What can we expect from different countries around the globe?
On the heels of the pandemic, tax reform is a hot topic both in the United States and around the globe. Many countries have increased spending in response to the pandemic as they cope with the closing of businesses, loss of jobs, and other economic impacts. Tax authorities around the globe now need to determine how to pay for the cost to support this increased spending and will likely raise their taxable base to cover stimulus packages and the like.
Countries have different postures on income/VAT tax that far pre-date the pandemic but are even more relevant now. Particularly in the U.S., we can see the current impact of the PPP, various stimulus packages, and the new administration in the White House. Tax reform is always a natural progression of events like this, and it is important to understand where current topics in tax reform originate.
The OECD initiative on Base Erosion and Profit Sharing (BEPS) started a movement toward substantive tax planning over a decade ago. Through BEPS, tax authorities agreed to not allow abuse that prejudices tax planning and structures in one jurisdiction over the other. This was built in response to paper companies being set up in places with preferable tax guidelines, but did not have boots on the ground or a tangible business structure.
BEPS put a focus on ensuring tax planning corresponds to where genuine business activity is taking place – also known as substantive tax planning. This means a business must have an employee base, product being made or sold, or some other tangible business activity happening in the foreign jurisdiction in which they want to base their tax structure. The progression toward substantive tax planning has evolved into other initiatives such as the Anti-Tax Avoidance Directive (ATAD) in the EU, and Global Intangible Low-Taxed Income (GILTI) as part of the Tax Cuts and Jobs Acts imposed in the United States.
Moreover, on October 8, more than 130 countries, including the United States, agreed to an OECD initiative to set a global minimum tax rate of 15 percent as governments look to end a perceived race to the bottom on corporate taxation. But, the discussion is far from over. To comply with the new global minimum tax requirements, Congress will have to pass legislation raising the tax that American companies pay on foreign profits to 15 percent, or higher, from 10.5 percent.
Considering these continued tax reform initiatives and the focus on substantive tax planning, we know planning cannot be done in a box. Structures cannot be created on a whiteboard and handed to companies to carry out. Tax planning needs to start with a commercial conversation where clients detail what they are looking to do in various jurisdictions. Based upon these plans, structures are then built around the actual operational activity that a company intends to carry out around the globe.
No matter the jurisdiction or current economic conditions, if tax planning is predicated on substance and commercial activity, equitable tax structures will flow naturally from that and set up a business for success. Our Global Business Services team provides counsel to multinational organizations that wish to engage in efficient global commercial transactions, while navigating the many challenges of tax reform.