How multi-jurisdictional taxes could result in double taxation

Companies could face double taxation unless they devise a strategy to deal with the increasing complexity of multi-jurisdictional taxes.

Filing taxes used to be a relatively straightforward exercise. A taxpayer would compile the relevant data, send it to the tax authority and answer any subsequent questions.The process is much more complicated today.

Taxpayers must comply with new laws as governments around the world implement global tax reforms via the Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) project. Companies must also file tax data on a regular basis, knowing it will be shared among jurisdictions.

Tax authorities are getting tougher with enforcement, examining tax rulings and positions from the past. As governments maneuver for more tax revenue, multinational organizations could face a growing tax liability. Companies need to devise a strategy to deal with increasingly complex, multi-jurisdictional challenges or face the real possibility of double taxation.

A sticky situation: the modern tax predicament explained through a cake allegory

Five years ago, a business paid taxes in seven jurisdictions outside its home market and brought the income it earned back to Jurisdiction A, receiving a credit for the taxes paid elsewhere.

Three possible outcomes

Jurisdiction D conducts a retroactive audit of the taxes paid in 2012 and informs a business that it now owes an additional US$30 million. A business informs its home market of Jurisdiction A about the assessment and applies for an additional foreign tax credit of US$30 million for 2012.

1. Same size portions

A business successfully appeals the audit and retroactive increase in taxes demanded by Jurisdiction D.

Total cake: US$500 million.

2. Shifting servings

Through an agreement between the two jurisdictions, it is determined that a business will pay US$30 million more in taxes to Jurisdiction D, while Jurisdiction A will issue an additional foreign tax credit and collect less tax revenue.

Total cake: US$500 million.

3. A bigger cake

After the jurisdictions fail to reach an agreement, a business must pay US$30 million more in taxes to Jurisdiction D for 2012 with no foreign tax credit from Jurisdiction A. Double taxation and a growing tax liability is the outcome. A business may seek a resolution through the mutual agreement procedure (MAP), administrative appeal or litigation.

Total cake: US$530 million.

This article was originally published in Tax Insights on 28 Feb 2017.