What’s Worrying Heads of Tax?


 

That was the question posed to the Heads of Tax of multi-national companies at a forum held earlier this year.

Not surprisingly, one of the biggest areas of concern expressed by all the participants was U.S. tax reform, now enacted as the Tax Cuts and Jobs Act of 2017 (signed into law by President Trump on December 22, 2017). They and their teams have expended a great deal of time and energy following the various proposals and counter-proposals as the complex legislation made its way through the U.S. legislative process. That was no easy task, given the incredibly short timeframe (about seven weeks) in which the legislation was enacted. By contrast, the last major U.S. tax reform, back in 1986 (the Tax Reform Act of 1986), took almost eleven months to wind its way through the legislative process.

Given the speed with which the 2017 Act was passed, leaving little time for the proposed changes to be fully scrutinized and absorbed, many of the participants said that their focus this year would now shift to trying to understand how the new rules would affect, in practical terms, their businesses. But concerns were also expressed as to how permanent the new rules might be. Given the partisan manner with which the 2017 Act was passed, would a future Democratic administration (or, as the Congressional mid-term elections are only eight months away, a future Democratic Congress) seek to change all or part of the new tax code? 

It’s worth recalling that the 1986 Act had significant bipartisan support. Indeed, although President Reagan announced, in his State of the Union address in January 1984, his Republican administration’s desire to simplify and reform the tax code, the bill that eventually became the 1986 Act was officially introduced and sponsored by the Democrats in both the House and the Senate. Moreover, a majority of Democrats in both the House and the Senate voted in favor of the legislation. 

The 2017 Act, by contrast, was passed in an almost entirely partisan manner. No Democrats, in either the House or the Senate voted in favor of the Act. In the House of Representatives 227 (out of a total caucus of 239) Republicans voted for the Act and all 191 Democrats voted against it. Similarly, in the Senate all 51 Republican Senators voted for the Act while all 48 Democrats opposed it. Given those facts, the participants’ concern over the ‘sustainability’ of the 2017 tax reforms is thoroughly justified. (It’s worth remembering that one of the first pieces of legislation the Trump administration tried to repeal was the Affordable Care Act (also known as ‘Obamacare’), an Act that was also passed in a highly partisan manner. All Republicans in the House, with one exception, voted against it and all Senate Republicans opposed passage of the bill.)

Turning to the U.K., there was a consensus among the participants that Brexit will be less of an issue for them than it was in 2017. Most businesses are now proceeding on the basis that Brexit will happen in March 2019 and are making plans accordingly. However, there is a concern over the weakness of the May government and its ability to continue in its present form until and beyond March 2019.

Another area of concern expressed by the participants was public relations. How will their tax strategies be received by the public? This is now much more important to companies than it was a few years ago, almost certainly as a result of recent tax scandals (e.g. LuxLeaks and the Paradise Papers). Companies now seem to accept that they must be much more proactive in this area, and not wait until their names are mentioned, in a negative way, in the press in relation to a tax scandal before they seek to explain their tax strategies. Many companies are now issuing tax strategy documents (either to their employees or to a wider audience) explaining, at least in general terms, what they are doing and why they are doing it. From the comments made at the forum, it seems clear that how the public will react to a company’s tax strategy is now an integral part of a company’s overall tax planning.

Digital taxation was also on the minds of the participants. This is clearly an area which could see significant developments this year. The OECD, which released a report under Action One of the Base Erosion and Profit-Shifting package (see ‘Addressing the Tax Challenges of the Digital Economy’ (October 2015)), issued a further report on digital taxation today. The EU Commission is currently drafting a proposal (expected to be published shortly) which could well recommend the imposition of an EU-wide tax on multi-national companies (those with worldwide turnovers above 750 million euros a year) with EU digital revenues of at least 10 million euros a year. Some EU member states are thinking of imposing their own versions of such a tax. France, for example, is currently looking at imposing an ‘equalization tax’ on large multi-nationals based on their sales made via the internet rather than on their profits. In its 2018 budget, India announced its intention to tax businesses that make sales over the internet to a large number of customers in India but which don’t have a significant physical presence there.

Of all the issues raised and discussed at the forum, the one that appeared to be most pressing on the minds of the participants was the ongoing political uncertainty and instability around the world, and how best to manage, from a tax perspective, the risks arising from those factors.

 

By Stephen Hetherington, Technical Editor, Bloomberg Tax

 

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