Many companies have already begun implementing long-term intercompany tax reporting solutions that comply with evolving international tax regulations and adhere to tax disclosure obligations. This voluntary movement toward building ethical, globally relevant intercompany tax reporting is rooted in concerns about country level ambiguities or loopholes, inconsistent regulatory implementation, and financing structures understood to be used by certain multinationals to reduce effective corporate tax rates.
Influenced by growing public awareness and global coordination of tax authorities, companies have been shifting policies and practices in favor of ethical intercompany tax reporting and transparent data exchange. These moves are precursors to changes that are expected to become increasingly mandatory as global corporate tax policies are adopted.
Who’s who in global tax policy and reporting guidance
Especially over the past decade, the Organization for Economic Co-Operation and Development (OECD), founded in 1961 to promote better policies worldwide, has closely monitored multinational tax avoidance and global intercompany tax reporting practices.
Its subsidiary, the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum), was founded in 2000 to implement global transparency and exchange of information standards around the world and was subsequently restructured in 2009 in reaction to the financial crisis. As of February 2021, the Global Forum counted 162 members, including 38 OECD member countries and other jurisdictions that have agreed to implement tax-related transparency and information exchange.
Evolving tax reporting regulations – a brief history
To boost collaboration among regulators, governments, and a growing number of multinationals, the OECD actively responds to current events. For example, in 2012, the UK Parliament conducted a tax evasion investigation triggering widely publicized public debates about unethical international intercompany tax reporting. The investigation singlehandedly increased public awareness about transfer pricing practices used by multinationals to avoid paying corporate taxes. It scrutinized how existing regulations allow digitized multinationals to legally avoid paying taxes and called for more principled, corporate accountability.
In 2013, the base erosion and profit shifting (BEPS) project was launched by the OECD and G20 countries. BEPS offered a unified, worldwide tax policy solution designed to remove country specific tax law discrepancies. In addition, BEPS promotes tax payment and business operation, and data transparency at the country jurisdiction level, requiring companies to report detailed information to taxation authorities in each country where they do business. In turn, intercompany tax reporting transparency enables government entities to synchronize their global tax law coordination efforts with OECD members.
In 2017, the European Parliament proposed a measure that requires multinational firms to publicly disclose their income tax information via tax jurisdictions where they operate. The OECD Pillar One proposal, published in November 2020, was another effort to create lasting solutions in countries struggling to get their fair share of taxes from multinational enterprises “without adversely impacting productivity, innovation, and trade relationships.”
Biden’s tax challenge and the implications for global tax coordination
American corporations were estimated to have repatriated more than $1 trillion in offshore profit after the Trump Administration cut the tax rate on corporate profits earned offshore from 35 percent to a one-time rate of 15.5 percent on cash and 8 percent on other assets. Although the Biden Administration wants to avoid again driving multinationals and the income tax revenue they generate outside of the U.S., this is more than complicated by its proposal to increase the U.S. corporate tax rate from 21% to 28% in order to fund the estimated $4 to 6 trillion in proposed new spending.
This drove the Biden Administration to initially call for a 21% global minimum tax agreement, but 130 countries and jurisdictions settled on a global rate of 15% and a preliminary understanding of related rules. The OECD plans to finalize a landmark global minimum corporate tax accord and publish a rewrite of international tax rules at a summit in late October 2021.
This is historic because tax avoidance investigations in the UK and elsewhere in the world have often involved U.S. multinationals. Historically, the U.S. had not participated in efforts to adopt income tax reporting transparency at the country level, making it easier for U.S. multinationals to avoid paying European jurisdictions taxes they would have paid in the U.S.
Final adoption of these rules will require participating countries to write new laws, agree to new tax treaty language, and repeal conflicting policies. For example, the outline specifically states that existing or planned unilateral digital services taxes must be terminated, a U.S. demand that will equalize the impact on the many and large technology companies headquartered there.
Fitting into the new international tax order
Arguably, much of the aggressive international tax planning that gave rise to the 10-year global journey toward this agreement was already snuffed out by tax rules targeting specific structures (e.g., ATAD rules in the EU and anti-hybrid rules in the US). And various multinationals, such as Royal Dutch Shell, voluntarily disclosed their income tax data publicly before regulatory rules were even proposed.
As larger, more developed countries are establishing corporate tax rules for all, many smaller countries and tax jurisdictions around the world are building new tax plans and digital capabilities. Across the globe, corporations of all sizes now are building automated tax processing and business operation infrastructures that will allow them to compete globally. Up to date infrastructure will enable additional countries and companies to join the global marketplace during the next five to 10 years.
Other challenges remain. The newly unified international tax law regulations that eliminate tax avoidance ambiguities, for instance, cannot stop fraud related to indirect taxation. Likewise, transparent intercompany tax reporting practices do not necessarily eliminate double taxation risk when tax jurisdictions in two different countries disagree.
Solutions to the rescue
For multinationals seeking to lower their risk, reduce the financial effect of non-compliance, and increase productivity, a reassessment of how their tax teams operate is in order. FourQ helps large multinational companies optimize their intercompany transactions and reduce their global tax and compliance exposure. It provides an integrated approach to the people, processes, data, and technology elements of intercompany financial management that delivers:
- Accurate, timely, and consistent corporate-wide data comprising all relevant intercompany transactions.
- Automated invoice processing to ensure accuracy and efficiency.
- A global billing and payments capability that provides speed and accuracy while supporting a high level of granularity.
Download our 10-Step Guide to Transforming Intercompany Accounting to learn more, or contact our experts today for an introductory consultation.