Corporate tax uncertainties
By Donald Drysdale for ICAS
25 April 2018
In this uncertain world, Donald Drysdale highlights a new survey being undertaken to assess recent changes in international corporate tax and recommends that interested ICAS members participate.
Living with uncertainty
With Brexit looming and many of its facets still unresolved, businesses are facing massive uncertainties – not only throughout Britain but also across Europe and in other parts of the world.
Tax is only one topic of uncertainty but, for multinational enterprises, uncertainties about corporate taxes can have a fundamental influence on their strategic decisions regarding location and investment.
Brexit is supposedly less than a year away. However, it is still unclear whether or not the UK will be in a customs union with the EU from April 2019. Understandably, businesses that used to see the British Isles as a strong base from which to conduct their pan-European or worldwide operations are having misgivings.
Businesses operating globally need to understand the uncertainties they face and strive to reduce the adverse impacts of these.
European Tax Policy Forum
The European Tax Policy Forum (ETPF) was established in 2005 as an educational charity to commission independent academic research into the impact of tax policy on business in Europe. Over the past twelve years, the ETPF has commissioned around 50 research projects, many of which can be found on its website at www.etpf.org.
One of those projects, undertaken in 2016 by Michael Devereux (co-founder of ETPF) in conjunction with the Oxford University Centre for Business Taxation, was a survey of senior tax professionals in large businesses and professional firms on their views about the uncertainty of corporation tax in major countries around the world.
The results of the survey, published here, helped inform a subsequent OECD report which aimed to help policymakers and tax administrations shape a more certain tax environment.
Key results of the 2016 ETPF survey included the following:
- Of 21 countries analysed, the four BRIC countries (Brazil, Russia, India and China) took four of the top five places in respondents’ assessments of those with the highest levels of corporation tax uncertainty.
- In the previous five years, corporation tax uncertainty had increased in 20 of the 21 countries analysed.
- Respondents ranked corporation tax uncertainty third in a list of factors influencing business investment and location decisions – more important that the anticipated tax rate itself.
- The four BRIC countries were those in which corporation tax uncertainty most frequently had a serious impact on business decisions.
- The most important factors in determining uncertainty were unpredictable or inconsistent treatment by the tax authority (especially in BRIC countries) and complexity in the tax code.
How did the UK fare?
The 2016 survey was conducted before the Brexit referendum of 23 June 2016. Opinion polls shortly beforehand had shown a clear majority of the electorate in favour of Britain remaining within the EU. Although the referendum campaigns were gathering momentum, few businesses were expecting the outcome that finally emerged.
Of 21 countries covered by the survey, Switzerland emerged as the country with greatest certainty regarding corporation tax, and the UK was not far behind in fifth place. However, two-thirds of respondents thought that tax uncertainty in the UK had increased over the preceding five years, while only one-tenth thought it had reduced.
Those responding were invited to say how frequently uncertainty about corporation tax in each country had had a serious impact on business decisions, and in a ranking of countries, the UK was in median position.
Finally, the report tabulated how the reasons for tax uncertainty differed between two arbitrary groups of countries – the BRIC countries (which stood out as having a significant problem of tax uncertainty) and the UK and USA together (which were represented by the largest number of respondents and answers).
Particular uncertainties in the BRIC countries, not so prevalent in the UK and USA, were caused by unpredictable or inconsistent treatment by the tax authorities and the courts, failure to adopt OECD guidelines on transfer pricing, and corruption. In both groups of countries, complexity in the tax code and frequent changes in the statutory tax system were key problems.
Lessons for UK jurisdictions
The ETPF research in 2016 contained salutary lessons for the UK government and its devolved administrations by drawing attention to the difficulties which international businesses faced as a result of fiscal uncertainties. There are few signs that those lessons have been learned.
In order for a jurisdiction to be competitive as a location for international business and as a place to invest, tax certainty is crucial. Simplification of the tax code is not simply ‘nice to have’ but must be made to happen. Chancellors and Finance Ministers should avoid the urge to chop and change tax law except when absolutely necessary.
A new survey
With BEPS and related initiatives, major changes have been taking place in the international taxation of business. ETPF now wishes to update its survey to understand how recent changes have affected uncertainty and the implications for business.
Accordingly, a new survey of business tax uncertainty is being undertaken by Will Morris and Michael Devereux, respectively Chair and Research Director of ETPF.
Tax professionals interested in this topic are invited to complete the online survey here by Friday 18 May 2018, to help provide more evidence on this important issue. The survey form provides that responses may be submitted anonymously if preferred.
Article supplied by Taxing Words Ltd