The changing tax environment

There’s seemingly little to temper jurisdictions’ desires to possess a competitive low-rate, broad-base business tax environment, good news for shipping companies seeking countries with favourable tax policies.

According to Ernst & Young’s 2016 outlook on global tax policy, seven jurisdictions have either enacted or plan to enact reductions to their headline corporate tax, or CIT, rates in the year ahead, while twenty-nine jurisdictions anticipate no change at all.  

Consequently, the consultant has predicted that CIT rates will continue to fall throughout 2016, though at a slightly lesser rate than in the last two years. Ernst & Young also expects the projected CIT to fall in a slightly higher number of jurisdictions than in the previous two years, and the overall CIT burden to fall in almost twice as many jurisdictions as it is to rise.

Other key trends, adds Ernst & Young, include transfer pricing changes, which are forecast to be the leading issue driving a higher tax burden for taxpayers, enforcement changes and legislation to tackle hybrid mismatches.

Corporate burden

Seventeen of the 38 jurisdictions, or 45%, project a static corporate tax burden, while seven project a rising burden. Moreover, thirteen jurisdictions, or 34%, project a falling corporate tax burden. This figure was 26% and 16% in 2014 and 2015 respectively, adds Ernst & Young. “In essence, jurisdictions are more likely than in the previous two years to reduce their overall burden on CIT taxpayers in 2016.

“That is an unexpected outcome, given the very existence of the BEPS project, perhaps indicating that some change has pre-empted the finalization of the Base Erosion and Profit Shifting, or BEPS, outcomes and that other changes will take time to bed in.” BEPS is a technical term referring to the negative effect of multinational companies’ tax avoidance strategies on national tax bases.

Under BEPS, global companies face further, significant and new challenges to cover their total compliance burden. This includes new requirements for country-by-country reporting; a two-tier approach to transfer pricing documentation; and the recommendations that jurisdictions should adopt or refresh mandatory disclosure regimes.

European dimensions

Certainly, 2016 will be a year of high-paced activity for the European Commission. Under pressure from the European Parliament to drive results, the Commission recently released an anti-tax avoidance package comprising four separate documents: first, a proposed European Union Anti-Tax Avoidance (ATA) Directive; second, a proposed directive implementing the automatic exchange of country-by country, or CbC, reports; third, a communication proposing a framework for a new EU external strategy for effective taxation; fourth, a recommendation on the implementation of measures against tax treaty abuse.

At this stage, both the anti-tax avoidance and county-by country directives remain in draft form, and all Member States must reach a unanimous agreement before they can be implemented. Although there is strong political support for an ATA directive among Member States, it is likely that the form of the final directive will differ significantly from the current draft and that the timetable set for agreement by July 2016 may not be met, says Ernst & Young.

“The ATA directive is more controversial than the other proposals, as it includes elements that are arguably wider than anti-BEPS measures, but in fact represent a compromise between the EU Common Consolidated Corporate Tax Base proposal and common EU response to BEPS.

“As such, it goes much further than the OECD BEPS recommendations, including making recommendations which are really not related to BEPS, but are instead related to the desire for increased EU harmonization – such as the switch-over clause, consistent GAARs and consistent exit tax regimes.”

Indirect changes

With regard to indirect taxes, which include both Value Added Tax and Goods and Services Tax in this report, none of the 38 jurisdictions have either experienced or predict a standard rate reduction in 2016, although Ernst & Young notes: “Curiously, eight of the 38 jurisdictions forecast an overall VAT/GST burden increase, double the number that forecast a decreasing burden.

“As always, the burden increases reflect changes to the VAT/GST base in a number of different areas demonstrating that, as ever, the devil is in the detail.” Many changes may also be the result of new indirect taxes on digital activity, whereby the final quarter of 2015 saw many jurisdictions enact new legislation, in turn reflecting the overall lack of action on the digital economy, adds Ernst & Young.

According to the report, five jurisdictions have also either experienced or will experience Personal Income Tax rate increases in 2016, mirroring the ongoing exit from the financial crisis, with more governments now having the confidence to increase higher marginal rates of tax on top earners. These include Canada, Malaysia, Mexico, Singapore and South Africa.

Actions to consider

While all this change makes for weary reading, Ernst & Young remains consistent with its recommendations to businesses from 2015. With BEPS implementation proceeding at full pace, the consultant, for the most part, suggests that businesses increase their focus on monitoring and assessing ongoing and possible future tax policy shifts.

“Companies should develop processes and channels to stay up to date with tax legislation and the tax policy environment in key jurisdictions, and they should communicate this process to their organisation’s key stakeholders,” it says. Ernst & Young adds that this will help companies anticipate potential adverse policy changes and identify potential opportunities to work closely with government to design a policy that meets all stakeholders’ needs.

Businesses should also consider becoming a more active participant in tax policy development, according to Ernst & Young. In such a rapidly changing economic legislative and regulatory environment, new tax laws have the potential to impede commercial decisions in ways unintended by policymakers. Faced with this issue, Ernst & Young says that companies “can either adapt their business plans accordingly, or work collaboratively with the government to explain the impediment, model the potential outcomes and develop alternative policy choices.”

Another option is for businesses to join forces; to consider whether forming an industry or trade group is an appropriate way to develop a collective voice, particularly within a relatively specialist sector.

Finally, Ernst & Young says: “If change is clear and documented, create an impact assessment that contains economic modelling of the policy impacts. This is useful not only for internal budgeting and forecasting purposes, but also to use when discussing change with policymakers.

“Policymakers need information to develop good tax and economic policy, and comparative tax studies and insightful analysis of tax policy proposals’ effects on competitiveness can help in this effort.”