Beyond the current tax environment

(First of two parts)

Loughlin Hickey, current KPMG Global Head of Tax, was previously named by Tax Business magazine as one of the most influential people in the tax world. He is particularly interested in putting tax into a commercial context, bringing tax into the boardroom and developing collaborative relationships between regulators, businesses and their advisers.

Hickey delivered the following speech on June 23, 2010 at the KPMG Tax Summit in Hong Kong. In his speech he acknowledges the drivers behind the changing global economy, viz. the creation of stimulus packages leading to high budget deficits and the resulting reactions of internal revenue authorities across the globe. He also identifies the trends as to how taxpayers are responding to revenue authorities’ actions.

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Looking to the international environment where countries battle to emerge from the financial crisis we see that there are two priorities: first, there is competition for investment to grow the tax base and secondly, there is a need for tax revenues to help pay down deficits.

A general global response on competition for investment is to reduce the headline corporate tax rates. There are two reasons: first to attract investment and secondly as companies globalise and move activities, and profit shocks hit, it is increasingly being recognized as a mobile and volatile source of income. But how is the reduction in rates being paid for? Generally it is a combination of strengthened Transfer Pricing (to protect tax base), a shift to Indirect Taxes to create a more stable source of tax revenues (as consumption taxes are less mobile) and reduce Corporate Reliefs.

It has been tough for companies but tax authorities have also been at the centre of the storm. First they were a mechanism for delivering stimulus packages and now they are being asked to get tax revenues to pay for it.

They too are following common trends. Globalizing, collaborating and sharing information and ideas. Also, inevitably there is the potential for more disputes which comes at a time when tax authority resources are being squeezed. We can better understand these trends if we can find a common voice amongst tax authorities. If you want to look for representative voices to get a sense of the trends globally you could choose three individuals: in Asia, Michael D’Ascenzo, the ATO Commissioner; in the Americas, Douglas Shulman, the IRS Commissioner and in Europe, Dave Hartnett, the UK Commissioner.

A common link is they are founding countries of the Joint International Tax Shelter Information Centre (JITSIC) – which has co-ordinated actions on actions by global companies. It may sound scary and some would say it is!

It was originally formed to look at large scale international tax planning transactions it has a renewed purpose.

This renewed purpose has four main themes: issues arising from the economic crisis, offshore tax avoidance arrangements, high net worth individuals and transfer pricing compliance.

But JITSIC only brings together a small number of countries.

A broader platform is the Forum on Tax Administration (the FTA) – a body set up by the OECD for tax administrators which brings together around 40 tax administrators from around the world. It also re-inforces the connection of our representative commentators.

Douglas Shulman is the Chair and Michael D’Ascenzo and Dave Hartnett are two of the Vice-Chairs. Each of them is very public in their views.

So let’s listen in on their public conversations – here is Douglas Shulman in a speech in Washington on 8June 2010.

“[This gathering] is an excellent opportunity to look forward to what I see as the next rung in the evolutionary ladder of international tax administration: the progression from co-operation to coordinated action on global tax issues. The starting point is looking for the right launch pad. I believe international bodies such as the OECD and its Forum on Tax Administration are a good start.”

A clear signal that the FTA is a good indicator of tax administration concerns.

So what is on their agenda?

Most recently a continued push for information on offshore activity, an experiment to conduct joint tax authority audits: looking at bank losses, looking at the feasibility of a Code of Conduct globally for banks (taking into account developments in South Africa and the UK) looking at repayments/payments/incentives made through the tax system. Each of these has potential implications for companies operating globally.

Also there is a continuing theme of greater engagement with taxpayers – the so-called “enhanced relationships.”

(To be concluded)

(Noel P. Bonoan is the chief operating officer and vice chairman for Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected])