Managing Tax Change
Tax systems change, and we are going through a significant period of change now.
The conventional wisdom in my career, now approaching 40 years, is that structures have to adapt and change every 5-years to avoid becoming obsolete and inefficient. In my experience, it is not quite that bad, but at least every 8-years. When I started my career, the Federal US corporate tax rate was 46%, and most of Europe was about the same or higher. Then Ronald Reagan and the Tax Reform of 1986 reduced rates, and the world followed. When Eastern European countries joined the EU, their average income tax rate was 18%. Ireland and Cyprus have corporate income tax rates of 12.5% and no withholding tax on dividends. Today, on average, most of Europe is in the upper teens on corporate income tax rates, but that is changing.
Today, the trend is reversing, and it is reversing rapidly. It is reversing in response to (1) crippling deficits, (2) regime changes from conservative to progressive politics, and (3) digital commerce. The G-20, with the strong encouragement of the Biden Administration and Janet Yellen, Secretary of Treasury, are pushing to have a minimum tax of 15% across the globe. France and other countries are looking to impose a “digital tax” on e-commerce. States and countries have enacted laws that create economic nexus and tax presence from sales activities alone. The OECD and EU have pushed to increase transparency in tax reporting with country-by-country reporting, and DAC 6 turns our accountants into police officers for the government. These are all “pillars” of a process whereby governments are increasing their control over business transactions and finding novel ways to impose tax on them.
Change is coming quickly now.
How does one manage it? What is your answer to the CEO or CFO when she asks, “What should we do to manage the risks of this rapid change?”…. “What is coming next?”
Here is how to handle it:
- Accept these changes are happening and find the resources to handle the increased reporting and compliance that comes with increased transparency and government oversight.
- Automate data collection and reporting for tax compliance and tax provision reporting. You are being asked for real-time information and dynamic forecasting. These require automation. Don’t wait until something explodes. There are tools, beyond spreadsheets, that can be used to automate without a lot of budget and disruption.
- Stay away from high risk, highly controversial tax planning “schemes” and stick to fundamental and basic tax planning around transfer pricing, value chain alignment, and tax incentives for recruiting and investing.
- “Nowhere sales” and double dipping are things of the past. These are exactly the type of planning structures the tax officials are targeting.
- Unravel highly risky “uncertain tax positions”. They take too much energy to support. You have limited resources.
- Make sure all tax planning henceforth is supported by a strong business foundation: people, assets, processes, and substance (“PAPS”).
- Find ways to keep the tax function on the forefront of business changes. Too often, tax is brought in at the end of the process not the beginning.
- Simplify your structure and remove touchpoints in the organization so funds can move easier and with less friction costs. This will streamline cashflow, and “optimize” your structure.
- Vet ideas and build a strong and extended team of advisors around yourself to get perspective on risks, upcoming changes and solutions.
- Network with people and professionals around the globe and in your industry space. Use social networking and trade associations to network. These other professionals too are asking themselves the same questions. You will also learn dialogue and messaging tools from these networks.
Change is coming quickly now, especially in the tax area.
- Expect tax rates for corporations to go up, probably 5%.
- Expect more transaction taxes, like a digital tax
- Expect more destination based taxation – tax where the customer is.
It is important to stay in front of the changes, or you may not have the necessary resources or information when you need it later. At BILTgroup, we are a team of CPA / Lawyers who have been the heads of tax departments for multinational companies. We can help you manage the changes coming.