Seismic shifts in the tax landscape
There is increasing pressure from tax authorities, governments and the media to change international tax rules perceived to allow tax abuses by multinational corporations. As the OECD nears the end of its global initiative against tax avoidance, regional and country authorities are also striking at perceived abuses. Justin Woodhouse, PwC CI partner, provides an overview of recent international changes and the impacts for local businesses.
Nearing the Finish Line – OECD BEPS Agenda
The OECD has been driving forward a 15-point Action Plan regarding Base Erosion and Profit Shifting (“BEPS”) and will publish final guidance in September 2015. Although some issues will be deferred and implementation of the changes may take time, BEPS has already led to a material shift in the behaviour of tax authorities – and increased scrutiny of companies’ tax affairs.
In particular, there will be substantial changes in the international tax framework around:
- Obtaining tax deductions for interest payments.
- Utilising “hybrid” structures or transactions with asymmetrical treatment in different jurisdictions.
- Gaining benefits from the use of locations with broad treaty networks.
- Increasing transparency of companies’ tax practices to assess risk and change behaviour.
So businesses operating internationally (especially those in the funds industry) can expect not only a greater compliance burden associated with the new transparency requirements, but also higher uncertainty and/or a need to restructure as tax authorities use new powers and more subjective tax rules to raise tax revenues.
Jumping the Gun – Unilateral Measures
Although part of the OECD, the UK and other nations have begun to pre-empt the finalisation of the OECD work by implementing their own tax avoidance measures. The first major action was the UK’s new Diverted Profits Tax, effective April 2015 and already requiring businesses with UK activities to assess whether they are liable to pay the penal 25% tax. Several other jurisdictions have expressed interest in similar regimes, with Australia recently announcing the implementation of its own version of a diverted profits tax.
At the same time, the UK and others have announced support for finalising new restrictions on the level of interest deductions and on perceived abuses from the use of hybrids and treaties. Taken together, these changes will pose challenges for the funds industry, which relies fundamentally on tax neutrality.
In addition, the UK’s new government took further steps in their first Budget, released in July 2015, announcing a variety of new measures to restrain perceived tax avoidance by intermediaries and non-domiciled individuals. In particular, HMRC kicked-off a new ‘Offshore Evasion Strategy’, the first step of which was the release of four consultations seeking views on new criminal offences, civil penalties and sanctions aimed at offshore tax evasion. On top of this, the UK has issued further consultations on several measures that will increase public scrutiny on tax practices and give HMRC more powers to combat what it views as aggressive tax planning.
Most of the new regimes being implemented around the world are widely drafted and are creating a new world of subjectivity and scrutiny surrounding businesses’ tax affairs. It is therefore important for businesses in Jersey to ensure that tax advice for their structures or structures they administer is up-to-date and that they are complying with their global and local tax reporting obligations.
Leading the Charge – European Union Actions
Tax avoidance has long been a concern for both the European Commission and European Parliament, and these bodies are leveraging the OECD and unilateral changes to push forward the EU agenda. Recent actions include:
- A number of State Aid investigations into tax practices of certain multinationals.
- A proposal to require all companies to prepare a country-by-country report, which may be made publically available.
- A proposal from the TAXE committee to automatically exchange all tax rulings.
Although some of the proposals have not yet been enacted, the State Aid investigations are already bearing fruit – for example the European Commission recently ruled EDF must pay an additional €1.37 billion to the French government for incompatible aid received since 1997. Any business with EU operations or structures, especially those that rely on tax rulings in the EU, should closely monitor the EU developments to assess any risks.
Jersey Businesses in the New Tax Environment
It is clear international businesses will be greatly affected by the ongoing tax changes, both in terms of needing to comply with new reporting requirements and managing tax risks related to their structures and transaction. On top of this, increasing scrutiny from tax authorities creates a greater level of uncertainty and the potential for challenge.
Although Jersey is well-placed within the international tax environment, due to its clear and transparent tax system (without the secret rulings and agreements that have caused concern in the EU), risks remain for most companies - not least from a reputational point a view. The benefits of current structures and transactions can be maintained, even in this new world of tax, but businesses will need to work harder to comply with new requirements and adapt to the changing tax landscape. The first step in mitigating risks for Jersey businesses will be to take a closer look at how the recent announcements and upcoming OECD BEPS reports will impact existing structures and transactions to assess risks and plan a way forward.
Justin Woodhouse
Justin Woodhouse, Tax Partner: Justin has been a PwC tax partner since 1990 and has recently transferred to the Channel Islands as tax partner. He leads PwC's European Banking and Capital Markets team and has experience advising clients on tax optimising their structures and activities, while managing tax risk and maintaining strong relationships with fiscal authorities. Clients include global and international banks, insurance companies and asset managers. Justin worked in New York and for five years in PwC's financial services practice in Japan.
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