Q&A: Tax policy developments for governments and multinationals

July 17, 2020

Fiscale ontwikkelingen voor overheden en multinationals

Governments and tax policy

The European Green Deal suggests that well-designed tax reforms can boost economic growth and help reduce greenhouse gas emissions by ensuring an effective carbon pricing.

Q1: Loek, do you think that using taxation as a policy tool, by revising the Energy Taxation Directive and creating a Carbon Border Adjustment Mechanism, is the right way forward?

Well, that's a difficult question to answer for a tax advisor. It is clear that climate change will have a considerable impact on the economy. For that matter governments and institutions like the EU will probably take some considerable measures which will also impact the economy and all taxpayers. I'm curious to see the outcome of the consultation process on CBAM. Personally I would be concerned about the differences in levels of ambition on the carbon emissions and the associated measures taken by governments, and the impact this may have on industries and individual companies which will largely depend on how these have organized their supply chains. It is my understanding that the EU ambition exceeds the Paris Agreement and that certain countries have withdrawn from the latter, notably the US of course. The CBAM is apparently seen as a tool to steer the carbon footprint and therefore an additional complexity in structuring a company's supply chain. But obviously this must lead to a better climate with less emissions, or at least that is the goal of course.

The European Commission also launched the EU Recovery instrument (Next Generation EU) including new revenue sources of the EU budget in the form of (i) Emissions Trading System-based own resources, including extension to the maritime and aviation sectors to generate €10 billion per year, (ii) Carbon border adjustment mechanism to raise €5 billion to €14 billion per year, (iii) own resource based on operations of companies, that draw huge benefits from the EU single market, which, depending on its design, could yield around €10 billion per year and (iv) digital tax on companies with a global annual turnover of above €750 million to generate up to €1.3 billion per year.

Q2: Wilbert, is the EU running the risk of losing the EU Member States support by bringing new elements to the EU own resources?

I am not sure whether this train can be stopped, especially in this time of excessive crisis caused by the COVID-19 pandemic both within individual states and the EU as an institution. With the harmonization of indirect tax, one of the objectives of a free trade zone within a common market was supposed to be met to some extent. Direct tax harmonization is long seen as a violation of tax sovereignty for the member states. However, we have also seen many unilateral and multilateral measures taken against tax planning strategies which resulted in the shifting of profits from one jurisdiction to the other, e.g. BEPS actions, including the MLI, State Aid cases, ATAD. Of course, the BEPS and associated EU initiatives have been successful and have to a certain extent led to harmonized anti-avoidance legislation, with many action items being implemented within a very short period of time. A further harmonization on direct tax, including a harmonized tax base has been considered and discussed within the EU for decades and lately with initiatives around for instance CC(C)TB again. None of these have resulted in agreement amongst the member states, because of the perceived impact on the national budgets. One could question whether climate change or COVID-19 is the game changer for EU Member States to further give up tax sovereignty. In today's global crisis, people do understand that a change in the way we deal with the planet will be required, but I believe that people are more likely to put their trust in institutions close at home and will rely more on their own national governments to take the necessary measures and to decide on the method how to finance these measures than on international institutions. The main challenge for the EU as a whole is whether Member States that have a robust budget are willing to step in and help other Member States.

Q3: Loek, should sustainability be government-led, or should this be a matter of corporate initiatives?

Today's crisis and the connect people tend to make with sustainability, may lead to governments and organization as the EU and OECD, taking the lead or an important coordinating role in these matters. In my view 2020 could become a turning point in these developments. However, this can't be seen as a challenge to be only led by governments or international organizations. Individuals, organizations and corporates all will have to take their responsibility. And this isn't new. During the last decade we have seen many multinational organizations changing the way they run their business with a focus on sustainability. This will vary from the impact the company makes on the environment, to the health and wellbeing of people. In my view governments should stimulate these initiatives and governments may use the tax instrument as it is currently already used in multiple jurisdictions, provided the tax instrument is used in a smart and effective way. This requires rules that are simple, targeted and robust and not subject to abuse.

Multinational companies and tax policy

Q4: Wilbert, which trends do you see in corporate sustainability and tax?

One simple trend is that companies approach us or other consultancy firms to provide support in this area. Ever since the OECD launched the BEPS initiative in 2012 and the EU more or less simultaneously launched its own anti-tax avoidance initiatives, multinational companies have become more transparent in their approach to tax. Tax has become part of the public relations policy of many multinationals. A sustainable tax policy and tax risk management have become an integral part of Corporate Social Responsibility. Within KPMG we have established an experienced network of professionals from across the globe to deliver industry leading practices, research and trusted client solutions to address these sustainability issues, including sustainability solutions in the field of taxation.

Q5: Loek, which guiding principles would you recommend to companies willing to publish tax policy statements as part of good corporate citizenship?

Of course, it is important for companies to consider the overall picture, the trends in the industry and the trends at peers, as well as the legislative landscape. Obviously, some multinational companies may take a very advanced approach and become leading edge and a frontrunner in this field. This will also depend on the overall sustainability strategy of the company. Once multinationals have become very advanced in terms of sustainability goals for the company at large, it makes a lot of sense to also consider transparency in the field of taxation.

Q6: Wilbert, do you think that the tax transparency principles published brings the tax function of multinational companies into a potential conflict with creating shareholder value?

I don't think so. Over time maybe even the contrary. Being transparent on your tax principles may provide a reputational benefit against your peers, whereas being secretive about the group's tax position may bring a potential conflict with the creation of shareholder value for that matter.

Obviously before deciding on the publication of data under such tax transparency principles, company management must consider its impact. This does not apply to tax only of course, but also to the other parts of the business. Business reputation plays an important role, more than in the past. With today's media attention and the overall public debate around tax, of course companies want to make sure that indeed they pay a fair share of tax, whatever the definition of "fair". Being transparent about your aggressive tax planning won't help. For that same reason we have seen companies taking the appropriate measures and making changes in their tax position on elements of their business structure, before the publication of their country by country reports under BEPS 13. Of course there are various degrees in the approach companies may take in publishing tax data under their tax transparency principles. Most companies publish their tax principles or tax policy, but so far only a few have decided to be very transparent about the total tax contribution of the group for instance on a country by country basis, but this may change over time. In December 2019 for instance the Global Reporting Initiative (an independent international organization that helps businesses and other organizations understand and communicate their sustainability impacts) launched a new tax reporting standard that seeks to ensure multinationals are much clearer about how much – and where – they pay their taxes. This has received widespread international support, but of course we now have to see to what extent companies will actually apply the standard. Apart from this standard, it should be kept in mind that public transparency/public country by country reporting may one day become the compulsory minimum standard.