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better to stay put than get lost

Kitty Miv, Editor
23 December, 2016


It was always going to be unrealistic to expect Australia to reconsider its stance on carbon taxation so soon after its bad experience the first time around. Once bitten, twice shy, you might say. It therefore comes as little surprise that restoring a carbon tax or an emissions trading scheme is not part of the federal Government's policy, at least for as long as Malcolm Turnbull is Prime Minister – although, in the often Machiavellian world of Australian politics, the premiership has been something of a revolving door in recent years.

With the role of the United States in global efforts to reduce greenhouse gas (GHG) emissions now subject to some uncertainty, it could be argued that Turnbull is taking a sensible, pragmatic course. The major argument against Australia's former carbon tax was that it was a self-inflicted blow to the country's economy when carbon taxation was very much the exception rather than the norm. Pragmatists might say that increasing the tax burden while the world's largest economy sits on the sidelines, and with little actual proof that carbon taxes are effective, would be foolhardy.

The global carbon tax picture has changed markedly over the last couple of years. China, by far the world's largest producer of GHGs, is fully committed to an emissions trading scheme, and seems to be taking its commitment to the environment seriously. And a consensus emerged in the build-up to last year's Paris climate conference that carbon pricing is the way to go to combat climate change. It is notable for example that Canada is forging ahead with a national carbon tax (minus Saskatchewan) even though its southern neighbor is unlikely to do likewise for the foreseeable future, potentially driving up the cost of doing business and putting it at a competitive disadvantage with the US.

In general, governments are continuing to move quickly in the area of taxation in the era of BEPS. Yet, a survey conducted by financial advisory firm Grant Thornton earlier this year found that the OECD BEPS project has had little impact on the way companies plan their tax affairs. As many as 78 percent of businesses have not changed their business's approach to taxation, the survey, published in September, found, despite more than 80 countries having agreed to adopt at least the minimum elements of the BEPS Action Plan at that point.

Why should this be the case, when companies around the world are experiencing an unprecedented level of change and uncertainty? Well, the key word it seems is uncertainty. When you are uncertain of the right way to go to get to your preferred destination, and someone keeps redrawing the map at almost every step, it is probably better to stay put, rather than get yourself completely lost. Better still, why not follow in the footsteps of those before you that have worked out the path of least resistance. As Francesca Lagerberg, Global Leader of Tax Services at Grant Thornton International, concluded, "a number of companies will be reluctant to be the first mover in this area and may be looking to see what others are doing in their industry or region. Governments have not yet explained how or even if they will implement BEPS in some countries, so that leads to business caution."

However, multiple other surveys also confirm that even if taxpayers are playing it safe, tax audits are on the increase, and companies are under scrutiny from tax authorities in so many different ways, including, we learned recently, with respect to the mobility of their work forces. It seems that in the current environment, the tax man is determined to leave no stone unturned, and as far as taxpayers are concerned, it could be a case of damned if you do, damned if you don't. But until the BEPS project tails off, and we have something resembling a permanent, coherent international tax structure, companies aren't going to have much choice but to ride out these turbulent times. How long this will take is anyone's guess.

Though international corporate tax rules are in flux, one rule of the commercial universe no doubt still stands: multinationals will gravitate towards those countries where the fiscal conditions are most favorable. Last month, a KPMG survey revealed that many businesses located in Switzerland fear that the country will lose its competitive edge after the implementation of corporate tax reforms designed to assuage the concerns of the EU on harmful tax practices. The Netherlands, which has often been described rather unflatteringly as a tax haven, is also concerned about its tax competitiveness after committing to abolish special corporate tax regimes in response to BEPS.

So, which countries are benefitting from this shift in sentiment? Perhaps it is too early to say, and we might have to wait a while before the corporate investment map is fully withdrawn. The United Kingdom, having slashed corporate tax, could be emerging as an early front runner.

Earlier this year, KPMG concluded after a survey of over 100 senior corporate decision makers that recent tax policies have made the UK a more attractive location for businesses, with the country "now seen as much more competitive than its European peers [that are] generally viewed as having attractive tax regimes."

The recent decision by McDonald's to pay tax on its non-US royalties in the UK instead of Luxembourg could be viewed as a ringing endorsement of these policies, given that the company probably explored many options for the restructuring of this part of its business. Certainly, judging by the company's statement, there are obvious operational reasons for this shift. But considering the uncertainty surrounding Brexit, does this move also represent a vote of no-confidence in Luxembourg, and the EU in general? Maybe it knows something we don't!


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Kitty Miv, Editor



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