Adoption of the base erosion and profit shifting (BEPS) action items in specific countries can be expected to alter traditional multi-national enterprises (MNE) tax strategy processes. In this regard, it is appropriate to note that tax authorities and the Organization for Economic Co-operation and Development (OECD) often seem to overlook, or conveniently ignore, that MNE strategies are often a function of the rules established by countries to develop their own tax base (at the expense of other countries). In other words, countries, in their respective self-interests, grant incentives of various sorts to encourage economic investment. MNEs take advantage of these incentives to minimize their tax liabilities, which the BEPS process views as, somehow, inappropriate behavior of MNEs denuding the tax base of other countries.
Like water going downhill, MNE planning strategies will utilize the most efficient path to achieve desired objectives. This is a fiduciary duty to shareholders. Effective tax rates are a major expense of all MNEs, which need to be managed as effectively as possible in a competitive world. For example, if Country A offers an incentive such that MNE #1 makes an investment in Country A, as opposed to Country B which offers no such incentive, the net result is that jobs and economic activity are created in Country A not B. Country B may perceive that its tax has been eroded. But who has done this? Country A via its incentive or MNE #1?
International tax disputes arise when Country B challenges the activity of MNE #1 asserting that it should have been paying tax in Country B. If there is a treaty between Countries A and B, there could be a mutual agreement procedure (MAP) proceeding. If that proceeding stalls for whatever reason, then all parties would benefit from processes that would lead to resolution.
The transparency demanded by the Country-by-Country (CbC) package and related matters evolving on a unilateral country basis (seeking, once again, to attract tax base away from other countries) will create new opportunities and paradigms for MNE effective tax rate strategies. It may be that these evolutions will drive planning and acquisition strategies toward treaty or non-treaty protected corporate structures designed to: (i) take advantage of new opportunities created by the new regimes; and (ii) minimize transfer pricing exposures, imposition of exit or other taxes on the movement of intangibles or other assets, and so on. As these strategies evolve, the net result may not be an outcome that was anticipated by organizers of the BEPS project. This was certainly the case with respect to design of our current international tax system just after World War I.
These evolutions in the international tax world reflect, not surprisingly, what is evolving in the global political world. The popular press regularly addresses what is often described as globalism vs. populism, which reflects an apparent trend of voters and governments to focus less on the global good and more on local needs. The same phenomenon appears to be evolving in the world of cross-border taxation, which may be evolving as it did in 1926: idealistic visions of a globalized tax order (BEPS) vs. realism-populism on a CbC basis. Countries seem to be reacting to the former (BEPS) as they did to the League of Nations (The League) in 1926. The League assumed there would be consistent adoption of tax policy throughout the world, but countries pursued agendas to achieve their respective objectives. In contrast to the policies incorporated in the BEPS final actions, countries seem to be pursuing their own policies. Several countries have adopted, or are considering, an incremental tax on what are deemed excessive profits in other countries (the diverted profits tax or its equivalents in the UK, India, France and so on), declaring that taxes so collected are not subject to treaty relief (it is up to other countries to provide relief from double taxation). The US may be seriously addressing border adjustability, territorial, and related elements, as the EU is evolving toward the formulary allocation mechanism (the “CCCTB”). These are all elements that will need to be framed in MNE effective tax rate (ETR) strategy evolution (including compliance and controversy realities).
In short, our global tax world is plainly in a state of transition. The ultimate reality may be far different than was anticipated by the BEPS process.