Balancing Tax and Investment Needs a Dilemma for Governments

Governments across the globe faced a real dichotomy last year in balancing the need to address a difficult economy via increased tax revenues with that of maintaining the attractions of their country for foreign investment, according to Taxand. It is a challenge that will continue to be relevant throughout 2013. 

The tax advisory firm asked its employees in 36 countries to reveal the three most pertinent tax changes introduced in their countries last year, and extrapolated a number of key global tax trends from the responses to look out for this year.

Despite some countries overcoming the worst of the global economic downturn last year, the Taxand staff survey revealed that most of the important tax changes in 2012 centred around increasing tax bills for multinational companies (MNCs), as governments continued to strive to raise revenues and pay down sovereign debt. These included developments in ‘permanent establishment’ – the status awarded to some foreign companies operating within their borders – in Chile and China, and also in withholding tax in Denmark and Germany. 

Also of interest was the development of anti-abuse legislation; particularly in India where recommendations to delay the introduction of a General Anti-Abuse Rule (GAAR) are currently under review to avoid limiting the country’s attractiveness for overseas investment in the short-term. The introduction of similar legislation is also underway in Peru and the UK. 

Other measures negatively impacting MNCs last year included: 

  • Limitations to interest cost deductibility in Spain and Sweden, predominantly impacting private equity houses making leveraged acquisitions. 
  • The introduction of capital gains tax (CGT) in Belgium on shares held for less than 12 months.
  • Reinforced limitations in France on carrying forward losses on company profits. 

Country Competitiveness

The wider global economic situation also resulted in a struggle for investment, with several countries seeking to increase the attractiveness of their tax regimes to secure the attention of big business. Six countries – Finland, Japan, Korea, Sweden, Switzerland and the UK – identified the reduction in the headline rate of corporate income tax among the three most important tax changes in their jurisdiction during 2012. 

Other measures introduced last year to stimulate inward investment included: 

  • The lowering of the tax rate for foreign dividends received in Ireland. 
  • Tax reliefs for innovative start-up businesses in Italy. 
  • Romania’s introduction of the recovery of tax losses incurred by companies involved in restructuring operations. 
  • Enhancement of the productivity and innovation credit (PIC) scheme in Malaysia. 
  • New controlled foreign company (CFC) rules in the UK, aimed at making the country more attractive as a location for holding companies. 

Evolution of Tax Legislation and Simplification

Last year was also marked by the evolution of tax legislation across a number of jurisdictions. The development of transfer pricing (TP) regulation was particularly prevalent, with several measures introduced to update and modernise tax systems. Chile, for example, brought its legislation in line with Organisation for Economic Co-operation and Development (OECD) standards, while Canada made changes which will see an increase in the overall tax liability in connection with a TP adjustment. Denmark also toughened its TP regime, with the imposition of minimum fines for non-compliance with the new requirements.

Taxand concludes that MNCs will be disappointed by the fact that most major changes to tax systems over the past year have done little to simplify country regimes. Greece has arguably seen the most favourable changes, with major steps to rationalise, simplify and modernise fiscal provisions, to limit the obligations of companies as well as accelerating the country’s dispute resolution procedures. In Singapore, there is more certainty on the non-taxation of gains from share disposals. However, these two were exceptions to the rule generally.

Summary

“2012 has been yet another important year for global tax systems with a number of changes bringing mixed fortunes for MNCs,” said Frédéric Donnedieu de Vabres, chairman of Taxand. “While we have seen the emergence of numerous positive measures, as countries look to bolster their competitiveness, we have also seen a number of governments continue to penalise businesses in order to plug budget deficits. 

“More encouraging are the developments we are seeing, amongst the emerging markets to bring their tax systems up to date – particularly in the field of TP. This will go some way towards the evolution of a more harmonised global tax system. 

“The latter half of the year has also seen the debate around multinational tax planning come to a head [see gtnews’ coverage of Starbucks and the Parliamentary Public Accounts Committee (PAC) hearings here –Ed]. Looking forward, 2013 is likely to be a crucial year as this debate continues and countries may enforce further measures to limit tax planning under the weight of public pressure,” added Taxand’s Donnedieu de Vabres.

“What is clear is that the prospect of continual tax code changes does little to promote the stability needed for MNCs’ growth and the potential for tax authorities to, for example, penalise certain structures retrospectively, is doing little to encourage investment in an ongoing environment of economic uncertainty. A more sustainable solution that encourages international collaboration will be essential in the future.”

 

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