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News analysis: G8 agree new tax regime

G8 leaders have agreed on further transparency on sharing tax information. They will establish automatic exchange of information between tax authorities as the new global standard and will work with the OECD to develop a model for this.

At their meeting in Lough Erne, Northern Ireland, the leaders stated their support for the OECD's work to tackle tax avoidance by multinational companies, and announced they will draw up a template for global corporations to report to tax authorities where they make their profits and pay taxes around the world.

This will give governments a new tool against tax avoidance by multinationals and will be particularly helpful to governments of developing countries, to which they agreed to provide support in collecting tax.

Following the UK's announcement that it will establish a register of company ownership, the G8 agreed to publish action plans to require companies to obtain and hold information on who really owns and controls them, and ensure this information is available to tax authorities and law enforcement, including through central registries.

The UK government also announced further plans to assist developing countries in strengthening their tax systems - known as capacity building - in order to help them claim the tax which they are owed and benefit from information exchange.

The Department for International Development will fund a programme of international tax seminars with HMRC tax experts advising about negotiating information exchange agreements with counterparts in developing countries and support them in joining in the multilateral convention on the sharing of tax information.

ICAEW chief executive Michael Izza said David Cameron was right to put the tax issue on the agenda for the G8 summit, demonstrating leadership and ambition, successfully getting policy-makers to engage in the debate.

Izza called for commitment in establishing automatic exchange of information between tax authorities and information on company ownership. He said the OECD must make progress on its base erosion profit shifting programme so that the international tax architecture reflects the way that international business operates.

"When we look back in time a few years from now, we may see Loch Erne and the G8 meeting as an important part of the step-change in making tax systems work for the benefit of all," Izza commented. "A strong accountancy profession is critical to making the tax system work, both in developed and emerging countries. The profession therefore has an important role to play in implementing the actions that will spring from the G8 summit and make the new system function."

Ernst & Young welcomed the G8's announcement. Its UK head of tax John Dixon remarked that a key concern of tax authorities is to understand the nature of the transactions that cross in and out of their jurisdiction, describing the meeting as a great opportunity for the G8 to extend the focus onto common transfer pricing and dispute resolution rules.

Dixon stated: "The lack of common standards and comprehensive rules in this area places excessive burden on companies and authorities alike, as is evidenced by a steep increase in unresolved mutual agreement procedures, and stops the information being readily compared by tax authorities. This is a good example of a change that would increase efficiency for all.

"Full alignment by the G8 countries around transfer pricing determination and documentation, combined with appropriate exchange of information protocols between the G8 countries, would also provide greater transparency to the tax authorities as to the role that any country's operations have within a global group. This is an initiative that should include all governments."

Ernst & Young's global head of tax policy Chris Sanger said the agreement presented a "great opportunity" for the largest economies to endorse efforts to reduce complexity, increase information sharing between governments, and develop a more consistent approach to transparency between taxpayers and tax authorities.
However, RSM Netherlands partner, international tax services, Mario van den Broek pointed out that businesses are becoming more transparent about their entire tax position, which includes more than just corporation tax. He cited the example of Vodafone, which has included a statement in its annual report, breaking down all the different taxes its pays, such as wage taxes and VAT, not only corporation tax. Given the direction the tax evasion debate is going, other businesses may consider this approach since the debate is to some extent fuelled by "the perception of opacity, rather than any actual wrongdoing".

Van den Broek concluded: "Businesses in general are responsible for generating different types of tax revenue, from payroll taxes to property taxes and VAT. This needs to be understood more widely, and businesses could help through greater disclosure. The focus on corporation tax is somewhat misplaced when you consider that, in the UK for instance, it's only around 10% of total tax revenue. In total revenue terms the amount of money at stake from corporate tax avoidance is relatively small and governments have to consider how much they stand to lose, both in terms of jobs and employment taxes, if they are too aggressive in pursuing the corporate tax agenda."

Aad Rozendal, head of tax technical office at RSM Netherlands pointed out that international tax law is, amongst other things, based on tax treaties which countries have entered into willingly. He used the example of the Netherlands' new tax treaty with China, which has set the tax rate on dividends at 5%.
"Some people may say that is too low and that it will facilitate tax avoidance," Rozendal said. "But that's the rate which both countries have agreed. Businesses act in accordance with the rules which governments have devised. Part of the problem is that legislation is mismatched internationally, so governments will need to make sure that tax law is more closely aligned. But, even in Europe, there is very little agreement on what corporate tax rates should be, and without convergence you can hardly blame businesses for favouring lower tax jurisdictions."

Rozendal went on to assert that there was a problem because of the number of countries with large public sector debts, each wanting a slice of the tax pie. The issue wasn't so much how much tax business should pay, but to whom.

"There is currently not a balanced debate about the fair share that companies should pay," he said. "Look at the media coverage about the alleged tax evasion of Google in the UK in which it is mentioned that only $16m of corporate tax was paid whereas a turnover of $18bn was realised. Looking at the amount of tax paid in relation to the turnover is not a proper indicator for tax avoidance as corporation tax is based on profit, not turnover. So to say that a business turned over billions in sales in a jurisdiction, without looking at profitability, is meaningless in the context of its tax liability."

"Tax evasion is clearly wrong, but no one pays more tax than they are legally obliged to, and there is no suggestion that any of the multinational businesses which have been in the headlines recently are guilty of tax evasion."

Related links
Big Four reputation harmed by tax avoidance: PAC
Tax avoidance a lost battle says PAC

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