With the introduction of the Organization for Economic Co-operation and Development (OECD) and the G-20 Base Erosion and Profit Shifting (BEPS) Action plan as well as BEPS 2.0 Two-pillar approach, the question arises for multinational companies: is there still room for tax planning?
This article examines the issue of maintaining the need and existence of tax planning as a legitimate and economically recognized instrument of corporate strategy.
Does tax planning still exist?
In the 1990s, tax planning was seen as a necessary entrepreneurial tool for multinational companies – partly justified by high tax rates coupled with the possibility that, in the case of cross-border transactions, the accumulation of tax jurisdictions could be considerably reduce the taxable profit, or even eliminate it entirely. Therefore, tax planning has mainly focused on so-called quantitative tax planning.
Since the introduction of the BEPS Action Plan and BEPS 2.0, these efforts to minimize the tax burden have been systematically combated at international level by the conclusion of international conventions (OECD, G-20) whose main objective is to prevent aggressive tax planning.
In other words, the objective of OECD member countries is to define a fair tax burden for companies and a “fair” distribution of total tax revenue among member countries. In addition, the second pillar sets out the intention to achieve some degree of global tax harmonization in the form of minimum taxation.
As a result, tax planning has not been abolished, but has become more difficult than before for multinational companies.
Effects of changes in international taxation
- Features of tax planning
Until recently, tax planning was primarily aimed at optimizing the effective tax rate (ETR), ie the quantitative element of tax planning. However, the ETR relates exclusively to taxes on profits. Taxes reported above the tax line in the annual financial report were often not covered by tax planning strategies.
Tax planning activities should include, on the one hand, tax planning through the organizational structure, such as decisions regarding the legal structure (subsidiary, branch, holding companies, etc.), the choice of jurisdiction and the relationships agreements between group companies mainly focusing on profits and withholding taxes. On the other hand, tax planning must take into account the organization of business processes, including taxes such as sales tax, value added tax, customs duties, stamp duties, withholdings at the source on the services.
- Legitimacy of tax planning
The company has a duty towards its stakeholders to manage its resources economically. Considering that tax payments lead to “cash out” effects, which are then no longer available for other investments, strategic tax planning represents a legitimate and indispensable entrepreneurial task. The avoidance of double taxation is also supported by the tax treaty network as well as the international efforts of the OECD BEPS project.
- Qualitative element of tax planning
Newly introduced or proposed restrictions on tax planning do not make planning per se impossible, or even replace it. On the contrary, tax planning, which used to be purely quantitative, has now been extended to include a qualitative element.
Tax payments are now also assessed by companies in terms of sustainability and socio-political aspects. It is therefore no longer a question of (only) minimizing the tax burden by playing on hybrid mismatches in national tax legislation; more importantly, tax planning now aims to optimize the tax burden under the principle that taxation of profits should take place where the value-creating functions are performed.
In other words, the qualitative element of tax planning uses tax incentives if they are aligned with entrepreneurial value creation and business goals.
With regard to the detection, mitigation and avoidance of risks, tax planning is imperative in the context of the continuous efforts of tax administrations to digitize and automate work processes. The functions previously carried out by the internal tax services are now carried out by the tax administration. For example, in the area of indirect taxes, internal data is transmitted directly to the tax authorities and evaluated by automated means. This is very close to a “real time” audit.
To provide standardized data to the tax administration, the internal processes must be defined and structured according to a detailed tax control framework.
Tax authorities exchange information, the complexity of tax assessments increases and lengthy reconciliation procedures are required. This triggers a corresponding demand for resource generation in the relevant tax administrations and calls for appropriate dispute resolution mechanisms. Adaptation is likely to take some time, and therefore involves some risk of double taxation and double non-taxation, which may require resolution by appellate courts.
The future of tax planning
As a result of these developments, qualitative tax planning will become much more important. On the one hand, it is important to ensure that the group’s internal narrative regarding the business model is designed consistently across all countries. On the other hand, in order to be able to respond to new external requirements, a more automated tax control approach along the value chain is essential when it comes to understanding in detail the processes of the different business units.
The internal tax control system aims to ensure that the business lines discuss planned changes with the group’s internal tax system upstream, in order to ensure that these changes are only initiated if no tax regulations have been overlooked. in the process.
Moreover, with the extension of the tax nexus, it will become more difficult to avoid the creation of a permanent establishment with tax planning instruments. An important aspect of the “fragmentation” of a multinational enterprise’s tax liability is the significant increase in compliance costs for taxpayers.
Summary and outlook
International tax planning should and will continue to exist. International measures are not intended to eliminate international tax competition, but to limit it to a fair and reasonable level. Tax planning remains a legitimate business tool, as long as it is exercised within certain internationally recognized limits.
To avoid major disputes with local tax authorities, increasingly comprehensive tax compliance will be required, the human and financial effort of which can be partially offset by digitization. To this end, many companies have also introduced a tax code of conduct for tax planning and compliance purposes, which is now considered part of sound corporate governance.
Therefore, qualitative tax planning will take on greater importance in the future. The effective tax burden of a multinational company will be considered in relation to the principles of sustainability and corporate social responsibility, which will become increasingly important.
As a result, it is no longer a question of minimizing the tax burden by playing on inconsistent local tax rules (hybrid mismatch in local tax legislation), but rather of legitimately optimizing the tax burden (structural, operational, cross-border planning) as well as the recognition that the taxation of profits should take place where the value-creating functions are actually carried out.
Qualitative tax planning is therefore not contrary to quantitative tax planning; on the contrary, it introduces an additional accent which is likely to become increasingly important today and in the future.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Martin Arzethauser Ph.D. is Head, Group Tax, at Kuehne+Nagel Management AG.
Daniel Lehmann Ph.D. is a Swiss Certified Tax Expert and Anke Stumm Ph.D. is a Swiss Certified Lawyer/Tax Expert with Bär & Karrer, Zurich.