In this article, Paul Gisby, Senior Manager at Accountancy Europe – shares his views on the first provocation.

Understanding the challenges of corporate taxation in a digitized, globalized economy is one of the key focus areas for the Responsible Tax project in 2019. An initial provocation was published in the spring and a Think Piece is scheduled for the autumn. This will embrace multiple viewpoints, from across the expert spectrum. Roundtables to discuss some of the emerging issues have been held in London and Brussels, with more to follow.

Responsible Tax - Global Taxation in an Era of Digitization

Taxation in a changing world

The current international tax framework is approaching its centenary and has never been under more pressure. The framework dates back to a time where it was inconceivable that a business could have a significant market presence without a physical presence that consumers could contribute to value creation or that countries other than the industrial nations of the west should have any say in international tax law.

All that has changed.

Other changes will have an equal or greater impact. Demographic trends towards an older population, primarily in developed economies but also an increasing issue in emerging economies, are putting a strain on government budgets due to the reduction in the tax base and increasing need for the provision of social benefits.

Patterns of work are changing rapidly, with a fall in the number of secure long terms jobs and an increasing reliance on the ‘gig economy’ for employment. Technological developments threaten to reduce the number of well-paid ‘traditional jobs’ and it is not immediately apparent what jobs will appear to replace them. This puts additional strain on governments’ tax bases – which have become increasingly dependent on labour taxes and indirect taxes (which are predominantly paid out of taxed wages).

It is obvious that there needs to be considerable change – what is less obvious is the new model that we need to replace it.

Globalization and digitalization, which have increased tax competition between nations, cannot be dealt with by individual nations or even groups of nations. It requires international agreement. It is encouraging that recent developments, such as the OECD’s BEPS, show that there is an acceptance amongst many national governments that doing it alone is not a long-term answer.

The impact of digitalization on tax systems has been a cause for concern for national governments from almost as soon as global e-commerce became possible. In particular, the ability for businesses to provide goods and services into other markets without a substantial presence (‘substance without scale’) was identified as an issue at an early stage. The increasing importance of intangible assets, together with their mobility, is also an important issue for tax authorities. It has long been considered that these difficult challenges can be dealt with by enhanced tax anti-avoidance measures and do not require a fundamental change to international taxation.

Digitalization – a game changer?

This ‘light touch’ approach to adapting the international tax system is illustrated to some extent by the recent public consultation document issued by the OECD, Addressing the Tax Challenges of the Digitalisation of the Economy. The main proposals to deal with the challenges of the digital economy, the ‘user participation’ and ‘marketing intangibles’ proposals, proposed relatively minor changes to the international tax framework and appear to be compatible with the current ‘arm’s length’ and value creation concepts.

The marketing intangibles and, particularly, the user participation proposal may be useful as short term fixes, as indicated in the Accountancy Europe response1 to the consultation. However, it is likely that the impacts of digitalization, increasing mobility of taxpayers and the impact of technology on jobs will require more fundamental changes to the tax system.

At the moment, we see little agreement on what these fundamental changes should be or even much willingness by national governments to discuss them.

Perhaps this is not surprising. Although the changes proposed by the ‘user participation’ and ‘marketing intangibles’ proposals do not require a fundamental re-write of the international tax system they do require political will as they will require some nations to surrender taxing rights to other nations. The political difficulties increase exponentially when considering more radical suggestions, such as unitary taxation or destination-based taxation. Surrendering national interests to other nations is not an easy proposition given the current political situation in many countries, but it will be essential to obtain international agreement on such difficult topics.

With the OECD, UN, World Bank and IMF, amongst others, there are sufficient international bodies to work on international consensus, but they could benefit from a more coherent message. It is essential that any international solution has broad based support, so the organizations must not be seen as representing particular stakeholder groups or regions, for example. In that regard, the OECD’s work in establishing the Inclusive Framework on BEPS, expanding its remit to include nearly 130 countries, is to be applauded.

Political courage will be essential to drive through any significant tax reforms – be they domestic or international. Discussions about such topics as changing the tax base (such as a move from taxing income to taxing capital, introducing more environmental taxes or moving more to indirect taxes) will inevitably be heated because there will be winners and losers. Consequently, it is necessary to have a reasoned public debate – based on real facts and not on fake news.

In addition, it is also likely that the tax system will play an important role in dealing with the existential issues of climate change and resource depletion. First, dealing with these issues will require direct funding by national government – a robust taxation system is essential to give governments the financial means to do so. Second, tax can be used to change behaviour – although, using tax incentives or disincentives to facilitate such change must be carefully considered to avoid unwanted spill-over effects.

The accountancy profession will, of course, be ready to provide its expert technical input to ensure that any measures proposed are well designed – to be effective, efficient and equitable.

And above all, fit for the future.

Transparency promotes evidenced-based policy making

To achieve these ends, the policy-making process must be evidence-based. BEPS Action 13, amongst other exchange of information initiatives, has given governments access to sources of tax data previously unavailable, but many tax authorities do not have the resources to fully exploit this data.

Consequently, we believe that there is a role for greater tax transparency. This belief is increasingly being shared by business leaders. This can be seen from business led initiatives - such as the responsible tax initiative from the B-Team2 and CSR Europe’s work on a Blueprint for Responsible and Transparent Tax Behaviour3. The growing demand for an international standard to cover such increased transparency has also been demonstrated by the positive response to the GRI’s draft standard on Tax and Payments to Government4, which includes a template for public country by country reporting of tax information.

We have previously stressed the importance of developing an international standard for public country by country reporting in order to reduce the compliance costs of business and to provide greater consistency of reporting – proposing a model template5 for the disclosure of such information.

We believe that enhanced transparency is essential to rebuild the trust in tax systems that has been badly eroded in the past decade. Trust is an essential component in a functional tax system as it is the cornerstone on which the majority of taxpayers comply with their tax obligations. Trust allows tax authorities to better use their resources to target non-compliant taxpayers, who, if left unchecked, reduce tax morale6.

Building trust to enhance compliance

One important development in building trust is the development of cooperative compliance programs on a national level, based on work by the OECD. Businesses that are prepared to implement strong tax control frameworks and provide enhanced tax transparency to tax authorities benefit from enhanced tax certainty and a less regimented tax audit environment. Tax authorities benefit from being able to divert the resources previously used to closely monitor these businesses to other businesses that they have assessed as having a high risk of non-compliance.

We greatly support the introduction of national cooperative compliance programs. Currently, such programs are mainly targeted at the largest businesses, but we believe that there is scope to extend this to smaller businesses, if suitably scaled. Smaller businesses can still benefit from a tax control framework and their accountants can help them introduce frameworks that are suitable to their business’ size and operations.

We also believe that accountants can help create additional trust to cooperative compliance schemes by providing external assurance of tax control frameworks – the benefits of which are discussed in our paper7 Providing support in tax controls and assurance.

In fact, accountants already create trust in tax systems, many of which would not function reliably without our contribution. However, this doesn’t not mean that we are immune to changing societal expectations of how we perform our work. Both domestically and internationally, there have been calls for the profession to consider the public interest in the provision of tax services, often driven by the profession’s perceived involvement in tax scandals.

Even if one believes these are mere perceptions, the profession has to take seriously its responsibility for ensuring that tax systems function properly for taxpayer and tax authority alike. We have addressed this issue on many occasions in our work, both in respect of responses to consultations and also in proactive papers such as The accountancy profession and taxation: doing the right thing8 and The role of the professional accountant in tax9.

The future will bring many challenges to tax systems and to those that interact with them. The accountancy profession is committed to playing its part in finding solutions to these challenges.

The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG International.