There are currently several ongoing regulatory changes within the international tax arena. The OECD base erosion and profit shifting project (BEPS) – initiated in 2012 – is looking at whether and why multinational corporations’ taxable profits are being allocated to locations different from those where the actual business activities take place. A BEPS action plan was published by the OECD in July 2013. The main purposes of the BEPS action plan are to ensure that companies are taxed in the countries in which they are conducting their business activities, and to prevent double non-taxation as a result of gaps in the interaction between domestic tax systems.
The plan includes 15 action points within areas such as hybrid arrangements, interest and other financial payments deductions, transparency, substance and transfer pricing. The action plan is to be completed by December 2015.
On a regional level the EU implemented changes to the its Parent-Subsidiary Directive in July 2014. In brief, the main purpose of the Parent-Subsidiary Directive is to exempt dividends – and other profit distributions paid by subsidiary companies to their parent companies – from withholding taxes, and to eliminate double taxation of such income at the level of the parent company. The purpose of the recently implemented changes is to counteract the effects of mismatches resulting from the differences in the tax treatment of hybrid loans.
The changes imply that EU member states are obligated to refrain from taxing profit distributions to the extent that such distributions are not deductible by the subsidiary, and to tax profit distributions to the extent such distributions are deductible by the subsidiary. The changes are to be implemented by the EU member states at the latest on 31 December 2015. It has also been proposed to introduce a general anti-avoidance rule in the Parent-Subsidiary Directive.
Swedish regulatory changes
Changes in the regulatory environment can also be found on a country level. Prior to 2009 there were no limitations on interest deductibility in Sweden. In 2009 rules were introduced implying restrictions on deductibility of interest on intra-group loans used for intra-group acquisitions of shares. As of 2013 the rules have been tightened and the main rule is currently that interest on intra-group loans is non-deductible, regardless of the purpose of the loan.
There are two exceptions to this main rule focusing on, among other things, the level at which the interest income is taxed and the business reasons for the debt. So far the Swedish tax agency has taken a restrictive approach towards applying these exceptions. In June 2014 there were new rules regarding interest deductibility in Sweden proposed by a government appointed committee. The main rule in the proposal is that interest expenses – applying to interest on both intra-group loans and external loans – and other financial expenses are non-deductible to the extent they exceed interest income and other financial income. Interest expenses and other financial expenses are, accordingly, only deductible to the extent there are corresponding amounts of interest income and other financial income.
A standard financial deduction – financial allowance – has also been proposed. The financial allowance equals 25 percent of a company’s taxable profit. It has also been proposed that tax losses carried forward in a company as per December 31, 2015 will be subject to a 50 percent reduction. The committee has proposed the new rules to be enacted from January 1, 2016. The proposal has in general been met with considerable criticism.
Challenges with these changes
All current and future regulatory changes on a global, regional and country level – such as the ones described above – make the international tax law environment considerably more complex and unpredictable. The economic consequences of a company’s business activities also include tax costs. Changes in the tax consequences are important for companies to know prior to making a business decision regarding, for example, an investment or financing.
It is a challenge for companies to conduct business activities efficiently as the regulatory environment changes and the changes affect not only future, but also current business activities. The tax consequences of business activities that are known today may be different in the near future, making it difficult for companies to make long-term plans with predictable consequences.
Changes that happen quickly require adjustments with short notice. From PwC’s 17th Annual Global CEO Survey it is clear that these are concerning for companies, with 64 percent of CEO’s surveyed agreeing that the international tax system does not meet the requirements of multinational companies (see Fig. 1). Furthermore, only 21 percent of the CEO’s are of the view that the authorities have been efficient in the creation of internationally viable tax systems (see Fig. 2).
Behavioural changes
Regulatory changes are not the only changes currently taking place in the international tax world. There are also fairly new discussions regarding what tax companies should be paying. These discussions concern whether globally present companies are paying their fair share of taxes. The focus here is not whether these companies are following the relevant tax laws and regulations, but whether they are paying a reasonable amount of income taxes considering their income. One example of this can be seen in the recent British parliamentary questioning regarding multinational companies’ business activities in the UK in relation to the amount of corporate income tax paid in the UK.
There is also a focus on corporate social responsibility (CSR). The view that is being expressed in this regard is that companies should consider their obligation to pay taxes in the same way as they consider their environmental and ethical obligations. In Sweden these discussions have also become relevant at the level of the Swedish tax agency, which in its activity plan for 2014 stated that it will act towards companies developing their own tax policies. Development of tax policies is a way for a company to look after its brands and take social responsibility. The tax policies should, according to the Swedish tax agency, be an equally integral part of CSR work as having environmental policies and ethical guidelines.
The ongoing discussions about fair share of taxes and CSR add a new dimension to the dynamics of the international tax environment. The discussions can be said to be an expression of the global tax system not being up to speed. It is also an expression of the tax system being more politicised. The relevance for companies in this regard is evident from PwC’s survey, which shows that 75 percent of CEO’s are of the opinion that it is important that their companies are perceived as paying their fair share of taxes (see Fig. 3).
Successful strategy
In our work as tax advisors, PwC Sweden notice the impact of both the regulatory and behavioural changes on our corporate clients. We are as always being asked to provide our professional advice on the application and interpretation of tax law. However we are also being asked to express our view on future possible changes of the tax regulations, as well as the probability of such changes being implemented. It is also of increased interest for our clients to know what is going on in other countries in the tax regulatory environment.
At the same time we are being asked what the current discussions within the tax environment are, with regard to fair share of taxes and CSR. The requests for developing tax policies and guidelines are more frequent. Companies’ interest in tools for monitoring and managing tax risk with efficient processes is also increasing.
Tax legal advice is as important as it has always been – if not more important. At the same time we see a simultaneous focus on the general approach towards taxes. The corporate leaders currently have a difficult balance to maintain. An increased tax cost would normally be expected to negatively impact a company at the same time as tax management impacts a company’s reputation. The reality is that tax is a cost and at the same time an obligation. A successful tax strategy will balance the regulatory and behavioural aspects in a sustainable way. Following the implementation of the ongoing regulatory initiatives, the regulatory and behavioural aspects of the tax environment may become more aligned and discussions could shift towards the new regulatory framework.
