In addition to the main sessions, there are numerous meetings to evolve thinking on critical socio-economic topics. I am honoured to have joined the group working on the Sustainable Global Value Chain Platform, which will look to how global value chains work and what can be done to minimise the downsides and maximise the upsides they can have. Tax will be one element of this project, and I am looking forward to following – and contributing to - this project.
The importance of value chains to taxation
Taxes within the value chain can impede optimum development and influence decisions about location of the activities within the value chain. And in a post BEPS world understanding of the how the value chain works is critical. For these reasons a project looking at value chains is very welcome to all interested in tax. Here’s why.
As we enter into scenario planning for Brexit, as an example, it is evident that the current system of tariffs and taxes was designed for a world where goods were produced in one country and shipped to another. These days production can be spread across numerous jurisdictions, and components of a finished item may cross borders multiple times. Resulting charges can quickly render a business uneconomic. Methods need to be found to address this.
Then turning attention to corporate income tax, in the post BEPS environment we have agreed to the proposition that profits should be taxed where the economic activity giving rise to them is located. So far, so good. Agreeing to this location is much more difficult, especially in businesses where intangibles are important. Sometimes you can’t get to the total value of the chain by adding up the links; there may be something in how the links come together that creates value. What we are finding of course, is that there is a tendency for people to overvalue their role in value creation. In a situation where you have a group of people responsible for the “production” of goods or services and another group of people responsible for marketing and sales, I usually find that both groups think they create more than 50% of the value. We are starting to see this happen between countries.
So in the interests of getting the corporate tax system to work we need to get a better consensus on what value chains look like. But in gaining a better understanding would, it would also be helpful to consider how tax policy needs to develop to deal with the modern realities. It is true to say that the current corporate income tax system does not work well in a globalised, digitised economy. We need to get more minds focussed on this question, looking not just at corporate income taxes but at all possible taxes. I am encouraged to think this could happen as this issue cropped up again in a tax panel during WEF 2018 and continues to be raised across my twitter feeds. I am optimistic that the tax debate is starting to turn from looking to the problems of the past to thinking about the present and the future.
Areas of expertise Operating Effectiveness Pensions and Retirement Funds Tax Tax planning Tax strategiesEducation and qualifications MA St Hugh's College, OxfordAccreditation HM Inspector of TaxesProfessional Associations Forum for Tax Professionals Tax Policy Committee of the ICAEW