The shift towards stricter tax legislation and more aggressive scrutiny and enforcement has meant that corporates are transforming their approach to tax planning. Instead of minimising tax liabilities, companies are now more focused on minimising their tax risk, research from Allen & Overy has found.
The survey shows a significant change to the research released by Allen & Overy in 2015, which saw that minimising tax liabilities was the most important task for corporates. But in the face of rapid changes in legislation, companies are instead now searching for greater certainty around tax issues. Board members are discussing tax issues significantly more frequently than they used to, with roughly a quarter (23%) of corporates who said their board discusses tax issues more than once a month, up from just 5% five years ago. Over a third of companies (38%) said tax issues are now discussed at board level at least once a month.
“The UK is making it a strict liability criminal offence if a company fails to prevent the facilitation of tax evasion by an ‘associated person’”, says James Burton, tax partner for Allen & Overy in London. “The new offence is likely to be in force next year and applies to both domestic and foreign businesses and foreign tax evasion. The only defence is to have reasonable prevention procedures in place – and top-level commitment to such procedures is required.”
Today, the expectation is that companies should be transparent, operating on a full disclosure basis at all times, going proactively to the authorities to discuss situations before they become problematic. Across the board, 34% of corporates say they operate on a full disclosure basis and another 46% say they do so partially.
In the Netherlands, 48% of corporates said they have full disclosure. The UK and U.S. also had high levels at 44% and 40% respectively. “In the Netherlands over the past few years, there has been a big move towards more cooperation and companies accept this behaviour,” says Godfried Kinnegim, tax partner for Allen & Overy in Amsterdam. “When you have trust in the tax authorities, you go to them with things and it does not mean there are issues. That is a recent change. You now consider them as a business partner or stakeholder.”
In Germany however, this shift is only just beginning, with very little trust between tax authorities and taxpayers. Just 18% of German corporates said they operate on a full disclosure basis.
The UK has been at the forefront of the public debate around corporate tax. The government unexpectedly introduced a diverted profit tax in 2015, moving ahead of the OECD’s BEPS (Base Erosion and Profit Shifting) package. It is now forging a new path, enacting a law to make companies liable for knowledge of tax evasion by their advisers, while at the same time cutting corporate tax rates to the lowest level in the G20. James Burton comments, “Despite the pace of change many companies now have a sense that they have things in line. There is concern with the volume and complexity of the new rules that have been introduced in response to the controversies, but there is at least a sense that you know where you stand if you follow the rules.”
Gottfried Breuninger, Global Head of Tax at Allen & Overy in Munich, said, “Just a few years ago, the tax authorities used to be, in most cases, cooperative. There was a constructive atmosphere, a cooperative spirit and reasonable solutions. That has to some extent changed now. The authorities increasingly have a tendency to criminalise normal tax cases and dawn raids are becoming much more common.”
Godfried Kinnegim adds “The priority today is to have an effective and sensible tax strategy, but this is harder than ever – advance clearances are less available, there are new risks to consider such as challenges under state aid rules. It remains to be seen what impact the recent seismic political events will have. But with the new transparency requirements, sizeable financial penalties and the increasing use of dawn raids and criminal law, the stakes have never been higher.”
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