minimize your value chain risk amid global tax evolution · 2015-07-29 · minimize your value...
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Minimize your value chain risk amid global taxevolution
Top of MindIssues facing technology companies
1 2014 Global transfer pricing tax authority survey, EY, http://www.ey.com/GL/en/Services/Tax/VAT--GST-and-other-sales-taxes/EY-global-transfer-pricing-tax-authority-survey
Governments around the world are retrofitting their tax policies for the fast-evolving digital economy. Many are seeking a delicatebalance between policy goals of catalyzing and taxing their digitaleconomies. Pivotal to policymakers’ analysis is the movement andalignment of economic substance among countries, which includesagreeing on the definition of “substance” in the first place. Suchcross-border activity bring into focus matters such as the calculationof transfer pricing for services and intangibles among relatedcompanies, the definition of permanent establishment (PE) as a taxable presence in any given country and the location of IPdevelopment and licensing.
Shifting tax landscapeWhen is an international business entity or transaction structuredmore for tax avoidance than commercial objectives? Nationalgovernments are grappling with this question in an increasinglyglobalized, digitized business world — both on their own and within the Organisation for Economic Co-operation andDevelopment’s (OECD’s) far-reaching project on base erosion and profit shifting (BEPS).
Policymakers’ attempts to revise tax rules to “assure that transferpricing outcomes are in line with value creation,” as the OECD putsit, have generated extensive and sometimes heated discussionamong businesses and governments alike. But transfer pricing isnot the only topic up for global debate over the movement andalignment of economic substance. Underscoring the possible extentof change under consideration, an influential report in France has challenged the very nature, as well as location, of value in the digital economy, advocating international negotiations toredefine permanent establishment and raising issues surroundingthe ownership, compensation and taxation of personal data. Also causing tensions among some countries are the revision of R&D incentives (for creating IP) and the evolution of “patent box”incentives (for the location of IP licenses). One country’s taxincentive can be another country’s cause for concern about losing out.
“2015 is shaping up to be a watershed year in global taxation,” saysChanning Flynn, EY’s Global Technology Industry Tax Leader. Thisis, in fact, the year that the OECD is promising to complete its BEPSwork on new global tax guidelines — even as countries are moving
out ahead of the process with new policies of their own. The hope is that national and multilateral initiatives will coalesce in time, butcountries such as Australia, France, the UK and the US seeminglyare forging ahead with their own specific policies, which createsuncertainty about the likelihood of a multilateral outcome.
Risks aboundThe technology sector has been the catalyst of the global digitaleconomy, propagating new digital business models while providingthe products and services driving transformation throughout otherindustries, as well. Thus, technology companies have also foundthemselves on the front lines of global tax policy innovation —managing new risks that companies in other industries are nowcoming to face.
Uncertainty will continue to prevail in digital economy taxation.Although the BEPS project for global tax policy development ischaracterized by a desire for consensus, for example, practicaldifferences continue to arise on the ground, from country tocountry, as global guidelines remain “works in progress.”Meanwhile, technology innovation is certainly not pausing to let tax rules catch up.
What are the business risks?
• Tax increases in weaker economies• Double taxation between countries with different tax schemes• Fines and reputational risk to any company declared non-compliant• Burdensome administrative reporting• A chilling effect on restructuring for operational efficiency • The unpredictability of bottom-line business results• Impact on revenue from indirect taxes such as VAT and the Japanese consumption tax
De-risking the value chain — and finding rewardMultinationals need to plan ahead for tax changes coming at variousspeeds, with different nuances across numerous jurisdictionsworldwide — a diversity well documented in EY’s 2014 Globaltransfer pricing tax authority survey.1 For all that, however, internal considerations may be just as important in de-risking global value chains.
Technology today is driving the restructuring of global business operations into flexibleecosystems of highly mobile resource deployment and value creation. Multinational companiesacross industries are seizing this moment of continuous digital innovation to streamline, advancecollaboration and share services and intangibles such as intellectual property (IP) acrossborders. Their increasingly borderless, cloud-based value chains have, however, created tensionswith national tax authorities and challenges in corporate tax departments.
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Minimize your value chain risk amid global tax evolution
Multinationals need to planahead for tax changes comingat various speeds with differentnuances across numerousjurisdictions worldwide.
ConsiderationsDespite the odds, multinationals’ tax departments still need tofunction day to day, prepare for the various possible scenarios to come, steel themselves against potential business risks andmaybe even find themselves in better shape, tax-wise, when thecurrent surge of tax policy deliberation comes to a welcome end.That is their mandate. Steps toward a tax-effective global valuechain include:
External• Maintain an ongoing survey of the global tax landscape and do scenario planning
• Contribute technical expertise in public consultations on the rules most important to your company’s future
• Plot the evolution of patent box incentives and R&D incentives around the world
• Proactively seek out advance pricing agreements with tax authorities
Internal• Robustly document the allocation of income and profit to the key value driving activities
• Self-assess the ability to readily respond to changing transfer pricing rules and the increased likelihood of associated challenges
• Make sure the tax function is part of any internal discussion regarding business change. n
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Minimize your value chain risk amid global tax evolution
IP provides a case in point. Some national tax authorities havequestioned whether a company doing business in their (higher-tax)jurisdiction was actually exercising control over IP that was on thebooks of a related entity in another (lower-tax) jurisdiction.Companies need to understand where in their value chains peoplecontrol the development, enhancement, maintenance, protectionand exploitation functions of their IP. Some might considerrecasting the internal transfer pricing of some of these functions orrestructuring them. Whether or not such changes are necessary,many might find the answer is greater transparency and advancepricing agreements with tax authorities.
On the upside, an increasing number of countries are introducing or updating R&D and patent box incentives, providing opportunitiesfor globalizing operations. To benefit, companies should make athorough assessment of the changing landscape of available R&Dincentives as part of a holistic analysis including such local factorsas their overall IP regimes.
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors forspecific advice.
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Technology sector leader
Pat HyekGlobal Technology Industry Leader+1 408 947 [email protected]
International Tax Services (ITS)contacts
Joe Bollard+353 1 221 [email protected]
Ian Beer+44 207 980 [email protected]
Technology Tax contacts
Jess MartinGlobal Technology Tax Resident+1 415 894 [email protected]
Olga KoshelkovaGlobal Cloud Computing and Technology Tax Resident+1 703 747 [email protected]
Technology service line leaders
Channing FlynnGlobal Technology Industry Tax Services Leader+1 408 947 [email protected]
Jeff LiuGlobal Technology Industry Transaction Advisory Services Leader+1 415 894 [email protected]
Dave PadmosGlobal Technology Industry Advisory Services Leader+1 206 654 [email protected]
Guy WangerGlobal Technology IndustryAssurance Services Leader+1 650 802 [email protected]