The new Corporate Tax 2021 guide covers 39 jurisdictions. The guide provides the latest legal information on types of business entities, special incentives, consolidated tax grouping, individual and corporate tax rates, withholding taxes, tax treaties, transfer pricing, anti-avoidance, audit cycles, and base erosion and profit shifting (BEPS).
Last Updated: March 15, 2021
The business world has had to be very agile in changing business models during the last very difficult year. This guide will be helpful to all those facing the challenges of deciding what best to do in responding either to the consequences of the pandemic or in reacting to tax changes that have been made in their basic working environment.
The pandemic has undoubtedly cast a shadow over all the economies in the world and over fiscal management throughout the world.
Not quite unnoticed (but not with as big an impact as we might have had), the UK and the EU have quietly(!) implemented Brexit, the USA has had a rumbustious election (which looks likely to result in a number of consequential tax changes for multinationals based there) and the OECD continues to try to change the tax world.
COVID-19 Recovery Puts Spotlight on Potential Tax Rises and Competition
Commentators are currently speculating whether, with the huge government deficits that have been run up in many developed countries, we are likely to see immediate tax rises and perhaps the introduction of new taxes to put economies back on an even keel again.
Again, commentators differ but the majority view seems to be that, with interest rates as low as they are, governments should continue to borrow (if they can) to try to spur economic growth, which can then be relied on to recoup additional taxes and manage debt. (In truth, of course, relative performance between developed countries as manifested in the currency rates has not changed that much given that very many of them have been borrowing to much the same extent – so the commentators are probably right to say there is no sense of urgency in this.)
The idea that additional taxation will take money out of the pockets of consumers and business tends now to be the focus – and the possibility of increased (or new) taxes may, therefore, be put off for a while. (Though, at some point, governments will have to make it clear that there are sensible limitations to the use of the magic money tree and budgetary discipline will need to re-assert itself.)
Attempts by the OECD and some developed countries to rein in tax competition may also need to be paused or slowed down – Pillars 1 and 2 have been making no or slow progress. Whether the US election result changes that remains to be seen.
In the UK, as it adjusts to its new place in the world outside the EU, there seems to be no sense in moving away from the competitive tax economy approach that has prevailed since it was introduced by the coalition government in 2010 (a small start having been made by Labour at the end of the previous Parliament).
At the time of the recent Budget in the UK, many thought that corporate tax rises were unlikely against the background of both the pandemic and Brexit – the Chancellor thought otherwise. He is still facing wide criticism for sending a fiscal rectitude message by raising the corporate tax rate to 25% in the Budget. In doing that, though, he pointed out that the UK would still be very competitive and he has time, of course, to reflect on that decision before the 25% rate takes effect in 2023. Much will depend on how tax revenues have improved as the economic recovery has progressed – and also, of course, on what has happened elsewhere in the world and/or as a result of Pillar 2. This has all the hallmarks of a game of poker – as regards both the message sent to the UK electorate and how the UK is positioned in the global corporate tax rate context.
The basic regime, however, under which the UK has a pragmatic controlled foreign companies regime, no incremental tax on foreign dividend income remitted to the UK, interest limitations like any other country and no withholding tax on outbound dividends seems still to be the right package to encourage existing UK-based multinationals and tempt others to join them.
If you want evidence of the relative success of this approach, you need only consider the case of Unilever. A few years ago, Unilever looked destined to move to the Netherlands in order to achieve the corporate objectives of its then management. That was firmly rejected by shareholders. A more recent study resulted in the conclusion that unifying management and ownership in the UK under a UK holding company made more sense. That move has then been attacked by left-wing elements in the Dutch Parliament as an attempt simply to avoid withholding tax on Dutch dividends and radical proposals have been put forward to impose an exit tax on retained earnings. Whether those proposals will come to pass remains to be seen, but Unilever has bravely gone ahead with the re-domiciliation in any event.
The Dutch furore illustrates another aspect of international taxation: whether jurisdictions want to retain the use of dividend withholding taxes in their armoury and what impact they have on the ability to access capital markets when funding is needed. Withholding taxes on dividends are, of course, simply another way of taxing corporate profits – and jurisdictions no doubt find it satisfactory to raise tax from people who are not necessarily in their jurisdiction and so have no right to vote on whether they should be subject to tax.
With the Vodafone tax in India, taxes on foreign investors in real estate (particularly in natural resource assets) and the Pillar 1 and other digital tax proposals around the world, extraterritorial taxation seems to be very much in fashion. In the corporate world, this may adversely affect M&A transactions – for example, few M&A transactions will proceed without change of control issues having to be considered or dealt with (such as whether a change prejudices the ability to carry forward tax losses or, much worse, triggers deemed disposals of underlying assets) have to be considered and dealt with.
Possible New Approach to the OECD Pillars under the Biden Administration
Coming back to Pillars 1 and 2, the new US president seems more inclined than his predecessor to participate in multinational discussions. Whether this changes the general stance the USA has had in relation to the BEPS programme remains to be seen, but it seems unlikely that the US government will ever learn to love digital taxation when so many of its national champions are affected.
That is, of course, a great pity because without a low-level Pillar 1-type solution that is accepted internationally, chaos seems likely to reign.
The UK has already introduced a digital service tax – but that was obviously not thought by the Chancellor as being capable of paying off pandemic debt. In truth, of course, any such taxes are more likely than not to be passed on to consumers and so would tend to discourage spending at a time when the opposite is being hoped for.
Transfer pricing continues to be one of the most hotly debated topics between tax authorities and taxpayers around the world. Indeed, most multinationals will have a number of ongoing transfer pricing disputes around the world at any given time. The UK tax authorities seem to be proud of the adjustments they have been able to make since the introduction of diverted profits tax (no real change in the rules but a number of measures to put pressure on the process and encourage compliance).
The so-called destination-based tax proposal has been put forward as a way of achieving greater simplicity. It works on the assumption that you cannot have profits unless you make a sale, so, after allowing for returns on expenditure and investment (particularly on intellectual property) in jurisdictions that are farther up the supply chain, the residual profit from the business gets allocated to the jurisdictions in which sales take place.
This, of course, tends to benefit jurisdictions with very high populations (so maybe the USA will learn to love it) but when the easiest part of any transfer pricing investigation to settle seems to be the distribution return at a relatively low level, one wonders whether turning the supply chain upside down in this way really reflects where value is being added or created. No independent distributor would, of course, expect to get a share of the super profits in the group that had developed a valuable brand or other IT on top of is distribution margin.
Pillar 2 seems to be having a slightly easier time and is likely to be supported by the USA – but it is something that the successful developed countries with many natural economic advantages and a reasonably high tax rate can vote for easily, leaving those who need to go the extra tax mile to attract investment feeling deeply misunderstood.
We will see in the coming months what changes the US government might make to the taxation of multinationals, but recent statements by members of the Biden administration indicate that fairly significant tax increases are likely. Whether then there needs to be some restructuring (particularly in the intellectual property area, where jurisdictions such as the UK are imposing taxes on assets held offshore in tax havens that are deployed in the UK) will no doubt become clearer.
Creative Tax Initiatives Set to Play a Role in Brighter Times Ahead
In the investment fund area, it may be that life is getting a bit easier as, particularly in the post-pandemic era, countries seek to attract investment and avoid imposing tax barriers to this objective (such as withholding taxes on pension funds and other sources of investment).
But, in the UK at least, the idea of imposing a wealth tax on individuals has got some traction (some other countries already have such taxes, of course) and the employment tax area continues to be one where HMRC is pushing the boundaries to bring more things into the scope of tax. Carried interests for private equity employees and partners have, of course, been a controversial area for years – and HMRC seems now to be edging towards a different approach on more conventional company share schemes.
So, as we move into the sunny uplands beyond the pandemic, tax and how businesses should be structured will continue to be a matter for debate. Tax advisers are unlikely to be standing idly by.