What the changing tax landscape means for governments and businesses
BEPS 2.0 and the COVID-19 pandemic are forcing changes to tax rules around the world.
The global tax landscape has been changing at an unprecedented pace. The changes are having a major impact on how multinational enterprises (MNEs) carry out their business activities. The base erosion and profit shifting (BEPS) 2.0 project will impact the effective tax rate of MNEs in the future. The COVID-19 pandemic has also affected many economies, with countries dipping into their reserves to fund support and stimulus packages. This has a great influence on the future of tax collection.
We speak to Matt Andrew, EY Asia-Pacific Tax Policy Leader, who recently rejoined EY from the Organisation for Economic Co-operation and Development (OECD) to understand the latest trends and impact on tax policy in the changing tax landscape.
What insights have you gained working with the OECD?
One of the trends that I observed is a move towards multilateralism with greater sharing of information and best practices by governments around the world. With this comes cooperation among governments in managing multilateral tax compliance.
There is also an increase in the forums in which tax policy is being talked about. Within the OECD, the original group of 38 members has now grown to 140 members of the Inclusive Framework (IF). The IF was originally set up for the BEPS project, but it is now potentially playing a bigger role in the development of tax policies beyond BEPS. For example, the OECD went to the IF to get sign-off on the COVID-19 TP guidance in December 2020.
Many countries have signed the OECD’s Multilateral Instrument (MLI). An increasing number of developing countries are taking part in framing multilateral tax policy. Over time, developing countries will likely play a more influential role in the co-development of international tax policies, considering the fact that only 40 of the 140 IF members are OECD countries.
What are some of the current trends in the Asia-Pacific tax policy landscape that you have observed in recent years?
There has been a higher level of demand for tax transparency not just from the Asian tax authorities but also the tax authorities from the Pacific Rim. This demand translates into greater levels of information requests and sharing.
I have also noticed that there have been some changes in the way tax authorities seek to administer tax compliance – with a greater emphasis now placed on companies demonstrating that they have proper tax governance and control frameworks built into their tax functions. Also, some tax authorities are looking to build higher trust relationships with taxpayers through a collaborative approach to ensuring the company is tax-compliant. This combined tax governance and collaborative approach aims to build and maintain community confidence that taxpayers are paying the right amount of tax.
Tax authorities have also been looking at broadening the tax base post-pandemic to include new areas of taxation. These include taxes and levies connected to the digital economy. Environmental and carbon taxes as well as wealth taxes are on the horizon as well. The exact nature of these taxes (direct or indirect) can vary, but the goal seems to focus on expanding the tax base so companies pay their fair share and support economies through the pandemic.
A case in point is the new BEPS 2.0 Pillar 1 Amount A taxing right. This allows countries to tax remote digital companies that were not taxed under existing international tax rules, which focus on economic participation through having some form of physical presence. In addition, with the implementation of the 15% minimum tax in 2023, many Asia-Pacific jurisdictions will likely seek to apply a top-up tax on overseas low-taxed profits of their headquartered MNE groups. This is called the Income Inclusion Rule in the BEPS 2.0 Pillar 2 proposal.
And as a side point, this means many Asian countries will need to reconsider their tax incentive regimes to attract foreign direct investment. The new minimum tax may mean low taxed income could now be taxed at a higher effective tax rate due to the top-up tax, reducing the value of the tax incentive to multinational companies.
How has the COVID-19 pandemic impacted the way the government and tax authorities implement their tax policies?
When the COVID-19 pandemic started in early 2020, many governments around the world turned their focus to job creation and retention schemes, and provided support and subsidies.
Guidance was also provided by the OECD in terms of governments taking a more flexible approach to permanent establishment (PE) and transfer pricing (TP) issues. For example, more flexibility was suggested in situations where employees were stuck, say, in Malaysia due to border restrictions, but continued working for a Singapore entity, thereby potentially creating a PE in Malaysia.
Some companies and industries were also facing challenges with their TP compliance. A few Asia-Pacific jurisdictions provided more specific guidance in the administration and compliance in these areas. Now that the world is beginning to live with COVID-19 as endemic, we see stricter enforcement of the PE and TP rules. This comes back to the point on broadening the tax base as governments will now need to address funding the various support and subsidies provided.
There has been a rising “work from anywhere” trend. What are some of the tax implications of remote work in the new normal?
Governments around the world would need to review this, as it looks like this trend is here to stay. Traditionally, employment taxes will also need to be paid in jurisdictions where a multinational decides to incorporate a presence and employ workers. However, with the rise of remote working, there is a possibility of losing some of the employment taxes where the manpower of an MNE may no longer be concentrated in a centralised location, but the employees work in multiple jurisdictions due to more flexible working arrangements facilitated by the use of technology. There is an interconnection between employment taxes, PE and TP considerations that MNEs will need to grapple with and governments will need to look at in totality. The goal would be to establish a consistent level of flexible working arrangements while managing the impact on the tax bases. It is a massively complex task to marry the international tax system with the desire for flexible cross-border remote working.
With more than 130 world economies agreeing on the global minimum tax rate of 15%, what do you foresee are the impacts on governments and businesses around the world?
Under BEPS 2.0 Pillar 2, the global minimum tax rate of 15% is to be implemented on a voluntary basis under domestic law. I believe most jurisdictions will implement the minimum tax rule because they want to be a collection point for their headquartered MNEs. Still, they will also want to balance that with their ability to attract FDI. For example, in Singapore, the Economic Development Board provides certain incentives with preferential tax rates that might be lower than the minimum tax. The implementation of the minimum tax will therefore have an impact on the types of incentives the Singapore government may want to grant to multinationals in order to continue to attract FDI into Singapore. However, on this point, I think Singapore will continue to be optimistic in terms of its position as a regional headquarter location, as the country’s appeal has always been much more than just about tax incentives, having invested heavily in its people, capability, infrastructure, law and technology.
And while there will be jurisdictions such as the G20 countries who are likely to implement the minimum tax rate in the first year in 2023, there may be other countries that take longer either because of constitutional and legal issues, or simply adopting a wait-and-see approach.
Each jurisdiction will need to review its needs and leverage this new global minimum tax rule as part of its fiscal policy to influence its economy. Ultimately, it’s about striking the right balance.
This In conversation with article features Matt Andrew, EY Asia-Pacific Tax Policy Leader.