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International Tax: When Countries go Rogue – a summary article

VERSION 1 – Summary: Tax Planning International Article on “Taxpayers Going Rogue, summarized article by Cecilia Stassen

With multinational entities and digital companies becoming an everyday occurance and the status quo of doing business, governments are concerned with the shifting of profits away from the jurisdiction in which the entities mainly operate.

In light of the above the BEPS project was started to deal with this actual or perceived shift of profits. The project started in 2013, but is only now, 5 years down the line really being implemented. With the fast pace in which the digital economy is changing and the simplicity with which cross-border trade can happen, the issues under discussion in 2013 has likely changed drastically or expanded. The result is that BEPS is not adequately addressing all methods of profit shifting.

As a result of the above governments are starting to discuss or even implement domestic legislation to tax these digital companies. For instance, to tax the companies on their gross revenues, based on where users are located and advertising revenue generated.

The risk of a company or group being subject to tax on the same income in two jurisdictions are increasing and this shift in policy by the various governments are forcing international enterprises to re-evaluate their international structures on a continual basis. The entities can no longer assume that their structures will remain tax efficient.

Companies are urged to consider the following when looking at their structures:

  • Who are suppliers, customers and investors and where are each situated;
  • Where is value created and how does tis compare with where income is generated;
  • Keep up to date with proposals to change legislation and understand how it will impact their structure, and also those of their suppliers as some additional taxes may have a financial impact in the form of higher costs of inputs;
  • Engage with industry leaders to enter into consultations with the authorities regarding proposed changes;
  • And ultimately, act early.

VERSION 2 – Tax Planning International Article on “Taxpayers Going Rogue, summarized article by Nataly Marchbank

Lawrence Field, International Tax: When Countries go Rogue Bloomberg BNA 1 (2018)

Article summarized:

• Cash strapped tax authorities looking to entice businesses to get them to domicile themselves within their economies.

• Presents a real risk of suffering double taxation as tax authorities are taking unilateral action.

• Globalisation has transformed the world in which tax legislation was originally intended for.

• BEPS began in 2013 initiative to protect tax base of nations in a coordinated way by way of a coherent approach.

• Many countries moved relatively quick and after 5 years proposals were being implemented.

• BEPS only fixed partly the problem, as BEPS initiatives catered for the 2008 financial crisis and nor problems for 2020.

• An area that has moved rapidly is the digital economy.

• Tax competition amongst states are more prevalent and challenging the traditional methods of taxing.

• Countries such as UK, EU and Italy are looking at ways to tax digital transactions. This ranges from taxing digital companies where they earn their income rather than taxing profits to taxing gross revenues on where users are located to levying on certain digital transactions.

• Traditional business models are being disrupted by these possible taxing scenarios due to a possible threat of good old-fashioned trade wars.

• Companies need to be nimble in the face of these new challenges and understanding the changing landscape and evaluate how this may impact their business models and seek out specialist tax advice to overcome any confusion regarding such changes.