With significant momentum in global, transnational and domestic tax implementations and governance programmes, 2017 was an extraordinary year for tax. The unpredictability of major political developments across the world, however, continues to frustrate international as well as domestic business and tax planning and the need for trusted advisors to work internationally has seldom been greater.
UHY Global asked international tax specialists from UHY’s global tax special interest group for their thoughts on some of the issues facing their countries and clients.
THE TRUMP EFFECT
Donald Trump’s shock election to the US Presidency was quickly followed by promises to cut expenditure and reduce tax. By the fourth quarter of the year those plans were beginning to take shape, with repercussions for economies around the world.
Paul Marineau, director, international tax, UHY LLP, Michigan, says that despite a lack of detail, the US has clear priorities.
“There are still a lot of unanswered questions over the president’s tax reforms but for corporations the direction of travel seems clear. The aim is to lower the business tax rate to one of the lowest in the world. The proposed tax reform plan is being touted as one of the biggest individual and business tax cuts in American history.”
But Mike Aguirre, managing partner of Filipino member firm UHY M.L. Aguirre & Co, is cautious about what could actually be achieved. Can those ambitions be met without heaping debt onto the US economy? And will Congress accept whatever the trade-off might be? “Whether Congress can lower the tax rate and how much they can lower it by is the thing to look out for, and directly relates to whether it can implement revenue raisers to make the bill revenue neutral,” says Mike. “So the difficulty lies in achieving the lower rate, (announced in September 2017 as 20% for corporates, down from 35%) while being revenue neutral at the same time.”
President Trump’s tax ambitions have global implications. The worry for countries like the Philippines – one of the world’s leading destinations for Business Process Outsourcing (BPO) – is in his inclination to balance the books by adopting a territorial, US-first approach. US plans to implement ‘border adjustments’ to corporate taxation are aimed at eliminating tax incentives for US companies to outsource jobs abroad.
Mike believes the measures may be counterproductive: “Corporate inversion (doing business outside the US) may not be such an evil after all. Sustaining competitive market stature, the ease of doing business, compliance costs and hunger for growth drive companies to seek better opportunities abroad. In short, there could be compelling reasons why US companies want to move integral parts of their business activities abroad.”
If the US creates the sort of favourable domestic tax environment that sees millions of outsourced jobs returning to the US, many fear a race to the bottom as other countries follow America’s lead.
SIMPLY LOWER TAX
According to Clive Gawthorpe, tax partner at UHY Hacker Young (Manchester), UK, and chair of UHY’s global tax group, the drift towards lower corporate taxes and simpler tax regimes is not limited to the US. “The UK too has been reducing its corporation tax rates, from 20% in 2015 to 19% from 2017,” he says,“ and a proposed drop to 18% from 2020 has now been lowered further to 17%, though with the UK government negotiating terms for its EU withdrawal from 2019, the situation remains unpredictable”.
Other jurisdictions are set to benefit from their governments’ tax policy direction.
“India is gearing up towards a 25% tax rate in the next couple of years, as promised by the Finance Minister – and in principle it’s a good move,” says Sunil Hansraj, joint managing partner at Indian member firm Chandabhoy & Jassoobhoy in Mumbai. “Logically, the exemptions and deductions will reduce, hopefully leading to a reduced number of interpretation issues and hence less litigation.”
Aditya Lodha, managing partner, Lodha & Co, a UHY member firm with headquarters in Kolkata, says: “The 2017 budget seems to be directionally correct, fiscally prudent, strengthens the governance fabric of the nation and is in line with the government’s vision of building a New Age India. It is balanced on intent and its effective implementation will provide the needed direction to the Indian economy.”
China, too, has been reducing its corporate tax bill, according to Yong Sun, managing partner of Chinese member firm Zhonghua Certified Public Accountants LLP and UHY Board member. “The taxation of companies has been reduced by almost RMB 700 billion since a pilot project to switch business tax to VAT launched in May 2016. This reform resolves the issue of turnover tax fundamentally, and releases enterprises from a heavy tax burden.”
Yong Sun adds that China’s tax policy is geared towards attracting investment – domestic and foreign – in important industries. “To attract more investment, the enterprise income tax rate for high-tech enterprises was reduced to 15%. Tax incentives are also used to attract investment in remote areas and certain specific industries, like software development, integrated circuits, public infrastructure and environment-friendly industries.”
As with India, tax reduction is implemented alongside attempts to simplify the tax regime. “In the future, China will continue deepening the reform of taxation, optimising taxpaying services and putting tax preferential policies into effect,” says Yong Sun.
Across the water in Hong Kong, there has been a flat rate of 16.5% on corporate earnings, enabled by the boom years of real estate development which saw tax incomes rise massively. This has historically made Hong Kong an attractive ‘gateway to China’ for businesses setting up operations in Asia.
Hay Yuen (HY) Tai, managing partner, Tai Kong CPA Limited, a UHY member firm in Hong Kong, says: “Hong Kong’s corporate tax rate continues to be one of the lowest, compared with her competitors. China’s economic reform began almost four decades ago – over this period, the Chinese GDP continues to grow to become what is now only second to that of the USA, and the rise in direct investment into China is phenomenal.”
For HY Tai, economic incentives clearly far outweigh tax incentives, but it is complex.
“The Hong Kong economy and Hong Kong’s source investment into China continue to grow – but at a slower rate. I believe the structural and other changes in the direct/indirect tax regime, though important, are only some of the factors affecting business and investment decisions and should not be over-emphasised.”
India’s new Goods and Services Tax (GST) is a flagship reform intended to replace a raft of indirect taxes with on comprehensive alternative – but its success remains to be seen.
“The intention of GST is to formalise the economy and bring the unorganised sector into the mainstream, while at the same time providing equal opportunities and a level playing field,” says Sunil Hansraj. But falling numbers of returns and revenues towards the end of 2017 – the direct opposite of what the unified tax was designed for – may soon set alarm bells ringing. “The initial figures of registrations, collections and so on were reasonably encouraging, although the glitches in the system are becoming visible.
”There is already a time lag in compliance, and we have seen deadline extensions already. The bottom line is that the system has to work efficiently and until the government removes all stops to ensure this happens, ensuring compliance is not going to be easy.” adds Sunil.
Aditya Lodha believes that a fuller picture may not emerge for a few more months, as the system settles down. He also points to the government’s efforts to anticipate and respond.
“GST workshops have already been running for 16 months to the end of 2017, with over 8,400 sessions conducted nationally by CBEC (Central Board of Excise and Customs) as part of their GST outreach campaign. These cover GST awareness and migration training. Of course, there is also a responsibility on professional advisors and we are working with our clients to ensure transition is smooth, and supporting them in process, implementation and filing of GST returns.”
COMPLIANCE AND REPORTING
Ironically, while nations spent much of 2017 planning or implementing what they hope will be simpler corporate tax regimes, the year also saw a significant increase in the complexity of international compliance and reporting protocols over measures like transfer pricing. The implementation of the OECD’s anti-BEPS (base erosion and profit shifting) measures is proving to be a chief driver of change.
Clive has been following the initiative closely. “In the UK we started implementing the BEPS legislation two years ago, in 2016,” he says. “The programme was developed to block avoidance of tax but I think the outcomes of this may be hard to quantify in the future.” However, Clive believes it may bring other results. “BEPS has made countries around the world talk about the issue and may bring about a standardisation of tax legislation so that businesses can plan better.”
The final piece of the BEPS initiative for the OECD is the multi-lateral instrument (MLI). This instrument enables tax treaties around the globe to be changed without the painstaking need for the detail in each treaty to be amended. “But there are concerns here,” Clive adds. “Different countries still have their own ideas on what the instrument means and how it should be interpreted.”
Sunil, for one, is in no doubt of the effect BEPS will have in India. “Global transfer pricing documentation will never be the same again,” he warns. “With the incorporation of the BEPS action plan in Indian Transfer Pricing Rules, the reporting requirements have increased triple fold. As in most locations, the maintenance of a local file, masterfile and country by country reporting will add to already cumbersome and extensive transfer pricing compliance.”
Transfer pricing specialist Claire Sanga, whose firm TPS is an associate of UHY Fay & Co in Spain, agrees that new rules on fiscal structure are complicate, and adds that many companies are yet to take necessary action.
“The businesses that have yet to react are either taking risks or missing an opportunity. They may not have the time to get their transfer pricing right, which is the risk. Or they are missing the chance to streamline their structures for more efficient transfer pricing and tax planning.”
More generally, Claire continues, national and international measures designed to curb tax avoidance (like the Common Reporting Standard, or CRS) are increasing the administrative burden for businesses. “Even at the level of day to day compliance, it’s getting more complex. Many Spanish businesses are struggling with the new requirements for providing immediate information disclosure for Spanish VAT purposes. Even the best IT applications are not sufficiently sophisticated to be able to comply.
“The way countries manage enforcement of these new regimes is important. Penalties are levied for non-enforcement and spontaneous inspections have increased. Compliance converts itself into an exercise in damage limitation, with a focus on doing the minimum amount of compliance to achieve the minimum fine.”
Donna Frye, Director, Transfer Pricing, UHY LLP, Michigan echoes the comments from her colleagues in India and Spain. “Transfer pricing compliance and audits are also expected to increase in the United States. Having consistent, accurate and thorough transfer pricing documentation is the means to minimising risks.”
The last word goes to Clive – “It is clear that while national governments aim for lower business tax and simpler tax regimes in 2018, new global protocols on tax avoidance – and the unpredictability of a newly protectionist US – are going to add new layers of uncertainty to a mixed and contradictory picture. One thing is for sure: there is no easy or satisfying conclusion for businesses in this challenging and changing landscape. We are now working with our clients to help them navigate a way forward in effective and compliant international tax management. Along with my colleagues across the global UHY network of member firms, we will continue to provide advice and reassurance wherever in the world it is needed.”
For more information on these and other global tax matters, contact Clive Gawthorpe, chair,
UHY global tax special interest group.
Email him at firstname.lastname@example.org
The article can also be viewed via the full UHY Global publication here
Notes for Editors
UHY press contact: Dominique Maeremans on +44 20 7767 2621