Tax administrators in many countries believe that multi-national companies (MNCs) pay tax at lower-than-average rates. This, in their opinion, is because significant value is often added in one country which has high tax rates, but much of the profit tends to get shifted to, or reported in, countries that have lower tax rates or tax exemptions. This perception has led to questions about the fairness of the tax system globally and given birth, as it were, to the BEPS megatrend.
Base Erosion and Profit Shifting
Base Erosion and Profit Shifting (BEPS, for short) are two sides of the same coin. When profits are shifted from high-tax countries to low or zero-tax countries, the high-tax country experiences base erosion — that is, reduction of pool of entities through which the country’s tax is collected.
The G-20 countries (which include India) unanimously decided to re-engineer the rules of international tax to eventually reduce or eliminate incentives and opportunities for practices that have a BEPS effect.
Information exchange
Over the last few years, many new tools have become available to tax administrators, including a greater level of willingness among countries to share information about suspected profit shifting to low- or no-tax jurisdictions.
India has signed tax information exchange agreements with 17 countries in the last five years. Besides, Section 94A of the Income-tax Act enables India to notify a country as a non-cooperative jurisdiction if it does not effectively exchange tax-related information with India, with strong tax impacts on anyone involved in transactions with the notified country.
Cyprus and Switzerland were (so) notified, and later acceded to Indian requests for information. Also, initiatives like the SAARC (South Asian Association for Regional Cooperation) Multilateral Agreement, Multilateral Convention on Mutual Administrative Assistance in Tax Matters, the Global Forum Standards for EoI, and Inter-Governmental Agreements signed by various countries with the US for Automatic Exchange of Information (AEoI) are making it easier for tax officials to get information from other countries.
India recently joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information along with 59 other countries. When fully implemented, AEoI will enable Indian tax authorities to receive information from almost all countries about assets of Indians held abroad.
Thereafter, information sharing across tax departments of different countries will become commonplace. Tax authorities will develop data-mining skills and build capability to conduct global audits.
Corporate entities will have to take note of this and build robust documentation of all business activities.
Country-by-country reporting
One fallout of the BEPS project is that more countries are moving towards having MNEs report their financial statements on a country-by-country basis, thus laying bare what was hitherto not publicly available — the profits and value they add in each country in which they operate.
Regulators will demand transparency regarding global taxation. Global tax information reporting requirements — CbCR and other transparency initiatives — will grow exponentially and will have a material impact on the corporate tax function.
Tax compliance
The reputation and well-being of companies are affected by external perceptions of how they manage their tax affairs. Reputational impact can result from unforeseen/ misunderstood data arising from global regulatory transparency initiatives such as CbCR.
In most companies, tax departments will have to significantly change the way they work, to avoid financial reporting errors, and delayed or revised tax return submissions.
Increased scrutiny by shareholders, consumers and the accompanying reputational risk will force companies to continuously re-evaluate their tax decisions. For example, the “noodlegate” controversy will have forced the accounts departments of affected companies to eventually recalculate their sales and profit projections for this year, and also re-calculate tax provisioning.
Accounting systems will evolve to give ‘tax-ready’ data – something that is currently usually achieved by ‘manual’ work – importing ERP reports into Excel files and ‘massaging’ the data to convert it into tax-compliant formats. Indeed, ERP systems may evolve to become capable of directly reporting direct and indirect tax calculations.
Tax departments will become much more concerned about data security because of heightened sensitivity to the reputational risk of confidential information inadvertently leaking or being shared publicly.
Finally, tax executives of the future will need to be multi-speciality experts — they will not just require an expert understanding of tax, finance and accounting, but will need to be reasonably expert at data analysis, statistics and technology, and be involved in process improvement and change management.
Shailesh Monani is Partner, and Rajesh Haldipur is Director, Tax & Regulatory Services, PwC India