Globally, the issue of corporations shifting their profits to low-tax regimes has assumed significance, with countries making all-out efforts to check these practices. Leading on this front are the OECD and G20 countries that have devised a set of rules (BEPS Action Plan) to check this practice. Business Today caught up with Jane McCormick, global head of tax at KPMG in the UK, and discussed how BEPS is shaping the global tax regime, the challenges of taxing a digital economy and the impact of indirect taxes. Edited excerpts, reports Business Today.
How base erosion and profit shifting (BEPS) shaping the global tax regime?
One of the action plans that has been universally adopted is the country-by-county reporting and transfer pricing related to master file. I think that's the new world we are living in, with much more transparency, and tax authorities around the world are having a better picture of what the overall tax position of the group looks like rather than focussing on one country. It is important to have a bigger picture to assess the risk.
However, the flip side of this is a concern that with all the additional information, tax authorities across the world will start to suck additional profit into their own jurisdiction.
Although there are divergent views, we all agreed that post-BEPS you should be taxing the profit where the economic activity giving rise to that profit is located. The idea sounds great, but the problem comes when we start thinking where that could be. In the complex, globally integrated supply chain, it will be quite a difficult task to assess.
We are already seeing that different countries are taking different views on where they think the profit is. So, although we may have high-level agreement, we don't have an agreement on the next level down.
There is a concern among international businesses that there may be an increase in disputes in transfer pricing cases.
What are the challenges you see due to these divergent views?
The obvious risk is double taxation. You are already seeing that the effective tax rates of multinationals are higher than the domestic rates. If you add up all the domestic rates and expect a number, they are paying more than that because they are effectively being taxed twice on the same profit in different jurisdictions.
When that happens, there is some mechanism to address such issues through mutual agreements between two jurisdictions, but that is not the perfect system and often some corporations have to concede because the practical difficulties of having these negotiations are too great.
Have tax authorities become more aggressive post-BEPS?
I think they have become more aggressive and that's because of two reasons--partly because of the big global discussion on corporations moving profits to low-tax regimes and partly because every country in the world is looking at fiscal deficit and there is a need to collect tax.
In India, one of the big debates over the years has been tax terrorism. Do you think a similar situation may arise as we start adopting BEPS action plans?
I hope it's not so because having a lot of tax disputes is not a good thing for anyone. It requires time and resources of the government as well as of the companies.
So (tax authorities should be) trying to get the (mutual) agreement upfront... Businesses are happy to pay tax once and more than anything else, they want certainty. So, (the efforts should be to) try and find some mechanism to provide better information to tax authorities so that they can judge things and reach conclusions more easily. Also, (try to find) some mechanism for better risk assessment. Tax authorities should focus on whether there is risk rather than a lot of inquiries, where there isn't one.
And also, better mechanism to resolve disputes when they arrive.
There are concerns among companies about the safety of data shared under country-by-country reporting. How real are these concerns?
The issue is this: The country-by-country reporting (CBCR) is there to serve a special purpose--the risk assessment. By allowing tax authorities to apply the criteria of how profit matched with headcount, you get an indication if something is out of line, if the substance is not in line with the tax. So, it is just a risk assessment tool, which does not give all the right answers.
There is a concern that people will take CBCR, and say, the profit doesn't align with the headcount. So all I need to do is reassign the profit associated with the headcount. And that's the answer and I would assess that number. There could be all sorts of reasons why that's not the right approach. So, there's a bit of concern that some people will do that.
There's also a debate, especially in Europe, on whether the CBCR report should be made public and the European Union is consulting whether the information should be made public. So the concern that people have about making the information public is that the information in CBCR is for tax authorities to see and not for the layman reader.
What are the challenges of taxing the digital economy?
It's a huge issue. One of the action plans of BEPS deals with this, but it never went anywhere. It is like saying it is too difficult. It goes back to this issue where economic activities are giving rise to profit.
In a digital economy, you start to think whether the corporation tax is the right tax. There is a good view that the corporation tax is a tax for the old-world economy where a company was located in a country, the whole supply chain sat in the country, and it manufactured, sold and got financed from the banks in the same country, making it relatively easier to get taxed in such a country.
As the world becomes more complex and the supply chain gets more broken down, the corporation tax is becoming more difficult to administer. You must have seen a trend globally, the corporate tax rates are coming down and are becoming a smaller percentage of the total tax collection. More and more taxes are collected through other means, especially indirect taxes (GST, VAT).
If you look at the digital economy, these taxes (indirect taxes) look more suitable. For instance, you can have destination-based taxes in a digital environment where the services are consumed. This you can't do with corporation tax.
So personally I think, although it is going to take some time for the world to go on that route, digital economy will lead us to greater reliance on indirect taxes.
But indirect taxes are considered regressive as they do not distinguish between the rich and the poor. What do you think?
Indirect taxes are more progressive than people think. The real issue here is how you make indirect taxes more progressive. There are ways you can do it. The governments can work out a minimum standard of living people ought to have and then exempt those goods and services (required for that living standard) from indirect taxes. In many countries, basic goods like food items and children's clothes are not taxed, which means the poor surviving on these basic goods and services pay lower taxes.