking of massive amounts of confidential information by non-governmental actors (e.g., the Panama Papers, Luxembourg and Swiss leaks). Whistleblowers seeking bounties under various government programs have brought companies’ allegedly questionable tax practices to the attention of regulators, prompting securities, tax and other investigations, including under state “false claims” laws (with potentially substantial penalties). Also, in Europe, tax authorities have resorted to highly publicized “midnight raids” and criminal proceedings. Management needs to be prepared to respond to these challenges and the public relations complications that they present.