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The Future Of Tax!

Published on Sat, Oct 25,2014 | 17:40, Updated at Mon, Oct 27 at 18:02Source : CNBC-TV18 |   Watch Video :

This week, The Firm reports from on location the 68th Congress Of The International Fiscal Association. 1000 tax professionals in Mumbai debated Tax Morality, Double Non-Taxation, Base Erosion, Profit Shifting, Digital Economy Taxation & Treaty Abuse. As the global economy is awash with tax challenges, The Firm focused on revenue reform - what are countries doing to stake claim to their 'Fair Share of Taxes'.

Inversions are the most recent example. Several American corporate giants like Pfizer, Walgreens, Medtronic and Burger King have contemplated overseas mergers and hence re-incorporation in a more beneficial tax regime. However, last month, the US Treasury Department announced a new set of rules to make inversions less viable. These include closing a loophole that allowed a tax free transfer of cash or property from a foreign subsidiary to the new foreign parent. Perhaps, owing to the new rules, this week US based pharma company AbbVie, called off its $54 billion takeover of Britain’s Shire.

Brainard Patton, International Tax Attorney Professor, Boston University School of Law
“I think what that does is lets the air out of the balloon and therefore you are less likely to see – certainly the big rush to the door that we have seen- is going to go away.”

Peter Glicklich, Partner Davies, Ward, Phillips & Vineberg
“If in self interest people want to reduce their effective tax rates and the corporate income tax in United States isn’t that big a revenue raiser compared to a total fiscal raise, then what are we really saying? We are saying that US companies should pay higher taxes or have higher thresholds and burdens than foreign companies otherwise equally situated and that's just not fair.”

In its chase for its fair share of taxes, US has also put pressure on Ireland and the double Irish Sandwich is no longer on the tax avoidance menu. The infamous structure typically involved the use of two companies in Ireland one of which is a tax-resident in a tax haven. Several multi-nationals like Apple and Goggle have been accused of using the Irish Sandwich to shift profits from high tax countries to no tax countries. However, starting January all Irish domicile firms will have to be tax-residents there.

Richard Vann, Professor – Corporate Taxation, University of Sydney
“If they are now saying that incorporated companies in Ireland will be Irish resident which is what the UK did in 1988- UK made exactly the same change 25 years ago and which many other countries – Australia is one, it uses incorporation or management as a test of residence- that will certainly make it much harder to run the kind of structures that we have seen with a lot of publicity in recent years.”

Meanwhile Australia is battling with intangibles and there is no tangible solution in sight. The high profile case keenly awaiting a court verdict is Chevron where the Australian tax department has alleged that the oil giant used structures to gain tax free interest on inter company loans. In Chevron’s case the intangible under scrutiny is the interest payments. Experts say such transactions can take place in other forms too.  

Graeme Cooper, Professor - Taxation Law, University of Sydney
“This is just a manifestation; so the discussion about interest - what price should the local subsidiary pay on money that it borrows- you could ask that question about any other transaction that the local subsidiary conducts with its parent. If it is paying a royalty or license fee to its parent what rate should that royalty or fee be set at.

While countries re-write tax laws the Organisation for Economic Co-operation and Development (OECD) is working on a base erosion and profit shifting action plan to assist countries to claim their fair share of taxes. Last month, the OECD released its first action plan to deal with tax challenges in digital economy, treaty abuse, transfer pricing, hybrid mismatch arrangements, etc.

Graeme Cooper, Professor - Taxation Law, University of Sydney
“I think this is kind of the indirect consequence of base erosion and profit shifting (BEPS) - trying to tell tax payers that the rules of the game are now changing, the environment that you thought you are living in that's yesterday. In the 21st century some of the things that you thought were okay will not be okay and that may be the lasting legacy of BEPS that tax payers will be a little less ambitious, a little less pushing at the boundaries.”

The many trillion dollar question is the impact on how MNC's do business across the world. In this special episode of The Firm, on location the 68th Congress Of The International Fiscal Association, CNBC-TV18’s Menaka Doshi speaks to four of the world's best tax experts - Porus Kaka, Senior Advocate & President - International Fiscal Association; Philip Baker -QC, Gray's Inn; Michael Lennard, Chief - International Tax Cooperation, United Nations & Pramila Shrivastav, Former Chief Commissioner - Income Tax.

Doshi: If you could lay out for us - because you see both sides of this debate take place- what would you think are some of the top challenges that face both revenue as well as tax payers across the world?

Lennard: In lot of our countries even knowing the tax payers is an issue. However, we generally look at the information gaps which is very important for developing countries. There are resource gaps. Even if they do get information, they can't process it in the way that they want to and there is legislative gap where it is very hard for them to have legislation that works.

Baker: You need to make a distinction between small and medium size enterprises which are the greatest number and very often the major employment creators and for those enterprises the biggest problem I suspect is the compliance cost. It is a question of certainty but it is simply the compliance cost. Your question I think primarily asks about the relatively small number of multinationals that dominate international trade and what are the issues that are going to affect their move for the next couple of years and you ask for five areas.

The BEPS project through the OECD is dominating the work as it relates to multinationals and there will be a whole series of changes that come out from those. Some of them are potentially problematic - for example country by country reporting- is something where no one yet quite knows what impact that is going to have. The aim is that it will be simply a way of identifying potential issues but there is a fear that it would actually open the door for governments and multinationals to start challenging the amount of tax paid by companies in particular jurisdictions. Treaty abuse or the introduction of anti-treaty abuse measures into tax treaties are going to raise questions on existing structures.

On the positive side, one of the elements that is promised from BEPS is an improvement in the resolution of tax disputes. That's a big issue for multinationals and for medium size enterprises as well. Generally the whole area of transfer pricing is very active and number of elements of the BEPS project relating to intangibles, relating to documentation are likely to see changes. However, I will pick up the fifth matter which links the Congress here in Mumbai with the Congress next year in Brussels and that's the question of the practical protection of tax payers rights because as one increases the powers given to revenue authorities, it is key that one balances that with effective and practical protection.

Kaka: What is definitely going to happen and I believe that is going to be a game changer is Exchange of Information. I think there is a level of seriousness even at the political level and a level of commitment at most of the major economies. You know the economies that are slightly not committed, you are aware of them but the major economies even the United States, the developing world there is a seriousness of that and that is where Philip mentioned the country-by-country reporting. That amount of information, you must remember information is key today, that amount of information could be good, it could be detrimental. How to process that information that the revenue authorities across the world are going to get, is going to be a huge challenge and a huge concern for tax payers. So, that is definitely going to happen.

The next thing that is going to possibly happen is we are going to get some kind of a multi-lateral treaty along the way; some draft in the next couple of years. That is going to be the simplest way of changing all the current treaties. However, my concern is that, that is going to possibly have either very few signatories or many signatories with protocols, annexures, riders, savings clauses. So, the effectiveness of that I would just leave for debate at present. I don’t know how that is going to happen.

Last two I think is the digital economy which is going to grow leaps and bounds and how the world deals with that and that ties in with this wonderful concept that we saw in the very first draft of the OECD report which talks about value creation. That word nobody knows, everybody in each government or each country knows what it wants but nobody knows what means – whether it means market, it means activities, it means source of payment. I think there are huge issues on that and that ties up with transfer pricing, that ties up with the allocation of the right to tax and the attribution of that right and consensus on that I would say is going to be extremely difficult.

Doshi: How prepared is Indian revenue to deal with all of these challenges?

Shrivastav: I strongly protest against the word fair share of taxes because fair and tax are oxymorons; they don’t go together. Nobody likes to pay taxes. Having said that, I would imagine that the Indian revenue department from what I know, and let me make it clear that I am not representing the department anymore so these are my personal views- I think they are struggling with a constant stage of change management. So many things are happening and it is not the tax payers and the new companies alone but the department of revenue itself is also constantly facing challenges that are coming with the change in the system of governance, trade and business. Permanent establishment as I used to know 10 years back is no longer valid.

You have e-commerce coming in; you don’t have a clue how to tax it. I read in the papers day before yesterday Vodafone suggested to the Income Tax Department that why don’t you tax Facebook and WhatsApp also. So, it is almost like a big jamboree of tax payers of different levels, different levels of expertise, different business and revenue department is not backing off from what it has to face but the reality is that you learn from experience. Especially in transfer pricing for example, that is a very common complaint that it is very aggressive transfer pricing decisions taken by the government. However, the truth is that we are still learning through our way.

Doshi: So you all have laid out for me what the current context is. I want you to look a little bit into the future and talk about what seems to be here the first very key issue and it links into what Porus said about value creation as well. Who is your tax payer which is becoming a more and more difficult thing to reckon in this sort of world of digital commerce? Where is that value being created, where should that revenue necessarily be taxed?
Lennard: It is a huge issue and when you look at the BEPS action plan it is not even just value creation; it says where economic activity occurs and value is created. So, you even have the issue of what if the two were disconnected. The digital economy is a good example of that. You also see it in the discussion in the UN practical manual on transfer pricing where China and India and even in fact South Africa talk about location specific advantages and that really shows that lot of developing countries are more focused on the market side of value creation whereas traditional approach to transfer pricing have focused more on the production side. So, one of the big developments will be to recognize more the market end approach.

Baker: Let me try and shift the focus little here because what you are focusing on is the determination of the profit attributable to countries from a relatively small number of multinationals and the imposition of corporate profit tax. That is typically in most countries one of the relatively minor taxes that yields only a small part of the total tax revenue and most of the developed world corporate profit taxes yield less than 10 percent of total tax revenue. In developing countries sometimes it is more, it can go up as far as into the 20 percent but I don’t know of any country that it goes above 25 percent.

There are whole range of other taxes - custom duties, indirect taxes, taxes on land- that yield for many countries the larger part of the tax revenue. Looking at it from the point of view India, one of the most significant changes that would have taken place in a 150 years of the Indian tax system would be the introduction of a union level goods and services tax. You are one of the two major countries in the world that doesn't have a federal level goods and services (GST) or a value added tax (VAT) and that's going to be a game changer. What has changed in the last 50 or 60 years is an increased expectation from the population for public goods, for education, for health, for other services and people recognize that they do have to pay for that by taxes.

However, given that people expect this of government, governments have to tap into every source that they can to raise revenue and countries that don't introduce good and services taxes or VATs are in a sense condemned to try to squeeze out of the other tax payers through a profit tax as much as they can and that's where you get into problems of dispute and problems of transfer pricing.

Doshi: Exchange of information, change in treaties across the world- is revenue getting more empowered to be able to go after what they think is their fair share of tax whether it lies overseas or otherwise?

Shrivastav: I would imagine it would. That doesn’t mean to say that there isn’t any debugging to be done. There are major issues on which India defers from other countries.

Doshi: For instance?

Shrivastav: If I am not mistaken the issue of sovereignty on arbitration remains.

Kaka: Just to answer her question and Philip may also agree with me on this I was surprised to see a collection of taxes Article in the latest Indo-UK protocol. I never thought that would happen that fast especially with UK but it did happen. So, we have a protocol which now has an Article which allows the Indian revenue to collect taxes which are lying if someone has not paid and he is based in the United Kingdom.

Baker: I gave the UK negotiators quite a bit of a stick for that. I think they should never have agreed to that. I was going take up Pramila’s comment about sovereignty because there is an interesting balance here. It is strange that – again going back to BEPS- some of the proposals are to limit the scope of action by governments. For example requiring governments to put in anti-treaty shopping provisions in their treaties or governments to adopt arbitration of tax disputes and you might well say by limiting the action of governments, you are taking away their sovereignty.

However, the argument of the OECD and I buy into this is that actually you are preserving governments sovereignty by limiting it in a sense because governments are facing very strong multinationals and they are facing strong international pressures, they are facing competition from other countries. If you don’t limit your scope of action you will find that business is driven away. I think arbitration is a matter from which I solemnly hope that India recognizes that it is an act of sovereignty to agree to arbitration even though at the end of the day the arbitral results is something of which you have no longer have control and therefore might be seen as a loss of sovereignty but you have chosen to go into that. And why have you gone into that? Because other countries and investors demand a fair system of resolving disputes and that must involve something like arbitration.

Doshi: A lot of these changes that you gentleman and Pramila have flagged off, are they going to happen as uniformly as one expects over the next five years or is this going to be a multi-speed set of reforms that will take place across tax policies across the world?

Baker: It is very difficult to answer that because again it goes back to the leadership being shown by the G20 and by the OECD and by the UN much of which is aimed at trying to ensure that we don't end up with lots and lots of unilateral action by governments but there is coordinated action because again if I refer back to what I said before by governments acting together they preserve their sovereignty rather than losing it.

I fear though that we will actually see the contrary and we will see governments acting unilaterally and independently with their own versions of their own solutions because each of them is under their own pressure. In some sense it is actually really quite surprising that we have had 100  years of commonality in the approach to international taxation through the work originally through the league of nations and then through the OECD. The problem now is that the OECD represents of itself only a small fraction of countries and the UN doesn't yet have sufficient resources and isn't sufficiently set up to provide world leadership on international taxation.

Doshi: If you had to leave us with one thought on what you think the biggest change will be for Indian tax payers, assessees, mostly corporations because that's our audience, over the next few years what would it be?

Shrivastav: Definitely the one single only solution in my opinion is a better tax administration. We have enough policies around.

Baker: Developing standards for the practical protection of tax payer's rights. That's something that we have got to focus on and it is not just India, it is all countries across the board and it is all taxes and it goes way beyond BEPS because we are giving revenue authorities massive powers and we need to balance them. Just to give one example - the automatic exchange of information will give to revenue authorities tremendous information about the personal details, the addresses, the dates of birth, the wealths of particular individuals. If I were minded to join a mafia like organization, I would be trying to put my plants into revenue authorities around the world to tap into that information to identify for the future who are going to be the good targets for whatever it might be or kidnapping or whatever and nobody is thinking in that way about the safeguards that we need. So, standard setting, practical protection of tax payer rights that is critical.

Kaka: I would agree with Philip but I see exchange of information is going to be the game changer that's going to come in the next few years. Whether it is the obligations that you have to report or the datas that the tax authorities can get, the safety of it is one aspect, Philip is absolutely right but just the ability to use it, to process it and it is available to all authorities across it is going to be a huge game changer.


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