How to make international tax less challenging

Authorities worldwide have increased scrutiny of tax-avoidance strategies in the past year, CFOs and finance directors of multinational clients told global tax consulting firm network Taxand.

Sixty per cent of multinationals reported an increase in audits by tax authorities in the past year, and 70% said authorities had increased their focus on making sure multinationals’ activities were undertaken for business and operational purposes rather than to shift profits to low-tax jurisdictions, according to clients participating in Taxand’s 2015 global survey.

This finding reflects recent efforts by various countries to increase their tax revenue by hindering the ability of multinationals to move profits to avoid tax. International co-operation, led by the Organisation for Economic Co-operation and Development (OECD) and the Group of 20 (G20) as part of their base erosion and profit shifting (BEPS) initiative, aims to increase the exchange of information among countries and to increase global tax transparency. Low-tax jurisdictions, such as Luxembourg and Ireland, have also come under international pressure to change their rules to make them less attractive to multinationals wishing to park profits there.

The increased scrutiny is particularly worrisome to CFOs and finance directors because of the reputational risks that profit shifting carries, Taxand reported. Seventy-seven per cent of respondents said the public exposure of corporate tax planning has a detrimental impact on reputation, up from 72% in 2012.

“The US government is cracking down on multinationals undertaking inversions to prevent them from moving their tax domicile overseas, whilst the European Commission is currently engaged in the public exposure of businesses which have ‘sweetheart’ tax deals with governments,” Keith O’Donnell, Taxand’s global real estate tax service line leader, said in the survey report.

When asked to identify their most challenging tax area in the past year, 20% of Taxand clients named  transfer pricing, followed by tax disputes and litigation (15%) and indirect taxes and the corporate tax rate (13%).

Most respondents (80%) were hopeful that the BEPS initiative by the OECD and the G20 would bring greater harmonisation and clarity in international tax. A majority (57%) said they were in favour of the OECD’s proposal to require multinationals to report profits and taxes country by country, even though 83% felt that greater global tax transparency will increase their compliance costs.

To prepare for the BEPS requirements, some of which are scheduled to take effect in September, and to reduce challenges, Taxand offered multinationals these tips:

  • Evaluate internal tax reporting systems in light of the ongoing focus on cross-border activity by jurisdictions across the world.
  • Conduct internal risk analyses of key transactions.
  • Prepare defence positions in advance of potential tax authority challenges and build documentation into a proactive and systematic approach to audits to curb demands on the business.
  • Review your entire business structure to identify and rectify any locations of contention when considering economic substance requirements.
  • Ensure your company will be compliant with national and supranational requirements if you plan to expand business operations into a new market.
  • Be prepared to respond quickly to adverse public attention on tax structures and consider publishing your tax policy in annual reports and online.
  • Review corporate governance procedures established to control tax risks.
  • Review your transfer-pricing policies in light of the new BEPS initiatives with special attention to intangibles and intragroup services.
  • Implement a road map to ensure your business is able to meet the new BEPS requirements.

Related CGMA Magazine content:

Where Paying Taxes Is the Most Business-Friendly”: Find out which region in the world has the lowest tax rates and fewest tax-compliance hassles for businesses.

G20 Leaders Commit to Automatic Exchange of Tax Information”: The leaders of the G20 economies agreed at their Brisbane summit to start automatically exchanging tax and financial information by the end of 2018.

OECD Delivers First 7 Pieces of Base Erosion Action Plan”: The Organisation for Economic Co-operation and Development (OECD) announced the release of the first seven reports and recommendations called for in its 2013 Action Plan on Base Erosion and Profit Shifting.

Sabine Vollmer ( is a CGMA Magazine senior editor.