While U.S. laws governing international taxation haven’t changed significantly in the last year, businesses with operations and/or subsidiaries outside of the United States must closely monitor changes in enforcement activity and administration. Authorities worldwide continue to grow more sensitive to strategies that shift profits to low-tax countries without business substance, and public perception that multinationals are purposefully avoiding corporate responsibility has made multinational corporations popular targets for enforcement activity.
The BEPS initiative
The most comprehensive effort toward tax transparency in multinational corporations is the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) initiative. This initiative is applicable to nearly all multinational organizations. One of the key components of BEPS is Country-by-Country reporting (CbC), which requires businesses to report metrics related to their operations to tax authorities in their home country and applies to U.S. organizations with revenues greater than $850 million. This information allows U.S. and foreign taxing authorities to better evaluate the potential for underpayment of taxes.
Changing public perceptions
Another trend affecting multinational corporations is the application of “social or corporate responsibility” to the tax function. Many of the world’s largest corporations, often based in the United States, are publicly derided for not paying their “fair share” of corporate income tax here or in any other country. While no business owes a public duty to pay more tax than the law demands, some corporations are finding themselves in a public-relations hot seat for managing their tax liability down, in some cases, to nearly zero.
Countries struggle to keep up with the pace of economic change
Existing international tax treaties are reaching the limits of their effectiveness. In the past, treaties were negotiated on a bilateral basis to mitigate double taxation and resolve disputes related to taxpayers based in one country and doing business in another. Today’s multilateral transactions often generate tax consequences in more than two countries, but the current treaty system wasn’t built to handle multilateral transactions efficiently. Tax authorities and courts around the world are struggling to keep up with an economy that evolves at lightning speed.
The cross-border movement of people, products, and information grows daily. Countries respond by lowering the threshold at which they tax foreign businesses in their jurisdiction.
With the increase of the digital economy and the ease of cross-border movement of people, products, and information, countries are increasingly challenging the threshold a foreign business must meet to be subject to tax in that foreign country. Previous exceptions for warehousing or activities considered preparatory or auxiliary to a business are being scrutinized. Some jurisdictions are also now imposing filing requirements on all organizations providing services in their country, even when the services are de minimis.
The rapidly changing international tax environment makes it essential that businesses with multinational operations stay aware of the latest changes in the law and enforcement and administrative practices.