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Developments in international tax important for multinational corporations
Outrage in the press can cause confusion about the process of tax planning. The nuanced relationship between the spirit and the letter of the law, and wider issues such as the conflict between disparate national tax systems and competitive international trade are therefore often missed. A recent MarketLine case study gives detailed examples of tax planning involving both multinationals and private individuals as well providing insight into changes in tax policy and the debate around the morality of tax avoidance.
Although tax law itself may not be the most exciting topic, on a wider scale it is absolutely vital to the way that governments interact with businesses and how economies develop and evolve. The current push towards greater transparency and more equitable outcomes from the law will determine the tax landscape for the foreseeable future. Forthcoming changes in the way that tax is approached, particularly in Europe, are therefore likely to have long lasting effects on major economies and multinational corporations.
One of the most important changes revolves around the way that international tax treaties have not kept pace with developments in national tax laws. Multinational corporations have been taking advantage of this lack of coherence for a very long time, giving rise to ‘Base Erosion and Profit Shifting’ (significantly reducing the tax collected by governments and moving profits to low tax countries). The OECD published a 15 point action plan in 2013 regarding these issues and intends to go through a period of public consultation throughout 2014 and 2015. Following this period, recommendations are likely to be made to finance ministers around the world for changes in international and national legislation. These changes will be very important for multinational corporations and are likely to produce a shift in the way that large companies operate. One potential outcome is that nations will become even more competitive with their tax rates as they seek to bring the biggest firms into their tax net. Movements in where companies are centrally located can therefore be expected over the next few years. The likelihood of 19,000 companies being registered in a single office (as has been the case in the Cayman Islands) will also diminish as more substance will be required for a company to be located in a particular region for tax purposes.
The difficulties in implementing any changes that support greater equality will be significant due to the way that economies interact with each other. For example, the proposed introduction of a financial transaction tax, known as the Tobin tax or the Robin Hood tax, that would help limit the type of financial speculation that resulted in the global financial crisis, has been opposed by a number of countries. The UK for example, has made legal challenges to the proposed tax on the basis that it will negatively impact a large segment of the UK economy. National interests therefore often prevent progressive changes even when those changes might have wider benefits.
Tax planning operates in this type of continually changing legislative environment and can therefore be difficult to follow. The MarketLine case study (Tax Planning: The Good, the Bad and the Ugly) provides a useful and detailed insight into how this industry functions.