The Biggest Shake-Up In International Tax Rules In A Generation Is Here

On October 5, the Organisation for Economic Co-operation and Development (OECD) unveiled its comprehensive action plan to combat base erosion and profit shifting (BEPS). Mandated by the G20 in 2013 to develop this action plan in response to the increasing public and political furor over high profile multinationals using BEPS strategies to minimize global corporate taxes, the OECD released 15 reports. Together, they propose a radical overhaul of international taxation to improve the coherence of and collaboration between international tax regimes, align taxation with substance/value creation and increase transparency to aid tax authorities in risk assessments. If the proposals are implemented, they will put an end to many international tax planning strategies and significantly influence cross-border trade and investment decisions.

The OECD is presented the BEPS reports to the G20 finance ministers at their meeting in Peru on October 8 and will present them to the G20 leaders for approval at their meeting in Turkey on November 15-16. The challenge of implementation will then begin.

According to our latest International Business Report (IBR), a quarterly survey of 2,580 businesses in 35 economies, 74 percent of businesses would welcome more global cooperation and guidance from tax authorities. They would like to know what is and is not acceptable tax planning, even if this provides less opportunity to reduce tax liabilities. So will the BEPS proposals result in a tax system that is fairer, more efficient and more understandable? What are the risks and opportunities that may arise?

Damaging uncertainty

The increasingly high level nature of international taxation has in turn generated a lot of discussions within boardrooms. As long as businesses operate within regulatory boundaries, they have a responsibility to their investors to keep costs down—and this includes tax. But it's when executives are called up to answer legislative committees' questions that we see the extent of the shift in scrutiny. It's not whether companies are acting within the law, but whether they ought to pay more.

The problem is that there are no firm guidelines to help decision making. Simply telling businesses to pay their "fair share" is not a viable alternative to a clear set of rules or principles. What constitutes a fair share? Businesses need things to be black and white, but what they are getting is a lot of grey. They are increasingly faced with challenges from...