This OECD Base Erosion report is interesting reading for those of us interested in international tax planning and/or have BODs asking about tax management for the company (interestingly the OECD report sees this as an important role for BODs).
The OECD believes tax policy should be designed with a global view in mind. Governments usually design tax policy with a view to local country economic and social goals. The activity that some countries view as creating a PE/taxable presence differs, such as Rep Offices for supply chain activities. In Europe such activities are generally seen as creating a PE, contrast this to Asia generally these activities are not seen as creating a PE/taxable presence. There can be local economic and social reasons for these policies, but none the less these are real issues that the OECD must face in dealing with getting to a global viewpoint on tax policies.
The EU has not been able to develop one taxing system: VAT – different interpretations for the same transaction; income tax – UK group loss case involving Marks and Spencer; income tax – different corporate tax rates. But perhaps the EU model will be the base for the OECD model going forward.
Another issue that needs to be considered is does this also mean changing from a civil law or common law system in those countries?
The report recognizes that BODs have a duty to their shareholders as it relates to corporate governance and taxation. I would argue that BODs have to do more than that in their duty to shareholders. They have a responsibility to legally and ethically maximize the EPS for shareholders. This includes ensuring all costs are appropriately managed – tax should not be seen as any different from to any other cost. If the supply chain has a choice between two or three suppliers, then all things being equal, they should choose the lowest cost option – same principal should apply for taxes.
The OECD recognizes that different countries have different statutory corporate income tax rates. This is one of the more difficult areas for US MNCs as the US federal corporate tax rate of 35% (when combined with a blended state tax rate, tends to set a rate at approx.. 38% for US MNCs) is significantly higher than the average for the OECD countries of 25.4% for 2011 (refer to page 16 of the report). That is a huge cost disadvantage for US MNCs. When this is highlighted to the politicians in DC, they are argue they are concerned with a fall in tax receipts, and yet the OECD report provides that during the period 2000-2011, while the average corporate tax rates fell 7.26%, the corporate tax to GDP ratio did not fall. That is something I think should be highlighted to the politicians in Washington. Not merely for the cost of doing business for US based MNCs, but the cost of doing business for non-US companies wanting to invest in the USA.
Another issue that is not raised in the report (and in fairness the focus of the report is income taxes) , is the other taxes that are a cost of doing business – VAT, GST, sales/use taxes, services taxes, state/provincial/municipal taxes. Often the structuring that MNCs undertake for the Global Value Chains is how to minimize these taxes – again, don’t companies have an obligation to minimize costs in the supply chain to provide the maximum value to shareholders?
It will be interesting to see what happens at the Forum of Tax Administrators to be held in Moscow in May 2013.