Transparency

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Transparency Safeguard your reputation Where do your tax dollars go? Country-by-country reporting

Pascal Saint-Amans Director of the Center for Tax Policy and Administration at the OECD.

Credits: Courtesy of royale projects, contemporary art; photo: Steven King Photography and Randy Glass Studio (Illustration)

“Lucid Stead” is an installation by Phillip K. Smith III – a playful yet intelligent and most beautiful artwork dealing with transparency.

Editorial

A delicate balance Transparency may well be the watchword of our times. Leaders promise it; voters and s­ hareholders demand it. Both the World Bank’s ease of doing business index and the World ­Economic Forum’s global competitiveness r­ ankings take transparency into account in their calculations. There is a global trend towards transparency in tax matters and, consequently,  that is the focus of this issue. While tax authorities have long sought d ­ isclosure from taxpayers, the current push to greater tax transparency dates to the 1990 s.  A project of the OECD targeting harmful tax ­practices that commenced in 1998 was r­ efocused in 2001 on expanding and improving the exchange of tax-related information between jurisdictions. One outcome of this ­project was the 2002 OECD model agreement on Exchange of Information on Tax Matters. ­Following a push by the G20 in 2009 when the global economy was suffering the effects of the Global Financial Crisis and governments sought additional tax revenues, the number of Tax Information E ­ xchange Agreements in place around the world increased markedly. The EU, with its Savings ­Taxation Directive, and more recently the  U.S. with the Foreign Account Tax Compliance Act ( FATCA ) have sought to enhance ­intergovernmental information exchange b ­ etween tax authorities. FATCA also acted as a catalyst for the Common Reporting Standard r­ eleased by the OECD in 2014. Now the OECD, through the country-by-country reporting ­proposals under the Base Erosion and Profit Shifting project, is seeking a fundamental change in the level of reporting by multinational ­enterprises to global tax authorities. In addition, there have also been moves to ­increase the level of public disclosure of tax i­nformation. The 2010 Dodd-Frank Act in the United States, passed in the wake of the 2008 ­financial crisis which focused on financial ­institutions, also included a provision that ­requires public disclosure of tax information for elements of the extractive industries. The EU, in its Capital Requirements Directive IV (CRD IV ), has mandated public disclosure of certain tax and commercial information by affected financial institutions from 2015. The Commission will use private disclosures of this information made by institutions in 2014 under CRD IV to review whether such information should be made a ­ vailable to the general public going forward. EY – Tax Insights for business leaders №12

Demands for public disclosure of tax ­information present concerns for many. Such tax information is often complex, and therefore, could well be misinterpreted or misunderstood. Businesses are concerned about sensitive ­commercial information being released into the public domain. The level of detail required  would result in an increased cost burden to ­business. Making taxation information publically available will also not lead to enhanced tax ­compliance, in contrast to enhanced disclosure to tax authorities. Initiatives seeking increased transparency ­between taxpayers and tax authorities derive their momentum from a number of ­factors that  include development issues, ideas of fairness, government crackdowns on tax avoidance and advances in technology. The complexities and questions involved are many: What exactly does transparency mean? What will a global standard look like? How will it be implemented? Who will receive the data, and how will they make sense of it? Is transparency an all-or-nothing proposition? Companies will have to start thinking now  about how they will collect the data that may be ­required to be produced, and how they will ­explain it to tax officials. A number of critical transparency initiatives, including the OECD ’s proposal for country-bycountry reporting, will only be finally agreed upon and implemented over the coming years through supra-national initiatives and national legislation. The policy makers, legislators  and ­administrators involved in implementing these initiatives will have to apply good judgment in balancing between the expected benefits  from enhanced transparency and the associated increase in compliance costs, between defining principles and detailed rules, and between trust and excessive controls. Businesses cannot ignore developments in  tax transparency. They must be ­prepared to ­address these changes, and ensure policies and processes are in place to manage the risks ­associated with this dynamic environment. D ­ ialogue will also be required, not only with tax a ­ uthorities but with other stakeholders ­demanding additional transparency. I hope you find our ­contribution to this dialogue interesting and useful for your business, and it ­encourages you to engage in the discussion and to take ­decisions about how to deal with  Tax transparency.

Stephan Kuhn is Area Tax Leader for the Europe, Middle East, India and Africa (EMEIA) Area at EY.

Tax Insights goes global See page 8 to meet EY’s new global editorial board.

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A transparent cycle Businesses are facing persistent calls for more transparency from tax authorities, politicians, activists, the media and the general public. Governments, too, are finding themselves under ­pressure to become more transparent and accountable when it comes to developing new laws and spending tax revenues. The idea of tax transparency is therefore not static, and new ­initiatives, proposals and laws are first developed and then evaluated by a range of s­ take­holders. This cycle is repeated as the demands and interests of these varied groups ­continue to evolve.

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“Everybody is looking at­ ­increased sharing of tax information. It’s all ­technology-related; 20 years ago we just didn’t have the infrastructure, we didn’t have systems. Now we do.” David Dietz

Credit: Steffen Thalemann

Head of Compliance — North America at Rabobank, New York City

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“Tax transparency will either come through ­mandatory requirements or it will be voluntary but it’s coming.” Ross Lyons

Credit: Fabio De Paola

Global Head of Tax at Rio Tinto, London

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International input for Action Plan The OECD released its Action Plan in July 2013, and possible changes to tax policy were announced. Senior tax ­officials from over 100 jurisdictions, G20 countries who are nonmembers of the OECD and the UN all offered input. Between October 2013 and May 2014, interested parties had the opportunity to comment on the different policies contained in the plan. Business input was also ­provided to the OECD through the Business and Industry Advisory ­Committee (BIAC).

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Pressure mounts The 2008 financial crisis put government budgets under strain, and ­multinational companies were criticized for failing to pay their “fair share” of tax. In June 2012, the G20 released a statement calling for “the need to ­prevent base erosion and profit ­shifting (BEPS).” The OECD r­ esponded by ­releasing a report e ­ xamining the impact of BEPS practices in detail.

Internatio nal suppor t

Call for action

Steps required The OECD began introducing changes to transfer pricing guidelines and other BEPS recommendations in ­September 2014 and will continue to deliver ­on its BEPS Action Plan in 2015. Key recommendations for country-by-country reporting were outlined in 2014. A new multilateral ­instrument designed to provide an ­innovative a ­ pproach to international tax matters, reflecting the rapidly evolving global economy and the need to adapt to this evolution, is planned in December 2015.

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Kenji Amino Japan Tax Leader

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Transparency

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Transparency Safeguard your reputation Where do your tax dollars go? Country-by-country reporting

Pascal Saint-Amans Director of the Center for Tax Policy and Administration at the OECD.

Tax Online

Tax Insights platform In addition to these articles, which ­cover the topic of transparency, you will find a wide range of other tax news from around the world.

 taxinsights.ey.com

in this issue

Defining transparency

10 As pressure mounts for more ­disclosure, different views ­complicate ­efforts to define clear levels of transparency. A new era

14 Greater demands for increased ­visibility of tax affairs are coming and businesses need to adapt. Laying the groundwork

18 A look at the evolution of tax ­transparency, its key milestones, and the ­effort to establish a global standard. Indirect tax in the digital age

Discover how to proactively manage the challenges of the digital age.

Turn data to your advantage

24 Multinationals that embrace new technology to more effectively ­collect, process and analyze their tax data are finding there’s also a competitive advantage to be gained.

Staying competitive

42 Jacques de Watteville talks about Switzerland’s recent moves to ­remain ­a competitive economic ­location in an era of global tax transparency. Where do your tax dollars go?

44 The media, NGOs and the public want more transparency from ­governments. Understanding what benefits and challenges increased disclosure brings is crucial. Tax reform and the UN

48 In an interview, Michael Lennard ­explains how truly global tax ­reform will need to involve more than just the G20. It’s a ­challenge that the UN is working toward meeting.

The changing world of reporting

BEPS and legislative risks

Find the highlights from our 2014 Tax risk and controversy survey.

30 With the G20 endorsing the OECD’s Action Plan on Base ­Erosion and Profit Shifting, the push is now under way to ­establish country-by-country ­reporting. Getting the true picture

37 The total contribution of taxes that companies make toward ­government finances far exceeds the amount they pay in corporate tax alone.

How to sta

Ahead of Tax

Anywhere.

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Anytime.

Safeguard your reputation What treasury and finance should know about FATCA

With many FATCA regulations in effect as of 1 July 2014, we break down what treasury and finance professionals need to know.

40 Effective tax communication ­strategies help to manage ­reputational risk. There’s a need to be proactive but also to manage the level of ­information made public and how it is conveyed.

Tax Insights, anywhere, anytime

The Tax Insights platform is an invaluable resource to help you stay ahead of the challenges in the ever more complex world of tax.  Page 33

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Defining tra

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nsparency How differing views complicate efforts to define ideal levels of transparency.

Credit: TheTun, Shutterstock

By Klaus von Brocke

EY – Tax Insights for business leaders №12

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ressure has been building up on businesses to ­increase ­financial and ­nonfinancial disclosure. The reasons behind these calls for transparency are as numerous and varied as the stakeholders calling for them. They include a greater foundation for ­investment decisions by investors, data  to inform purchasing decisions by ­consumers and inquiry decisions by tax administrations. Much of this pressure comes in the form of “transparency initiatives,” primarily aimed at ensuring greater a ­ ccountability (such as the Dodd-Frank financial reforms in the US after the global financial crisis in 2008) and enabling authorities to judge adherence to tax laws.

The transparency balance Tax ­administrations say they need more transparency to collect the ­information necessary to accurately assess whether laws are complied  with and whether the appropriate amount of tax is paid. Businesses  say any transparency rules should impose only compliance costs that  are ­commensurate with the benefits and need to mitigate the risk  that ­commercially sensitive information ­becomes ­publicly available. Most tax professionals and taxpayers support full and compliant ­disclosure to tax authorities. Yet they also caution against public disclosures of excessive i­nformation. The goal should be to achieve a balanced outcome and, if more d ­ isclosure is required, businesses should only be required to give the right ­information to the right stakeholders. This view is also shared by Pascal Saint-Amans, ­Director of the OECD ’s C ­ enter for Tax Policy and ­Administration. In cautioning against the desire of some tax authorities to disclose information publicly about the tax affairs of taxpayers, he stated that tax authorities publicly ­disclosing taxpayer ­information “may be misleading, and it could do big damage unfairly.”

Stakeholder group 1: Businesses

The first group is businesses themselves. Those responsible for compliance with r­ egulations and reporting requirements ­impose rigorous internal reporting to e ­ nable proper governance, forming the basis for information that will be provided to outside stakeholders. However, as competitors in competitive markets, a business would wish to minimize the amount of sensitive information that  is made available to its competitors about its results and operations. Consistent  with this, and as a demonstration of the power of commercial information, a ­business would want maximum insight into its rivals for benchmarking and other ­purposes. These two competing desires normally result in a preference for ­commercial confidentiality.

The stakeholders Who then, are these stakeholders in the transparency debate and what are their perspectives? There are four main groups of stakeholders ­engaged in this conversation, each of which defines transparency differently.

Conclusions Underlying many of these calls for transparency is the core idea that the current tax system is not “fair” and that some tax payers are not paying their “fair share.” It is far from certain increased transparency may lead to ­ changes in the tax system that will mean more tax overall for multinational enterprises. So how do we arrive at a working definition of transparency? As explained above, different stakeholders

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have different ­objectives, and perspectives vary depending on the type of ­stakeholder, their different ­geographies and, of course, their varied points of view and ­underlying goals. These competing priorities mean that a simple definition of ­transparency is unlikely to be achievable. Indeed, the mere use of the term “transparency” ­presupposes that more ­transparency is better. As ­discussed, this is not necessarily

the case, and the debate could move to what level of “disclosure” is right for each type of stakeholder. Only by moving the debate into this level of detail will a coherent regime for “transparency” develop that can provide the benefits that are aspired to by stakeholders. Given that many of the costs of disclosure reside within the ­companies and are not ­immediately apparent to the o­ ther stakeholders, it is critical that businesses remain engaged and

contribute to this debate. ­Business leaders should make sure they engage in discussions with administrators, with national legislators and international working groups, such as the ­Business and Industry Advisory Committee to the OECD, to ­express their viewpoints and raise concerns. This will help achieve a more balanced outcome for future transparency rules.

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Stakeholder group 3: Financial stakeholders

Stakeholder group 2: Tax authorities, ­governments, ­legislators and ­supranational bodies The second group comprises tax a ­ uthorities, governments, legislators and supranational bodies. Tax authorities  are already the main recipient of financial information from businesses. Nonetheless, tax authorities are keen to have more a ­ ccess to information. Take, for example, Australian Tax Commissioner Chris ­Jordan, who during his closing remarks to the G20 International Tax Symposium  in May called on his colleagues “to  collaborate, cooperate, share information more” indeed to operate seamlessly around the globe the way multinational ­enterprises do. Governments and legislatures around the world share this desire for increased tax transparency. The Public Accounts Committee hearings in the UK have ­resulted in calls from its members for more transparency from large multinational companies. This drive for greater ­transparency can also be seen in the OECD ’s Base Erosion and Profit Shifting (BEPS ) Action Plan, in particular the i­nitiative around transfer pricing d ­ ocumentation and country-by-country ­reporting to tax authorities. While a consistent international a ­ pproach to disclosure may have benefits, there is also the risk that differences in ­implementation at the national level will create an even more complex, costly  and inefficient outcome for businesses and tax administrations.

EY – Tax Insights for business leaders №12

Shareholders, bond holders, other ­investors, banks, capital markets and ­regulators of financial systems globally have their own demands for tax ­transparency. In assessing investment ­opportunities or creditworthiness, a ­business’s approach to tax can be an  important criterion. Some ­investors may be concerned about the ­potential  reputational risks and costs ­resulting from certain tax positions being taken. Others may seek to avoid ­investments in  businesses deemed to take aggressive tax planning positions as part of their “socially responsible” portfolio. After the financial crisis of 2008 ,  there has also been a drive for broader transparency and regulation of the ­financial services industry. Industry ­participants, such as banks and insurance companies, are concerned about the costs and burden of complying with requirements like the EU ’s new Capital Requirements ­Directive IV (CRD IV ). The Directive is ­being actively implemented across the EU. For example, in the UK ’s CRD IV country  by country reporting framework, all ­institutions within the scope of the rules ­report not only turnover and profit, but the number of employees, corporation taxes paid and subsidies received from 2015. These disclosures will be made publicly a ­ ccessible, either in the business’s statutory reports or its website.

Stakeholder group 4: NGOs and the media Fourth is the group of the media and NGO s that seek to hold businesses ­accountable for the amount of tax they pay. Ask one of these stakeholders what ­constitutes “transparency,” — e. g., how much financial information a business should ­reveal — and they are likely to set the bar much higher than the other groups. Recently, NGO s and others have ­applauded the OECD for promoting more ­transparency through the BEPS Action Plan and its calls for a c­ ommon template for country-by-country r­ eporting and a two-­tier approach for ­transfer pricing documentation. However,  in contrast to the OECD position, these groups would like the information to be p ­ ublicly ­available rather than restricted only to tax administrations.

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Rethinking tax for a new era Ready or not, greater demands for increased visibility on corporate tax affairs are coming. While it remains unclear what exact form these requirements will ultimately take, companies need to start preparing to adapt.

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ax transparency, ­perhaps ironically, lacks a clear definition. It is a catchall term to cover several distinct, albeit overlapping, trends. What these developments have in common is that businesses ­operating internationally are under pressure to reveal more about their financial affairs to a wider audience. What varies more widely, and what is still unclear in several of the most important initiatives, is precisely what information taxpayers will need to reveal, and to whom. Barbara Angus, who was formerly the lead international tax official at the US ­Department of the Treasury before joining EY in Washington, DC , notes that in many ways, demands for transparency are ­nothing new. “Governments have always been interested in and had access to ­relevant information. In countries around the world, many corporations are under

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Key action points • Monitor and review changes in l­egislation to ensure that you are able to comply with them

• Take stock of the data infrastructure and software you will need to collect the correct data, and consider what changes to your organization’s systems and processes you will need to make

• Even correct data tells only part of the story and can be misinterpreted. Have a plan for how you will explain the meaning of your data to tax officials

• Review your approach to tax in the light of transparency, and consider whether it makes sense to align your tax policy more closely with your ­business strategy

continual examination by tax authorities,” she explains. Various tax authorities have long worked to expand bilateral and multilateral cooperation around the sharing of tax ­information. An important player in this ­effort has been the OECD ’s Global ­Forum on Transparency and Exchange of ­Information for Tax Purposes, ­established in 2000 to benchmark how well countries comply with their tax ­information exchange agreements (TIEA ). This tests countries’ responses to data ­requests relating to s­ pecific taxpayers by foreign revenue ­officials. “The US Foreign Account Tax Compliance Act (FATCA ) and revisions to the EU Savings Directive have helped set the stage for more advanced multilateral arrangements, led by the Global Forum on Taxation. The OECD ’s Common Reporting Standard (CRS ), issued in July 2014 and drawing extensively on the intergovernmental approach to implementing FATCA , is one example. Beginning in 2017, more than 50 jurisdictions applying the CRS — including EY – Tax Insights for business leaders  №12

Transparency

Credit: Marc Wetli

­ merica’s ­Dodd-Frank Act and the EU ’s A major financial centers — will begin the automatic sharing of certain financial ­Accounting Directive. information between tax authorities rather Furthermore, country-based reporting than waiting for a request. This follows requirements have spread from the endorsement by representatives of these ­extractives to the financial industry. As jurisdictions at the annual meeting of Philip Kermode, Director of the ­European the Global Forum on Transparency and Commission’s Directorate-General for Exchange of Information for Tax Purposes ­Taxation and Customs Union, argues, in his in Berlin on October 29. Pascal Saint-Amans, view this has been in large part to alleviate public mistrust of that sector. For example, director of the OECD Centre for Tax Policy and Administration, says that “in this the European Union’s Capital Requirements Directive IV (CRD IV ) stipulates area of transparency, progress has been unbelievable. All countries are changing large financial ­institutions provide countryextremely fast. Five years ago, bank secrecy by-country ­reports on activities, employee was the rule; today bank secrecy is over”. numbers, turnover, income, ­taxes paid Under developments such as FATCA and and subsidies received. More broadly, Denmark has joined its the CRS , governments will leverage global Scandinavian neighbors in making certain financial institutions to collect data on details from corporate tax filings publicly their behalf, rather than relying solely on available, and Australia is doing the same their own resources.” for all large companies. National and An important driver of enhanced ­multinational initiatives to date, however, ­information exchange is technological have been far from coordinated. The most ­advances that allow authorities to gather, talked-about current trans­parency exchange and analyze this data, in a way ­initiative is the effort under the OECD ’s that would have previously been too costly and time consuming. Just as important, however, has been the desire of ­governments to combat tax avoidance. The push for greater intergovernmental Tobias Brauner Head of Corporate information sharing was a direct response Finance & Tax at to growing concerns about the use of ­Daiichi Sankyo offshore ­financial centers and tax havens. ­Europe, a global The push for disclosure The link between perceptions of fairness and tax has driven another element of the tax transparency picture: the push for greater public disclosure. The earliest ­example is the Extractive Industries ­Transparency Initiative (EITI ), launched in 2003 in response to complaints of civil ­society organizations about the secrecy surrounding tax and other payments from natural resources companies to governments. While a primary goal of the EITI was to make governments receiving these payments increasingly accountable for how these monies were spent, it also made businesses operating in the ­sector more transparent. EITI is a multistakeholder organization — including government, corporate, NGO and investor representatives — which sets standards for the publication of tax and other ­payments to countries related to oil, gas and mining ­activity. Various governments have passed rules to effect greater ­compulsory d ­ isclosure too, notably EY – Tax Insights for business leaders №12

­ ction Plan on Base ­Erosion and Profit A Shifting (BEPS ) to ­develop a template for corporate country-by-country reporting. This will require companies to report, for every country in which they operate, figures for turnover, profit, taxes paid and accrued, employees and assets — data that will either be provided to, or automatically shared ­between, all relevant national tax authorities. This focus on transparency is happening in the context of widespread public concern at what is seen as the inappropriate use of legal strategies to reduce tax payable through ­shifting profits to low or no tax jurisdictions. Such concerns have grown more ­pronounced since the early 2000 s. David Dietz, Head of Compliance — North America at Rabobank, notes the striking change in the public mood: “Tax avoidance by corporations is now automatically front page news. ” He is not alone. A recent EY survey, ­Bridging the ­divide, which polled over 800 executives from leading global companies, found >

pharmaceutical ­company.

“Hiding things doesn’t make sense. You can’t. That is not the role of a modern tax function, nor has it ever been.” 15

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Dana Moscaliov Senior Tax Advisor at DOF Subsea Australia, a subsea construction and engineering company in the oil and gas industry.

“We are all for disclosing ­information to the tax ­authorities, but have ­reservations about having to disclose what is ­essentially ‘raw state’ ­information to the public.”

activity such as employee or production figures. Based on this experience, Phillips concludes that keeping the OECD reporting template unaltered and consistent may be challenging. What companies should do Transparency has already reshaped the tax world. Tobias Brauner, Head of Corporate Finance and Tax at Daiichi Sankyo Europe, says: “Hiding things doesn’t make sense. You can’t. That is not the role of a ­modern tax function, nor has it ever been.” Most companies are not yet ­prepared for broad new reporting requirements. ­According to a Thomson Reuters survey published early in 2014, only 35% of global firms have a tax transparency ­strategy. Given the global focus on greater disclosure requirements, this presents risks; but given uncertainty about proposals may evolve as they are ­implemented by countries, what should firms be ­doing? Barbara Angus explains that tax transparency is something to think about on many levels. Probably the most basic level is in that of data infrastructure and software. Rabobank’s David Dietz notes that FATCA alone involved an 18 -month period of significant investment in systems and redesigning processes for his organization. Looking ahead, he notes that companies will need to ­anticipate the needs of providing specific information to officials when putting ­systems in place. Getting necessary data — which is by no means easy — is only the first step. A ­strategic decision is required to ­determine whether and how, a broader ­explanatory context to data may be ­provided to tax authorities and, possibly, wider stakeholders. Barbara Angus expresses concern that the data requested in the OECD country-by-country template are high-level and rough. “The data requested could be prone to ­misinterpretation and misunderstanding for a variety of reasons. For example, a company may be running very different businesses in different countries so that comparison across countries would be meaningless,” she says. The risk of misinterpretation is even greater in the context of public disclosure where information would be in the hands continued on page 18 > EY – Tax Insights for business leaders  №12

Credits: Matthew Dakin, NOI Pictures and LUZphoto Agency S.r.l. - via Vivaio, 6 - 20122 - Milan

that 89 % are concerned about media coverage of corporate tax positions and ­potential misrepresentations. Under the OECD ’s proposal for countryby-country reporting, the ­recipients of the data will be tax authorities rather than the public. This may not ­ultimately satisfy ­demands for broader transparency from a public that sometimes distrusts tax ­authorities almost as much as companies themselves. EY ’s Barbara Angus, while ­expecting the OECD to remain focused on reporting to tax authorities, says that the potential for expansion ­remains a concern. “There may be p ­ ressure to have what now is a report to tax authorities to be made more public” says Barbara Angus. A major concern for ­multinationals is that even the high level, aggregate information being contemplated for inclusion in the BEPS template would be commercially sensitive. The OECD is aware of this issue and is ­continuing to consider how to best address it. Pascal Saint-Amans expects one of the challenges under the new reporting regime will be ­protecting the confidentiality of shared data. Even if the data is not made public, though, past experience from the US states does not bode well for those hoping that the reporting element of the BEPS project will lead to a coherent international reporting environment. Andrew Phillips, of EY ’s Quantitative Economics and Statistics Group in Washington, DC , notes that, after state income tax receipts dropped markedly in the wake of the 2002 recession, state-by-state r­ eporting requirements ­became increasingly common. The main impetus was for state governments to ­determine whether they were receiving an appropriate share of tax revenue from companies operating across the country. But even with a federal US coordinating body attempting to create a common reporting method, the process led to a wide range of different state ­requirements. “You don’t see consistent information being requested,” says Phillips. “Nobody is sure exactly what question they are trying to ask or what the answer is. In the US states, the question was, ‘Are companies paying their fair share?’ but nobody knew what the answer was.” Instead, different states took different approaches, some relying on revenue realized in-state and others on v ­ arious measures of operational

Transparency

Introducing BEPS Pascal Saint-Amans, Director of the OECD ’s Center for Tax Policy and Administration, talked to EY ’s Tax Insights team about the latest progress on ­country-by-country reporting under the Action Plan on Base Erosion and Profit Shifting (BEPS ). Tax Insights: What do you see as the main points of agreement coming out of the BEPS discussions this summer on country-by-country reporting and what ­impact do you hope these will have on the operating environment for multinational businesses? Pascal Saint-Amans: A template has been agreed which will require all multinational countries to report, on an annual basis, six elements of ­information about every country in which they are operating to every country in which they are ­operating: turnover, profit, paid taxes, accrued taxes, number of employees, and assets deployed to ­conduct business activity. It has also been agreed that this information will go to tax administrations only and not to the general public. This is a massive agreement. We have all 44 of the G20 and OECD countries — 90 % of the world economy — agreeing on an equal ­footing, which I think proves how ­important it will be. Very simply, the completed template will help to stop aggressive tax ­planning and change practices that are currently about divorcing the location of ­business activities from the location of taxable profits. We’ve come to a point where the international tax framework is used to plan non-­taxation and this will come to an end through the ­measures we are ­developing. Tax ­administrations will be able to ­identify very clearly, in a single ­document, whether or not they “smell a rat,” such as where, for ­example, Pascal Saint-Amans you have all your profits in a zero tax Director, OECD’s Center for Tax Policy and Administration. Saint-Amans was jurisdiction where you have no sales, ­appointed as Director of the Center for no ­employees and no assets.

Tax Policy and Administration (CTPA) at the OECD on 1 February 2012 . Prior to this, he played a key role in the ­a dvancement of the OECD tax transparency agenda in the context of the G 20 .

What have been the major stumbling blocks to progress in this area? The idea of country-by-country ­reporting has been in the air for some years, but there was no progress because of a lack of strong ­political support. We got that support in 2013, both at the G8 Leaders’ Summit, which requested a template on country-by-country reporting, and then at the G20. Once we had the political ­commitment, it was easier to negotiate. Clearly countries do not have the same views. But they

EY – Tax Insights for business leaders №12

all agreed that the right thing to do was agree on a common template, so that we didn’t end up with a proliferation. That would have been a disaster for the business community and not be helpful for tax administrations either. This all sounds easy, but it is tedious and extremely complicated to ­negotiate. Our job is to come to practical solutions, and we’ve done that. Throughout this process, how would you characterize the attitude of business? I’m not sure there is a single position from the business community. I’ve perceived mixed ­feelings including recognition that it is not illegitimate to impose country-by-country reporting, although some don’t like it and have said that as well. But, all have rightfully indicated that the cost of ­compliance should be taken into account and ­flexibility offered so we don’t end up with expensive, inconsistent, or unreasonable mechanisms. We have been extremely sensitive to the ­compliance costs of companies. There will be a ­pretty good level of flexibility in choosing the ­method of doing country-by-country reporting. Some ­companies can take a bottom up approach; others cannot because of the way their accounts are done and the level at which they consolidate data. We leave companies to choose the most ­efficient, least costly way to report, but they have to stick to it across time. What are the next challenges for implementing ­country-by-country reporting? In the coming months the technical issues need to be decided, such as whether there should be ­exemptions for small and medium-sized enterprises and entities which might not be relevant for the ­exercise. We will also look at whether companies will fill in the template for every country where they operate or do so once for the tax administration in their headquarters country and then that tax ­administration would communicate it automatically to all the others. An important longer-term challenge is that ­transparency is great, but it doesn’t mean that the information should be everywhere. It should be just for tax administrations, and we need to make clear and have agreement on the process through which tax administrations will obtain the information. We have challenges in terms of making sure the ­information is protected, is held confidentially, and is shared only with tax administrations, but that this process is done in an efficient, timely manner. If the process doesn’t happen quickly, pressure may well grow to make the information public. ı

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Transparency

continued from page 16 > of persons who are not tax ­specialists. This is probably the biggest concern for companies. “We are all for disclosing information to the tax authorities, but have reservations about having to disclose what is essentially ‘raw state’ information to the public. There are many lawful reasons why a tax payable might differ from say 30 % of your accounting profit, but without tax specialist knowledge the information is open to ­misinterpretation,” says Dana Moscaliov, Senior Tax Advisor at DOF ­Subsea ­Australia, an engineering company in the oil and gas ­industry. Addressing this aspect of transparency will require reconsideration of how businesses discuss tax. For example, Rio Tinto and ­Vodafone, in order to

give a more holistic view of their societal contribution, have ­issued public reports. These include country-by-country ­information not just on corporate income tax but also on royalties and payroll taxes of employees. Doing this is not a simple matter of releasing data — it requires a ­cultural change. Such a voluntary report may not be the optimum strategy for other ­companies, says Barbara Angus. “It is something that companies need to think about strategically — to think about what the information will show, and about where they will need to be able to tell the full story beyond the particular data points.” Finally, in an atmosphere of greater transparency, firms need to be certain that

if their tax affairs become public, they will pass increasingly stringent regulatory and public scrutiny. George Trollope, Vice President Tax at Sasol, a South African ­energy firm, explains that the shift toward tax transparency has swung the balance in favor of tax planning developed within the business context. “As in the past, our focus today, and very much the driving principle of our approach to tax is a tax p ­ olicy that is aligned with the group’s ­business strategy,” says Trollope. A more transparent world is on the ­horizon. This will require not just the ­release of information but new ways of thinking about how tax data is gathered and presented.ı

Laying the groundwork What began as a multilateral agreement to ­cooperate on tax matters led later to ­measures to ensure greater ­accountability in the financial ­industry and to current ­efforts aimed at establishing a global standard for tax transparency. 18

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Credit: Alain Benainous, Getty Images

Transparency

2002 — 03: Publish What You Pay campaign; EITI Principles approved Following the launch of the Publish What You Pay campaign by NGO s, G8 Ministers call for greater transparency in the extractives ­industry. The EITI Principles are approved in London in 2003. The then UK Prime Minister Tony Blair says the aim is to ensure funds g ­ enerated from extractive industries are put toward a country’s development.

Tax transparency milestones

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1988

1995

• Convention on Mutual Administrative Assistance in Tax ­Matters signed

• OECD Transfer Pricing Guidelines approved by OECD Council

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Transparency

Credit: The Official White House Photostream, Pete Souza

2010 — 2011: Dodd-Frank Act signed; European Commission to take action US President Obama signs Dodd-Frank ­Wall Street R ­ eform and Consumer ­Protection Act in July, ­ushering in major reforms within the financial industry.  European Parliament in S ­ eptember requests European Commission to take “action” in the area of transparency and accounting in extractives industry. European Financial Reporting Advisory Group (EFRAG) releases the ­discussion paper Improving the Financial Reporting of ­Income Tax.

1996

1999

2000

2002

• G7 Lyon Summit addresses tackling harmful tax practices and tax havens

• Global Witness report A Crude ­Awakening helps galvanize civil ­society around the principle of Publish What You Pay for the oil industry

• OECD produces list of tax havens • Global Forum on Transparency and Exchange of Information for Tax Purposes established

• OECD publishes Model Agreement on Exchange of Information for Tax Purposes

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EY – Tax Insights for business leaders  №12

Credit: OECD, Carolina Ziehl

Transparency

2012: Proposals for EU directives initiated; OECD ’s new BEPS initiative supported by G20 Council of European Union initiates discussions on proposals for EU Directives on Transparency and Accounting. Britain and Germany call for greater international ­cooperation to address profit shifting by large corporations at the G20 Meeting in early November  in Mexico City. The G20 Finance Ministers publicly state their support for OECD ’s new BEPS (tax erosion and profit shifting) initiative.

2003

2009

2010

2012

• Extractive Industries Transparency Initiative launched following the NGO-led Publish What You Pay ­campaign. Participating ­companies ­begin country-by-country reporting of payments to governments

• G20 Summit in London agrees to take action against tax havens • Rapid increase in number of tax ­information exchange agreements

• U.S. Congress passes Foreign ­ ccount Tax ­Compliance Act (FATCA) A • OECD publishes substantially revised Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

• G20 Meeting in Cannes issues Final Declaration referring to “the need to prevent base erosion and profit shifting” • First intergovernmental agreements for ­information exchange under FATCA signed

EY – Tax Insights for business leaders №12

21

Credit: Vincent Kessler, Reuters

Transparency

2013: BEPS plan released; EU ’s Capital Requirements Directive (CRD) IV amended OECD in February issues landmark report examining impact of BEPS and releases action plan in July. The EU Parliament approves  new legislation in June that would require entities in the extractive industries to reveal payments to governments in each country  where they have operations. EU finalizes drafting of Accounting Directive to require reporting of payments to governments by entities ­involved in the extractive and logging industries in the EU. 2013 • OECD publishes Addressing Base Erosion and Profit Shifting report • U.S. Senate Permanent Subcommittee on ­Investigations holds hearings on methods corporations use to shift ­profits offshore

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• EU Accounting Directive adopted, requiring country-by-country reporting of payments to governments by entities involved in extractive and logging industries

• EU Capital Requirements Directive IV (CRD IV) adopted requiring countryby-country reporting of income and tax information of large financial institutions

• Australia requires publication of tax payable by all corporations with an ­income of over AUS $100 million • OECD BEPS Action Plan includes ­development of transfer pricing ­guidelines including country-bycountry reporting

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Credit: OECD, Julien Daniel

Transparency

2014: Automatic Exchange of Information in Tax Matters endorsed Declaration on Automatic Exchange of Information in Tax Matters is endorsed during the OECD ’s annual Ministerial Council  Meeting in Paris by all 34 member countries, along with Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia,  Latvia, ­Lithuania, ­Malaysia, Saudi Arabia, Singapore and South Africa. The OECD says it will result in lower costs and greater e ­ ffectiveness as tax administrations administer and control tax compliance.

2014 • OECD releases an update on its BEPS initiative, including countryby-country guidance

• More than 90 countries publically commit to Automatic Exchange of Information in Tax Matters • Mandatory country-by-country ­reporting for large financial institutions under the EU’s CRD IV begins

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2015

2017

• EU member states required to have in force legislation for EU Accounting Directive • Canada expects to enact mandatory country-by-country reporting for the ­extractive industry

• First Automatic Exchange of I­ nformation in Tax Matters based on the OECD ’s Common Reporting Standard expected to go live for “early adopter” countries and other interested parties

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Transparency

How to turn data to Advances in digital technologies are increasingly spurring companies to use their data to discover more about customer behavior, increase efficiency and generate strategic insights. This holds true in tax – multinationals are increasingly realizing how important their tax data has become. But much needs to be done in terms of infrastructure and systems in order to benefit.

By Joe Dalton

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n the wake of the financial crisis of 2008 —09, tax authorities remain under pressure to deliver increased revenues with fewer resources. To do so, many of them are adapting their methods, ­particularly regarding their treatment of large ­corporate taxpayers, which in turn has significant consequences for how multinationals manage their data. One of the clearest shifts large taxpayers have to deal with is the demand for more detailed ­information about their business activities — such as the emergence of country-by-country reporting (CbCR) initiatives that will require businesses to detail how many employees they have and how much ­operating income on a per-country basis. Complying will be especially tough for the many organizations that still rely on spreadsheets to manage and store their ­financial data. Speed is one of the new challenges companies are facing. Countries such as Australia, Canada, the Netherlands, the UK and the US now offer large taxpayers the choice of being audited in real time. Such systems enable taxpayers to gain certainty about the tax treatment of a specific transaction much earlier than would ordinarily be the case, while the tax authority benefits from transparency. But delivering on this requires taxpayers to develop the capability to report all relevant transaction tax data — including ­complex data related to transfer pricing models — in real time to the tax authority. This is challenging to implement but also enables tax leaders to provide ­internal stakeholders with a far clearer picture of their financial outlook and related tax risks.

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Albert Lee, partner, leading the EY Tax Performance Advisory practice for Asia-Pacific, predicts that a new type of audit process, in which tax authorities effectively “plug in” to a company’s raw data sources with their own technology, will become more ­commonplace. “It’s far easier to pinpoint exceptions and errors with an algorithm than to search through a paper file,” Lee says. “Companies need to get ready for the fact that if they have data that can be processed, it can also be audited. This is something companies should stay on top of.” Some governments are already plugging into ­companies’ raw data to audit indirect tax payments. In EY ’s 2014 global survey on VAT/GST electronic ­filing and data extraction published in April, 69 countries reported that their tax administration uses data extracted electronically from taxpayers’ systems to carry out audits and detect errors or weaknesses in the enterprise resource planning (ERP ) systems and controls of taxpayers. Seventy-six percent of ­attendees of a related webcast said they expect tax or trade authorities to increase their use of data ­analytics in the next two years. The prospect of entire databases being audited at will by revenue authorities has huge repercussions for how taxpayers hold and store their data. “Private­ ­industry needs to be on equal footing with the ­organizations that regulate and investigate them,” says David Remnitz, Head of Forensic Technologies and Discovery Services at EY in New York. Regulatory demands Multinationals also face a wave of new tax regulations as governments seek to increase transparency on ­corporate tax affairs. Increased disclosure of corporate tax data is central to many of these changes, and these will challenge companies to update their systems and invest in new technologies, such as cloud-based ­financial systems and new data management systems. EY – Tax Insights for business leaders  №12

Transparency

your advantage For example, recommendations for CbCR in the OECD ’s base erosion and profit shifting (BEPS ) action plan mean that far more granular data will likely be ­required by tax authorities and potentially by the public. Jeff Westphal, CEO at Vertex, provider of tax ­technology that many EY clients use, says CbCR will require companies to reorganize information in new ways. “Ensuring that tax, finance and legal data are ­organized in a common data format and stored safely will become even more important if widespread country-by-country reporting becomes a reality, ­placing a significant burden on companies to change their data systems,” he says. The US Foreign Account Tax Compliance Act ­(FATCA ) is another example of regulation that will stretch taxpayers’ data management capabilities. Vertex’s Westphal says many companies have a long way to go to deliver on these new data demands. For example, it is not uncommon within global organizations to see data silo issues arising: data sets are often tied into different ERP systems, spread across ­divisions and countries, and in multiple formats, ­making access and exchange of information from ­different parts of the business challenging. These problems can be particularly serious for ­companies that have grown quickly or gone through a merger or acquisition and can leave tax professionals struggling to consolidate data sets or manually review spreadsheets when asked to respond to a tax ­inquiry. Turning data to your advantage However, those that are embracing these challenges are realizing that benefits are available in embracing the changing role of technology, not least from ­implementing more effective methods of collecting, processing and analyzing their tax data. While some may focus purely on compliance, other companies are asking what additional benefits may be gained. Businesses are recognizing that there are several ways that a new approach to tax data can deliver competitive advantage. Some of these are as follows: Live, standardized tax data. Creating a broader base of data that is up-to-date and highly accurate to share with revenue authorities will make filing and ­reporting processes more efficient and reduce the time and resources needed. Tools can also be implemented that generate ready-made or custom reports for EY – Tax Insights for business leaders №12

audit and planning and automate the management of filing due dates. Strategic insight. Once data is re-ordered into a format that is accessible across the global business, the possibilities to manipulate that data and extract business insights can be greatly enhanced. Tax data dashboards that make consolidated tax data easier to visualize can also be a great help in identifying ­potential tax issues as they arise. This data can also support scenario ­planning, helping business leaders better assess the tax implications of major investment decisions. “The finance department has stopped collecting ­information just for the sake of reporting it to ­shareholders. Tax professionals should do the same; if they must collect more information for tax monitoring or tax disclosure requirements, they should find a way to make it useful to the business as well,” explains EY ’s Lee. “Tax data reporting is about getting an overview of tax indicators to run your business better. ­Companies should ­perform continued on page 29

Brazil’s digital bookkeeping spurs ­technology investment Brazil’s Internal Revenue Service (RFB) has implemented a system of real-time raw data auditing to attain greater tax transparency for the government and to combat fraud. The public digital bookkeeping system (SPED) became mandatory in January 2009, and it requires corporate taxpayers to electronically ­record every tax and accounting operation and file that data to tax authorities, who cross-check it and examine the financial life cycle of each transaction in a company. “The government does the returns for the corporations and sends it over for review, approval and signing, instead of the other way around. That’s how much real-time data collection is going on in Brazil,” says Carolyn Libretti, a partner for tax services at EY in Brazil. SPED is seen as a revolutionary change in the relationship between tax authorities and taxpayers, as it automates their interactions. It is also putting pressure on companies to implement sophisticated new tools to deliver electronic files in the required digital format, without errors or inconsistencies. Those that fail to deliver face fines from the RFB.

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Transparency

Tax business intelligence What do businesses need to do to generate the best value from big data and realize business benefits?

Management

Public

Business

Look at

Crea valu te infore-add fro mati on m

t men e l p Im tax new lations regu

Demands

D e li dataver real in time

R m ec or o r e d da ta

Challenge

t t an n or ev tio e p el a R l r rm al fo in

Stakeholders

s Focu x on tairs affa

Government

Environment 26

EY – Tax Insights for business leaders  №12

Transparency

Governance  & strategy

s rea c n I

e

ve Impro

Call for action

Process efficiency

Generate

Detec IT Infrastructure

Inv est

t

e information environment Real-tim

Risk management

Data management

Analysis 27

The Solution EY – Tax Insights for business leaders  №12

Strategic insight and value-add Government

Tax business intelligence Stakeholders

Standardized tax data

Tax dashboard 1

2

3

A

B

C

Advantage Management

1   Direct tax 2   Indirect tax 3   Transfer pricing

Data quality improvement

Public

A   Compliance management B   Controversy management

Improved risk ­management

C   Entity management

Benefits EY – Tax Insights for business leaders №12

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Transparency

Dashboard

Detailed and drilled-down analysis

Flexible reports

Real-time updates

Credits: Vorname Name

Increased ­automated ­processes

Outputs EY – Tax Insights for business leaders №12

>  continued from page 25 dashboard-level ­monitoring — not to please regulators but because it’s good business practice.” Improved risk management. Some revenue ­authorities, such as the Canada Revenue Agency (CRA), are seeking to implement risk-based audit ­processes for large taxpayers. Data analytics tools are used to ­establish taxpayers’ risk profiles, with ­effective tax rates and gross margins compared across taxpayers within an industry. As businesses implement more ­sophisticated analytics tools themselves, these can help to proactively determine the level of audit scrutiny they will likely be subject to. Tax authorities themselves are already embracing such approaches. For many years, Revenue, the Irish Tax & Customs Authority, has been electronically screening taxpayers’ data covering several years and uses 400 + business rules to quantify risk, says Duncan Cleary, formerly a senior statistician in Revenue. Using business rules and predictive models in combination, Revenue also monitors the real-time risk of fraud and error, for both PAYE (pay as you earn) and VAT (value-added tax) taxpayers. Tapping nontraditional data. Tax authorities might seek to tap nontraditional sources of information ­during investigations as their digital sophistication ­increases. Such sources may include third-party watch lists, news media and social media, among others. ­Taxpayers can take advantage of such data too: with tax becoming so strongly linked to reputational risk, using external data sources can be an effective way to set strategies to counter any potential reputational damage. “If companies had more advanced technologies in place, they could analyze a far wider data population in a much more sophisticated way,” says EY ’s Remnitz. “Companies only scratch the surface when they conduct fact-finding, investigations or diligence exercises using basic tools or data sets that are too small.” Detecting internal fraud. With advanced analytic ­capabilities, internal auditors can help companies gain confidence that their underlying business is free of bribery, corruption, asset misappropriation and financial statement fraud. EY ’s 2014 Global Forensic Data Analytics Survey of more than 450 executives in 11 countries found that advanced data tools are ­ already being used to better manage internal fraud risk. Big data and analytics have seen major ­investment over recent years and are likely to reshape how many companies operate. In the tax world, there are few more important trends than the global push for greater corporate financial transparency. Tax leaders with the foresight to adopt new data technologies and harness these forces will not only better position the company to cope with transparency pressures but may also ­deliver new benefits from their existing data, including enhanced compliance and efficiency, to safeguard the reputation and brand value of their business.ı

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Transparency

A new world for multinationals By Gerri Chanel

As increasing numbers of people call for better insights into who pays tax, and where, ­momentum is developing around a system for country-by-country reporting. This is the new reality that companies need to start planning for.

I

“It's no use going back to yesterday,” said Alice after arriving in Wonderland, “because I was a different person then.” And so it is for ­multinationals as they face a new tax reporting environment in which governments, activists and the broader public are seeking unprecedented detail about where companies earn revenues and the relationship of those activities to where taxes are paid. On the pre-globalization, pre-internet side of the looking glass, a major share of companies’ profits was driven by physical assets and on-premises employees, making the geographical connections to profits relatively clear. These days, as business has become increasingly global and the digital economy has undergone explosive growth, multinationals are tasked with assigning value to intangible assets such as intellectual property, and value chains are increasingly reliant on computing power and IT infrastructure. The upshot is that the allocation of profits to the ­locations where business activity occurs is no longer as simple. At the same time, cash-strapped governments are keen to scrutinize corporations' finances in a bid to ­uncover more tax revenue, and activists are speaking out against multinationals’ cross-border tax planning. “In the past,” says David Dietz, Head of Compliance — North America at Rabobank, “tax rate was an important component of how public companies

30

­ anaged their ­after-tax returns. Although rates can be m managed in a way that complies with tax legislation, an approach that only focuses on whether planning is legal is just not acceptable anymore.” Politicians and the public are calling for multinationals to pay their “fair share” in the countries in which they do business and more than ever before, people want to know: who pays tax, and where? Under the Action Plan on Base Erosion and Profit Shifting (BEPS ) issued by the OECD, which was ­endorsed by the G20 governments in July 2013, one of the work streams has focused on developing a country-by-country reporting (CbCR) system as a means of answering that question. The OECD has also proposed more stringent transfer pricing ­documentation requirements for multinationals, in ­order to elicit a more thorough justification of prices and profit location within corporate groups. “If country-by-country reporting and transfer ­pricing documentation requirements are implemented as ­currently indicated, then tax authorities will have unprecedented information about where the key ­activities in the value chain are that drive the profits and about where the profits get taxed,” says Ben Regan, a Transfer Pricing Partner of Ernst & Young LLP based in London. Various CbCR initiatives have already been enacted, such as the Extractive Industries Transparencies ­Initiative (EITI ) that was launched in 2003, and others are on the horizon (see related story for more detail). EY – Tax Insights for business leaders  №12

Transparency

While it is not entirely clear how effective specific ­initiatives will be in achieving their goals and multiple concerns exist about the use of the resultant data in unintended ways, CbCR is increasingly a reality that multinationals must start to plan for, according to those interviewed for this article. OECD “BEPS Action 13” and more The OECD formally unveiled its much-anticipated BEPS Action Plan at the July 2013 meeting of the G20 finance ministers. The Action Plan contains 15 actions, each linked to specific outputs to be delivered in 2014 or 2015. Action 13 of the Action Plan called for a review of existing transfer pricing documentation rules in order to provide tax authorities more focused and useful ­information for transfer pricing audits. It also called for the development of a template for ­reporting income, taxes and economic activity on a per country basis. After a public consultation process, the final CbCR template and the transfer pricing ­documentation requirements were released in ­connection with the September 2014 G20 Finance ­Ministers meeting. The template requires reporting of aggregated information by country (not entity), financial data covering revenue, earnings before tax, cash tax, current tax, stated capital and accumulated earnings, employee head count, tangible assets, a list of all group entities by country, and business activity codes for each entity’s major activities. While the OECD does not make tax law, the concept of high level CbCR has been endorsed by the G8 and the G20, and it is therefore expected that many countries will act on the OECD recommendations. “There are ­already signals that some governments are thinking of including the OECD work in their domestic law, such as the UK ,” says Ronald van den Brekel, a partner in EY ’s Transfer Pricing Group based in the Netherlands. “Some territories might implement legislation soon now that the template is finalized which could mean companies have to report from 2015.” “It is very easy for a country to include the new ­guidelines in its domestic law — they can simply refer to the template and ask companies to provide that ­information”, says Thomas Borstell, EY ’s Global Director of Transfer Pricing. Borstell says some countries will adopt their own variations of the OECD recommendations while others may not adopt them at all. “There will be big differences from one country to another. But, we will definitely see some adoption because all the ­governments believe these measures will help them raise more revenue,” he says.

Concerns about CbCR The OECD ’s recommendations for Cb CR and related transfer pricing documentation are intended to provide tax authorities with the information they need to make high-level assessments of whether profits are ­being taxed in the jurisdiction continued on page 34  > EY – Tax Insights for business leaders №12

Other CbCR and related initiatives — the EU and beyond As countries begin to consider whether and how to include the OECD BEPS CbCR template and transfer pricing requirements in their domestic laws, other separate initiatives are either already in effect or moving ­forward, both at the country and industry level. Regional and country activity In April 2014, the European Parliament adopted a Directive requiring disclosure by large companies (more than 500 employees) of information with regard to environmental, diversity, human rights, anti-corruption and bribery issues. The Directive was adopted by the Council in September 2014, and companies to which the Directive applies will be required to begin publishing reports from their financial year 2017. In 2013, the European Council had stated that the proposal giving rise to the Directive would also “be examined notably with a view to ensuring ­country-by-country reporting by large companies and groups.” However, the CbCR provision has been delayed for now: in February 2014 it was agreed that the European Commission would report back on CbCR tax ­matters by 2018. Other countries, while not independently seeking CbCR, have begun to ­demand more tax transparency. For example, Indonesia has detailed ­reporting requirements and Denmark, Norway, Sweden and Finland all ­publicly disclose certain company revenue, profit and/or tax information. Australia is also ­contemplating public reporting of taxes paid by large ­companies; details are ­expected in late 2015. Banking industry – EU CbCR is already law for EU-regulated financial institutions as a result of the 2013 Capital Requirements Directive IV (CRD IV). The first reporting deadline of 1 July 2014 required disclosure of some basic country-by-­country information: name, nature of activities and geographical locations, turnover and average number of employees. However, from 2015 onwards, covered ­institutions must also disclose profit or loss before tax, corporation taxes paid and public subsidies received on a per country basis. A crucial difference between the CRD IV banking legislation and the OECD’s framework for wider application is that while BEPS Action 13 is intended for tax authorities only, the CRD IV country-by-country data on operations, turnover and employees must be publicly disclosed. The ­European Commission is currently considering whether future country-bycountry profit and tax related items should also be made public. Extractive industry The extractive industry has already seen multiple transparency initiatives, the most significant of these being the global EITI (see main article on ­country-by-country reporting for further detail), by which individual ­member countries voluntarily implement an agreed standard. In addition, an EU Directive was adopted in mid-2013 that prescribes new reporting rules for large companies and listed companies operating in the extractive and forestry industries, requiring such companies to report the ­payments they make to governments in relation to their extraction activities. Among other items to be reported, on a country-by-country and project basis, are royalties, dividends and certain other items, as well as taxes on income, ­production and profits. The Directive allows member states up to 24 months ­after its adoption to transpose its requirements into national law. In September 2012, an Extractive Resource Revenue Transparency ­Working Group was launched in Canada, with the aim of making a ­recommendation to improve mining transparency in the country. The group ­released recommendations in June 2013; it is expected that the resultant ­framework will be considered in future government legislation.

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Transparency

Rio Tinto and Royal Dutch Shell

On the forefront of country-by-country reporting Interview by Gerri Chanel

Credits: Fabio De Paola and Marc Wetli

While many companies have been ­waiting for legislation requiring them to provide country-by-country data, several are ­already doing so on a voluntary basis, ­including two founding members and ­current board members of the Extractive Industries Transparency Initiative: Rio Tinto and Royal Dutch Shell. Here, Ross Lyons, Rio Tinto’s Global Head of Tax, and Rogier Rolink, Royal Dutch Shell’s VP of Tax — EMEA and AP ­Regions share their companies’ experiences with country-by-country ­reporting. Tax Insights: Can you describe the ­evolution of your country-by-country ­reporting? Ross Lyons (RL ): For a number of years, we published a short form taxes paid ­report as part of a sustainability ­report, which a number of extractive ­industry companies do. In 2010, we ­separated the taxes paid from the ­sustainability report and created a ­complete, separate report that goes ­further than just publishing the numbers, but also ­explains about tax ­principles, our policies, and why the ­numbers were the way they were, and also does some reconciliation work between tax and ­accounting results. Rogier Rolink (RR ): Our revenue ­transparency journey started in 2003 when Shell became the first company to publish the royalties, taxes and other ­payments made to the Nigerian ­government, with their permission and support. In 2011, Shell began providing, on a voluntary basis, an annual revenue transparency report where we provide a more comprehensive overview of the revenues that we pay to host ­governments in the major countries that we operate in.

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Why did you decide there was a benefit in preparing voluntary reports? RL : We could see that the issue around transparency was becoming of more ­interest to stakeholders, ­particularly civil society and also governments. We could also see the need to try and explain it ­better, because there was confusion. We also saw a ­benefit in ­having one source where we make our ­information available so that interested people could get it ­without having to come to the company and ask for ­different bits and pieces throughout the year; we could just refer people to our Taxes Paid Report and let them know, “It’s available; it’s all in there.” RR : We’re supporting it because ­transparency is good for the industry in general and for society as a whole. What type of feedback have you received about the reports? RL : Feedback has been very positive. Kofi Annan [Secretary-General of the United Nations from 1997 to 2006] wrote an opinion piece in The Times last year that commented on our Taxes Paid Report very favorably. We’ve had similar ­comments in the G20 group; they’ve held up our report as a good example of

Ross Lyons Rio Tinto’s Global Head of Tax

what multinationals might want to aspire to. We’ve also had ethical ­investment funds, which are getting ­bigger these days, ­interview us in ­relation to the Taxes Paid Report and they’ve said one of the ­criteria they look at is tax ­transparency in determining where they place their funds. RR : The feedback that we have ­received is positive and NGO s have also commended us for providing our level of openness. What has your company learned in the ­process of developing its reports? RL : Don’t underestimate the degree of difficulty in doing it the first time, ­because for any multinational, you’ll be reporting to a far lower materiality than what you do normally, and that ­creates enormous challenges. RR : It is important not to ­underestimate the time, effort and ­resource requirements needed. Don’t necessarily wait for the laws to come in — be comfortable with providing the ­information on a voluntary basis, since it provides good experience with the ­process. We are constantly monitoring and reviewing the changes in legislation to ensure that we can ­comply. It’s not a push of the button.ı

Rogier Rolink Royal Dutch Shell’s VP of Tax – EMEA and AP Regions

EY – Tax Insights for business leaders  №12

Transparency

To help you stay ahead of the challenges in the world of tax, EY provides a wide range of resources. On the Tax Insights ­platform taxinsights.ey.com, you will find all the tax-related ­information you can imagine – articles, surveys, reports, videos, podcasts, ­infographics and more. Read the booklet below, learn more and find out about additional tax guides and other EY tax tools.

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Transparency

Key action points • Go over the OECD’s template for reporting income, taxes and e­ conomic activity on a per country basis, as well as the transfer pricing ­documentation ­requirements

• Consider the data you will be providing from the perspective of tax authorities, and identify any indicators that may require ­explanation

• Examine your transfer pricing policies, identify any inconsistencies, and address them as needed

continued from page 31 > where they are earned in a ­ ccordance with the functional profile of a company. However, in practice, problems can arise in the use of the information by tax a ­ uthorities. One problem is the potential for inadvertent ­misinterpretation, particularly if bulk data are provided without indexing, explanation or context. With such mass data, van den Brekel says tax authorities are ­likely to come up with incorrect indicators since, without an explanation from the company behind it, it’s very difficult to correctly interpret. “Mass unclustered data gives the impression of transparency and of something that tax authorities can use but, in the end, it most likely will not help them because it’s like trying to see the forest for the trees. Therefore it’s very i­mportant that the information is provided with sufficient explanation accompanying it,” says ­ van den Brekel. Another risk, adds Regan, is that even if only highlevel data are provided, authorities may be tempted to raise assessments based on formulary apportionment — taxing the corporate group as a single entity — rather than using the arm’s length transfer pricing principle. “For example, tax authorities may look at the amount of profit declared per employee in their territory and ­propose an adjustment if it doesn’t stack up compared to company operations elsewhere,” explains Regan. Yet another concern is that data intended only for tax authorities will become public or known to ­competitors, particularly since not all countries are as strict on tax secrecy as others. Competitors can use commercially sensitive information to their advantage. Stories also abound about public misinterpretation of data. One example recounts a journalist accusing a multinational of being located in tax havens, while the reality is simply that the company sells the same staple item in these places that it sells in dozens of

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­ ther countries around the world. In this case, it is easy o enough to rebut a false conclusion, but some complex yet equally valid tax situations are not as easy to ­explain in a public forum, particularly when only sound bites are expected. Companies may face additional challenges as CbCR continues to take root. One is the disparity between various initiatives. “At the moment,” says Ross Lyons, the Global Head of Tax at Rio Tinto “the position is ­getting more complex from the viewpoint of providing different information by country and region, which may confuse readers.” Another problem, says Rogier Rolink, VP of Tax — EMEA and AP Regions at Royal Dutch Shell, is that “Some countries may have legitimate national security interests for limiting disclosure of information on revenues from their national resources. So, some countries prohibit us from disclosing certain information. Under the mandatory requirements for reporting in the EU, there is no exemption where such a conflict of law exists. Secondly, disclosure of the ­commercial terms of a project under a project level ­reporting regime may provide a competitive advantage where our competitors do not disclose such information. Shell finds it important that revenue transparency is done on the basis of a level playing field, being applicable to all extractives companies. Lastly, there are several transparency initiatives and it is important to us to minimize the reporting burden. Ideally, we would like to be able to produce one report that complies with each of the regulations that we are subject to. Therefore, we ask for equivalence to be granted in the mandatory rules to achieve this.” Taking action Some countries may be quick to adopt the OECD recommendations and Borstell points out that if just one significant jurisdiction adopts them, a multinational operating there may need to make changes across the entire organization in order to be able to access the required information. “Most companies are not able to produce such ­reports today,” says Borstell. “They will have to do ­significant work to ensure compliance.” In addition to looking at the OECD ’s template to ­determine what information is required, van den Brekel says companies should look at the data from the ­perspective of tax authorities. They should see if false indicators come up that may arise from an incorrect ­interpretation of data (rather than the tax policy of the company), in order to prepare for likely questions from tax authorities. “It is also a great moment for companies to review their transfer pricing policies and identify any inconsistencies,” he says. While the exact format of CbCR reporting is still in flux, “tax transparency will either come through ­mandatory requirements or it will be voluntary, but it’s coming,” says Ross Lyons of Rio Tinto. And from all ­indications, it is coming fast.ı EY – Tax Insights for business leaders  №12

Transparency

The Extractive Industries Transparency Initiative

Country-by-country reporting in action The Extractive Industries Transparency Initiative has evolved considerably since its inception more than a decade ago, with 44 countries now implementing its standard. By Gerri Chanel

EITI Compliant Country Meeting all requirements in the EITI standard EITI Candidate Country Implementing EITI, not yet meeting all ­requirements Suspended Compliant/Candidate status is temporarily suspended Source: The EITI

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ne of the first formal countryby-country reporting schemes was the Extractive Industries Transparency ­Initiative (EITI ), formed in 2003 to reduce the “resource curse” — the paradox that countries with abundant oil, gas and mineral resources are economically poorer than countries with fewer of these resources. The EITI was founded as a voluntary multi-stakeholder effort to reduce this problem by increasing disclosure around payments by extractive-industry ­companies to resource-rich developing countries. The core goals were transparency and ­accountability,” says Salim Amersi, EY ’s Mining & Metals Tax Leader for Europe, Middle East, India and Africa, “to create

EY – Tax Insights for business leaders №12

greater consistency between the amount of payments companies reported and what governments reported as received, to shed light on how governments manage the revenue.” At a London conference in June 2003, a group of representatives from companies, government and civil society set forth 12 principles focused on the development of an internationally accepted transparency standard in the oil, gas and mining sector and objectives for the full publication and verification of company payments and government ­revenues from these natural resources. In EITI ’s early years, only a small handful of countries worked towards the publication of reports, and the organization was run by a small team within the UK Government’s

Department for International Development. In 2007, EITI established an independent governance structure and a secretariat in Norway. At the 2009 EITI Global ­Conference in Doha, the EITI was ­established as a legal entity and the EITI Members Association was established through the adoption of the EITI Standard. However, though the organization itself developed, it became clear over time that the existing standard did not address a number of issues, including ­timeliness of reports and the time taken by implementing countries to adopt the standard. In addition, says Amersi, it was felt that the EITI needed to do more to ensure the quality of information received and to link the EITI with wider governmental >

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Transparency

“resource curse,” developed countries also perceive benefits. In March of this year, the US became the 44 th implementing country and the first G8 country accepted as an EITI candidate. In the fall of 2011, when US President Obama announced that the US would implement the EITI , he stated that the initiative benefits countries in all What compliance looks like regions and at all levels of development. “Compliance does not necessarily mean a Norway is fully compliant, having country's extractive sector is fully ­adopted the standard because it sees the ­transparent,” reports the EITI , “but that EITI as part of a broader commitment there are satisfactory levels of disclosure to transparent public finances. Australia and openness in the management of the and Germany are piloting the EITI and, natural resources, as well as a functioning at a joint press conference in May 2013, process to oversee and improve disclosure.” UK Prime Minister David Cameron and The centerpiece of compliance is timely French President François Hollande publication of EITI Reports that include ­announced that their respective countries would also implement it. A 2013 G8 contextual information, such as a country’s legal framework and fiscal regime, full ­communique said that Canada intends to ­disclosure of all material payments to develop an equivalent mandatory reporting ­government by oil, gas and mining regime for extractive companies within ­companies, and a comprehensive the next two years; Italy will soon seek ­reconciliation of company payments with ­candidacy status; and Russia and Japan government revenues. The reports, support the goal of EITI and will encourage ­ repared by an independent administrator p national companies to become supporters. are required to be understandable, actively The EITI is supported by more than promoted and contribute to public debate. 90 institutional investors with total assets under management of more than US $19 EITI requirements go beyond the ­reports themselves, including a number of trillion. Almost 100 companies, both measures intended to lay the groundwork ­multinational as well as state-owned, and for sustainability and effectiveness of a comprising many of the world’s largest oil, member country’s efforts. gas and mining firms, actively support the A country must have: government EITI . The numerous developed countries ­commitment and oversight; a “functioning that support the EITI also provide technical multi-stakeholder group” that includes and financial support to the initiative and the government, companies and the “full, to implementing countries either directly or independent, active and effective through an EITI Multi-Donor Trust Fund ­participation of civil society”; and a time­administered by the World Bank. bound work plan with clear objectives Just as EITI compliant countries must for EITI implementation. have a stakeholder group that represents government, companies and civil society, Member countries must also take steps so does the EITI Board itself. Board to act on lessons learned and to review the outcomes and impact of EITI ­members include representatives from ­implementing and supporting countries, ­implementation. Compliant countries must civil society organizations and companies undergo regular validation to check they and investors. Rio Tinto and Royal Dutch are still meeting the required standard. Shell are among the corporate board ­members; both companies were also A decade in ­founding members of the EITI . The EITI has come far in its first decade. In 2009, only two countries were Is it working? ­considered fully compliant with the EITI “It is still early to assess the EITI ’s impact,” standard, ­compared to 26 countries now. says Amersi, “since these initiatives ­Membership has rapidly expanded beyond Africa to include countries in Asia, take time to measure and because of the Latin America and beyond. only recent increase in the numbers of While developing countries were the first ­compliant countries.” Nevertheless, there to come on board in order to help ease the are indicators of successes, such as audits ­processes around tax collection. At a global conference in Sydney in May 2013, a ­revised approach was issued to make it more relevant in each country, to provide a clearer set of rules and more accurate ­reports, and to incentivize countries to go beyond the minimum standards.

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in Nigeria that revealed the Nigerian ­ overnment was owed approximately G US $9.8 billion in royalties and other ­payments, of which US $2 billion has since been recovered according an EITI progress report. In Liberia, the same report showed that the procedure for awarding contracts appeared not to be consistently followed. In May 2014, the EITI published an ­article detailing that in the Democratic ­Republic of the Congo (DRC ) EITI Reports helped generate debate about the ­accountability of tax collecting agencies; one agency was found to be unable to ­account for US $26 million of royalty ­payments. DRC now ensures that the taxes collected by government entities actually reach the accounts at the Central Bank. Such findings provide a roadmap for wider reforms as well. In addition to these success stories, there also have been some criticisms of the EITI . These range from concerns about the costs of compliance, to interest groups and NGO s that have taken the position that the EITI requirements were not robust enough and lacked effective mechanisms of enforcement. The EITI standard was updated in 2013 to address calls to do more. The revised standard requires, among other things, ­enhanced timeliness of reports, improved reliability of data, and disclosure of ­additional types of information. While much of the additional information is not considered controversial, one ­sensitive area stands out: the requirement that data will be disaggregated by each ­company. As member countries consider how to implement the revised standard (countries have some flexibility in how to do this), company stakeholders are likely to have concerns about the disclosure of commercially sensitive information. This is one of the same concerns that companies have about the OECD BEPS ­proposal for country-by-country reporting and other transparency initiatives. As a ­result, extractive sector companies can ­perhaps find one small comfort: they are not alone.ı

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Transparency

Getting the true picture By James Gavin

Corporate tax rates are only the most visible of all the forms of taxation ­incurred by companies. There is now a move to document the many ways in which companies contribute financially and otherwise to the countries in which they operate, known as the total tax picture.

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ax justice advocates are i­ncreasingly targeting ­companies and focusing on the amount of corporate  tax they pay. Unfavorable news media coverage has tended to ignore or omit the fact that the corporate tax f­ igures are but a fraction of the broader tax contribution made by businesses. While economists will argue that all  taxes paid by businesses are ultimately borne by individuals, whether shareholders, employees, customers or suppliers, many still see the benefit of looking at “business taxes” as a category. Corporate income tax accounts for just 21.8 % of total business taxes in OECD countries, according to EY research. This is lower than property taxes, which account for 26 .3 %, and VAT and sales taxes, for 38 .4 %. Consequently, farsighted companies are going beyond simply reporting corporate income taxes paid at the back of their i­ncome statements to regulators and are beginning to highlight their total tax picture in an effort to put in proper context all of the liabilities that companies incur globally in the 21st century. Companies are opening up their tax books. The mobile telephony giant

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Key action points •• The corporate tax contribution may be declining, but that does not mean that companies’ overall tax ­burden is lowering

•• Companies should consider reporting the broad range of taxes they incur, with the advantages that transparency can bring

•• Reporting the broad range of taxes is more than just number crunching; companies must develop a narrative around the tax figures, to put them in their proper context

­Vodafone is one, noting that corporate tax is only one of almost 50 different types  of taxation paid by its operating businesses every year. The full range of taxes can include ­royalties, indirect taxes (such as VAT ), ­payroll taxes, withholding tax and stamp duties. Some of these taxes are collected

by businesses on behalf of governments, which involves costs to these corporate  “tax collectors”. VAT is a case in point. An overall increased focus on compliance and enforcement means ­additional compliance and administrative burdens for businesses. The direct tax contribution can be ­significantly outweighed by the total cash contribution a company makes. Where V ­ odafone in 2013 paid £275 million (US $471 million, €350 million) in direct taxes to the UK exchequer, it said its total cash contribution to the Government was more than £1.8 billion ( US $3.09 billion, €2.29 billion). Tina Gill, a UK-based partner at EY, ­highlights how traditional tax reporting methodologies are missing out the broader economic contribution that companies make to the economies in which they ­operate. “There are tax rules that state if you make certain types of investment — whether capital investment or in research and ­development — tax relief is available that recognizes the capital outlay. Yet these costs do not necessarily get directly charged against profits in the accounts,” she says. In some jurisdictions, corporate tax rates have been reduced in recent years in an effort to make the country’s economy >

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Transparency

Case African Barrick Gold

more competitive for business. Statutory corporate income tax rates in OECD m ­ ember countries dropped on average  7.2 percentage points between 2000 and 2011, to an average 25.4 %. Of the  61 countries surveyed in EY ’s 2014 annual Tax Policy Outlook around the world,  10 have announced reductions in their s­ tatutory corporate income tax rate for the year ahead, three of them from the  Nordic countries. Finland saw a reduction from 24.5% to 20 % that year, the largest drop among surveyed countries. Mirroring governments’ attempts to ­adjust tax rates in order to attract ­investors, subnational jurisdictions are also competing to reduce tax burdens. This is evident in the US , where states have,  for example, negotiated incentives and tax credits with firms in order to encourage them to locate their headquarters there. According to US aircraft manufacturer ­Boeing, 22 states submitted incentive packages for 54 prospective sites where the company would build the 777 X aircraft. Lawmakers in the states of Florida, L ­ ouisiana, Nebraska and North Carolina

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have seriously considered outright repeal of the state corporate income tax. The goal is to generate a positive return on that ­investment, whether through other types of tax revenue or broader economic growth. At the same time, other forms of tax have been increasing. “In the UK , national insurance forms a high percentage of total tax paid, and there are a number of indirect taxes that you will not see reflected in the tax charge line — employee taxes, indirect taxes, levies and stamp duties,” says Gill. For this reason, companies need to  take a holistic view of tax, setting it in the wider context of the company’s overall ­contribution to society. Andrew D. Phillips, from Quantitative Economics & Statistics (QUEST ) at EY in the US , says, “One  issue that many companies are trying to answer is whether or not the tax that they pay is fair. But often they are doing this without a complete understanding of how much tax they actually pay — in terms  of direct corporate tax, plus the indirect taxes, and then all the other contributions they make in terms of GDP, jobs and to ­social causes.” Lower tax rates and more

incentives highlight a broader aim: to e ­ ncourage ­companies to generate much more value than just that provided in ­remitted tax ­revenues. In 2012—13, Vodafone says it ­contributed more than £13.5 billion ( US $22 billion, €17 billion) in cash to the public ­finances in their countries of ­operation, which, the company says, shows there are other mechanisms to derive revenues  from business activities, including a wide range of licensing regimes, revenue or ­production-sharing agreements and, for communications companies, radio ­spectrum fees and auction proceeds. As Vodafone notes in its tax and total economic contribution statement,  “These additional sources of government revenue are often substantial — sometimes exceeding the monies raised through ­taxation — and represent a critically i­mportant contribution to public finances.  It is therefore essential to take those ­government revenue-raising mechanisms into account when assessing the extent  to which a company is playing its part in funding wider civil society.” EY – Tax Insights for business leaders  №12

Credit: imageBROKER, Alamy

London listed miner African Barrick Gold (ABG) commissioned EY to estimate the e ­ conomic and social contributions of the company’s 2013 operations in Tanzania, where it owns and operates three mines. The report found that ABG’s total direct, indirect and induced economic contribution in Tanzania in 2013 included almost 62,000 jobs, more than US$530 million  (€412 million) of labor income and almost US$855 million (€665 million) of valueadded (GDP). In total, including direct, indirect and ­induced taxes paid by ABG, its employees, suppliers and other affected businesses; ABG’s total tax contribution in 2013 was an ­estimated US$197 million (€153 million). The company’s ­total procurement expenditures, including capital investments, were US$769 million (€599 million). The overall employment multiplier (including indirect and ­induced economic activity) is 11, which can be interpreted  as, for each direct ABG employee, 11 additional jobs being supported in the broader Tanzanian economy. The process of obtaining the total tax contribution for ABG began with looking at all of the company’s payments made to government, suppliers and employees. EY then traced the ­linkages of that spending to all of the economic actors in the country. “You can ­essentially measure the activity that — were it not for the presence of ABG in  the nation — would not exist,” says EY’s Andrew Phillips from Quantitative Economics & Statistics (QUEST) in the US.

Transparency

Other companies are more guarded about detailing the overall tax picture. NTT Data, Japan’s largest telephony company, says it discloses only corporation tax  in its annual report — in accordance with Japanese standards of disclosure. If companies are to obtain a full picture of the economic contribution they make, then they need to embark on a data-­ gathering exercise that evaluates contributions related to the supply chain and consumption spending by their ­employees, which ties into the public value that companies provide. “We are finding that a number of ­companies are gathering information for their own purposes, but not necessarily ­always for the purpose of publishing it

­ xternally,” Gill says. “For example, they e might be asked questions by the board about what their tax profile is and that will include a view on total taxes paid rather than just the tax rate you see in the f­ inancial statement.” As yet, only a minority of companies are taking that information and publishing  it externally. When they do, it tends to form part of their corporate social responsibility (CSR) reporting. Instead, she says, “Companies need  to build a narrative around the bare  numbers, which on their own don’t provide a total picture.” Yet, businesses should u ­ nderstand the significant time and  effort it takes to assemble this type of ­information.

Tina Gill adds, “If a company is asked  about its total tax picture in a situation where it needs to respond quickly,  ­because the contribution goes beyond ­corporate tax payments into areas like payroll, ­procurement and real estate,  it greatly benefits companies in being ­proactive in pulling this type of information together.” There are also significant gains to be had from this process, such as better ­internal understanding of the issue and  the elimination of certain inefficiencies.  A total tax picture can create a framework  for understanding a company’s activities and dispel some of the myths that have been created about the share of taxes paid by global companies.ı

Public value scorecards Successful companies need a better sense of the public’s expectations in the jurisdictions in which they operate, and this too affects the total tax picture. Having identified this need, a team at the ­University of St. Gallen in Switzerland, led by Professor Peter Gomez, has developed a “Public Value (PV) Scorecard” to help organizations ­understand and measure their value to society. “Traditional measures of value created by a company focused very much on the perspectives of narrow groups of stakeholders and were often limited strictly to financial measures,” ­explains Professor Gomez. “With the PV Scorecard, we sought to develop a framework that helps ­businesses assess the benefits and help ­identify risks of their activities to society more broadly; to consider the points of view of those outside the organization looking into the business and its operations.” The total tax picture also takes such a ­systematic view. “Tax is just one way of measuring what a company contributes to society, but public value is generated by a much broader set of activities,” says Markus Schweizer, Managing Partner, Advisory Services, EY in Switzerland, who participated in the PV Scorecard project. The PV Scorecard seeks to provide objective well-founded basis for showing the risks and ­opportunities of a particular activity based on the following five questions: •• Is it useful, does it make a difference? •• Is it profitable and creating value? •• Is it decent and morally sound?

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•• Is it politically acceptable? •• Is it enabling a positive experience? For management, it provides a more robust basis for decision making, via a systematic ­process involving relevant stakeholders and ­citizens alike, which contrasts with this pragmatic approaches that tend to be based on boards’ gut instincts. “These interviews with citizens not only help determine how they assess this activities and contributions of a business, but also the importance placed on the five dimensions ­assessed,” says Professor Gomez. The current discussion surrounding the ­conflict between legality and morality in the tax debate can be reflected in a PV Scorecard, says Schweizer. “If you are a company that minimizes your effective tax rate at any costs and you look at the two dimensions as to whether that is ‘decent’ or ‘profitable,’ then you would probably get some interesting feedback.” “The PV Scorecard can provide a fact-based objective assessment of the risks and opportunities as to whether to go for a maximum minimization of taxes or not to because of economic or political considerations. At the end of the day, you end up with a more balanced decision,” says Schweizer. The tax debate, viewed through the PV ­Scorecard prism, is not a black-and-white issue, Schweizer points out. Instead, it is a continuum, including the following points: 1. Avoiding fraud through positive compliance with applicable tax law. This is the minimum stage.

2. Application of transfer pricing and certain tax arbitrage constructs, where firms try to ­optimize where the profit falls geographically. This is where many companies stand today. 3. Application of structural measures undertaken to optimize tax, through supply chain ­reorganization. This could be termed operating model optimization. 4. Tax optimization at the center of strategy and decision-making. This would represent the most extreme application of tax optimization. If the above points were assessed only from the perspective of profitability, it’s likely their ­relationship would be linear – from the least ­impact on profitability at point 1 to the highest impact at point 4. However, assessing these points using all of the five dimensions of the PV Scorecard would likely give a very different outcome. As a result, their placement on the ­continuum and their attractiveness to a business considering its approach to tax based on the PV Scorecard, may move considerably. While for the moment, the PV Scorecard ­remains a tool to assist management in decision making, a future development may be that such analysis forms part of public disclosures. “The Scorecard is definitely an internal tool today,” explains Professor Gomez. “To use it in public disclosures would require quite a change in the present compliance mindset and would require a very sophisticated approach to communications with stakeholders, but it is certainly something to look toward in the future.”

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Transparency

Safeguarding reputation: effective tax communications with stakeholders By Joe Dalton

Multinationals’ tax affairs have been in the spotlight over the last few years, but many companies’ communications teams are struggling to keep up with increasing transparency demands and heightened scrutiny.

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ailure to effectively communicate the ­reasons for adopting a given tax strategy is a significant reputational risk for ­today’s multinationals. This pressure will only intensify as the OECD, working on behalf of the G20, continues to deliver its Base Erosion and Profit Shifting (BEPS ) recommendations for reforming international tax practices. These ­encourage measures to promote further transparency such as automatic information exchange between tax authorities, and country-by-country reporting of revenues and business activity. A 2014 EY study of tax risk and controversy showed that 89 % of the largest companies surveyed are ­concerned about media coverage of the taxes some companies are paying, yet more than half of them have not changed the way they communicate tax-related ­information to internal and external stakeholders. Multinationals need to ensure their tax communication strategies can face up to these pressures. “A high-level understanding of organizational tax policy must first be in place, then companies should work to implement

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the communications strategy effectively at the ­ perational level — by making sure that tax and o communications are aligned internally, planning ­ahead and by engaging the media effectively,” explains Susan Sugg-Nuccio, a communications adviser at ­River  Communications. Mind your reputation While corporate social responsibility (CSR) has been an important part of many multinationals’ business models for some time, in the last three or four years tax certainly has moved to the forefront of this agenda. Companies have been surprised to find details of their tax planning arrangements at the center of ­media attention, and many have struggled to address calls from politicians, NGOs, activists and others for them to pay a “fair share” of tax, given the difficulty of such a loosely defined concept. Indeed, tax has long been an area in which ­companies — especially multinationals — can gain ­competitive advantage. Multinationals often argue that reducing their tax burden fulfills a duty to ­maximize returns for shareholders. Moreover, EY – Tax Insights for business leaders  №12

Transparency

“there can be legitimate reasons why companies would for a period not pay significant amounts of tax in ­certain countries, such as research and development incentives,” says Dr. Stuart Palmer, Head of Ethics at ­Australian Ethical Investment. Nonetheless, a negative public perception of ­companies’ tax affairs may damage their bottom line. It is crucial that multinationals mitigate this risk by avoiding disjointed messages about tax policy. ­ “Companies need to foster closer cooperation between their tax and communications leaders to ­ensure there is consistency in the message,” says Sugg-Nuccio. Communications teams also must now pay ­attention to NGOs and tax justice campaign groups. U.S. PIRG and Citizens for Tax Justice jointly released a report on tax haven use by Fortune 500 companies in June 2014. In 2012, the Greenlining Institute made technology companies in Silicon Valley the focus of a critical report on tax avoidance. Christian Aid, a ­ K-based organization, is running a global campaign U criticizing corporate tax avoidance, and the Tax Justice Network is an umbrella group for similar organizations worldwide. While the companies that are the focus of such scrutiny are often quick to ­respond, it may be too late to undo the reputational damage inflicted. Simon Whale, Managing Director at PR agency ­Luther Pendragon, argues that communications teams need to be proactive and constructive in their ­approach in order to manage reputational risk. “You should formulate your ideas and your plan, and ­stress-test them to find out where your weak points are — preparing yourself before questions are raised in the public sphere,” he explains. “And when responding to questions, you’ve got to stay constructive. Ideally, your aim is not just to defend yourself but to move onto the front foot by setting out solutions to problems. If you can say something along the lines of ‘what we’d like to see is the following …’ this puts you in an entirely different light.” The disclosure question While being proactive around tax communication can help manage reputational risk, it can be difficult to strike the right balance in deciding the correct level of information to disclose and the most appropriate way to do so. A well-defined and documented tax policy that is well implemented and communicated within the organization is an important element of managing these risks. Such a document also should capture an organization’s risk appetite, as well as capturing an agreed level of, and approach to, public disclosure. Australian mining multinational Rio Tinto, for ­example, publishes voluntary annual reports detailing its revenue and tax payments for the countries in which it operates. Unilever, the Anglo-Dutch consumer ­products multinational, publishes its “Approach to Tax” online. This outlines its global tax principles and EY – Tax Insights for business leaders №12

­ pproach to taxation in a number of areas such as a ­transfer pricing, transparency and compliance, as well as giving an ­indication as to the corporate tax paid both by region and major countries of operation. While more detailed reporting demands may be on the horizon, ­companies like these are positioning themselves as tax trans­parency leaders and seeking to attract the ­associated reputational benefits. In the UK , NGO s, business representatives and ­industry practitioners have begun the development of a Fair Tax Mark — an accreditation that companies can ­apply for in order to promote an image of openness, honesty and trustworthiness to consumers and ­investors. The Fair Tax Mark will be awarded based on two main categories of criteria: transparency and tax rate, ­disclosure and avoidance. Yet even voluntary disclosure can attract negative ­attention, highlighting the need for a carefully planned approach and knowledge of the pitfalls associated with such public transparency. There have been examples where voluntary disclosures by multinationals were met with challenges from tax activists, a reaction that ­highlights the exposures faced when publicly disclosing ­information. It is unsurprising then that multinationals are ­increasingly wary about their approach to disclosure. In the recent EY tax risk and controversy survey, 65 % of the largest companies — those with revenues of US $5 billion or more — said engaging with the press on tax is a no-win proposition, while just 13 % disagreed with that view. The complexity of tax regulations and ­individual business requirements means that while ­mandatory disclosure of information to tax authorities is clearly necessary, companies will need to form their individual views on any additional voluntary disclosures and find the best strategy for them.ı

Key action points • Review your strategy for communicating tax-related ­information to external stakeholders in an era of increasing transparency d­ emands. If you do not have a strategy, now is the time to consider putting one in place

• Tax and communications leaders should be closely aligned across all areas of the organization to ensure that the ­company’s messages on tax are consistent with its business purpose and ­wider ethics

• Consider carefully whether the benefits of public ­disclosures above and beyond the information mandated by tax authorities are worth the risk

• Stress-testing your tax messages will enable you to find out where the weak points are and to prepare an appropriate defense against potential criticism

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Transparency

Staying competitive in a time of global tax transparency Interview by Giselle Weiss Switzerland is a country in transition. The legal principle of banking secrecy forged in the lead-up to the Second World War proved ill suited to the open exchange of ­information increasingly required by ­globalization. In particular, the traditional Swiss distinction between tax fraud and tax evasion (see below) put it on a high-­ profile collision course with the US over the issue of ­untaxed accounts held in Swiss banks by US citizens. Jacques de Watteville, Switzerland’s State Secretary for ­International Financial and Tax Matters, spoke with Tax Insights about the Swiss government’s recent moves to align itself with inter­national taxation standards and about remaining a competitive ­economic location in an era of global tax transparency. Tax Insights: To what extent is the 2008 ­financial crisis responsible for the current emphasis on transparency? Jacques de Watteville: I think it began much earlier. But the financial crisis was certainly a factor. Many banks had huge problems stemming from the ­financial ­crisis. The states had to intervene to help the banks. And because the states themselves were facing huge public deficits, they had to increase their income to fulfill their mandate. To increase income you can raise taxes, you can spend less or you can fight tax evasion. Each country chose

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a combination of these ­elements. For ­ witzerland the key date was in 2009, S when along with Singapore, Luxembourg, and other countries, we decided to ­cooperate fully in providing administrative assistance in cases of tax evasion and not only in cases of tax fraud, as in the past. What accounts for the change of heart? We wanted to be on a level playing field with our competitors internationally. This was also the time when the Organization for Economic Cooperation and Development (OECD) and the G20 governments had pledged to restore ­confidence in the global economy and to strengthen the financial system, including tax cooperation. Greater transparency naturally entailed a move toward ­automatic exchange of information. In the past, this was a complicated proposition. Now, however, all our financial centre competitors are committed to a standard, and have signed the OECD ’s ­multilateral Convention on Mutual Administrative ­Assistance in Tax Matters. There is no ­longer any reason for us to ­oppose it. What is the historical basis for the Swiss ­distinction between tax fraud and tax evasion? Tax offenses were always prohibited in Switzerland. You s­ imply had different types of sanctions. What we call tax ­eva­sion was classified as an administrative violation and attracted a defined class of penalties. And tax fraud was a criminal ­offense for the

­ urposes of Swiss law. Today, however, p most of our double-­taxation treaties with third ­countries are in line with the latest OECD standard, which does not ­distinguish ­between tax fraud and tax evasion in this respect. Does greater transparency make life harder or easier for companies doing business in Switzerland? By automatic exchange of information the transparency standard is established for individuals. However, there are also ­initiatives related to tax practices that have an impact on companies in the sense that their profits will be allocated in a more transparent way. Their economic activities, too, will be transparent, to ­ensure fair taxation. You’re talking about the OECD’s BEPS (Base Erosion and Profit Shifting) project? Yes. The BEPS project concerns ­taxation of companies, in particular ­taxing income where it is effectively ­created. Within BEPS , many rules are ­being ­discussed, for example, regarding the ­extent to which transparency on ­business structures should be established while preserving trade ­secrets. Such BEPS rules will help to establish a fair tax system. But transparency can also be ­misused. In other words, it can also create situations where one tax ­admin­istration obtains information which may result in double taxation. The idea of BEPS is that the same rules should ­apply to all jurisdictions. EY – Tax Insights for business leaders  №12

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How important is the idea of fairness — reciprocity — in tax matters? I am thinking in particular of FATCA , the US Foreign ­Account Tax Compliance Act, which went into effect in July and requires financial ­institutions to pass information to the IRS . FATCA is an interesting case. There are two models. FATCA 1 is to some ­extent reciprocal. FATCA 2 is not. Switzerland opted for F ­ ATCA 2 because at the time, the country was not in a position to accept ­automatic exchange of information. But now that we are moving toward ­automatic exchange of information, we will probably renegotiate our treaty with the US to go to FATCA 1. Does that make it easier for you to sell that to the Swiss public? Reciprocity, certainly. It’s an important political argument. But the FATCA 1 ­system is also easier to implement. Based on your experience working with the OECD, what would you say is the biggest challenge to greater global transparency? Implementation. At the OECD, we ­adopted the global standard on automatic exchange of information. So the creative work is done. The next phase is one of negotiating with others and implementing the standard in domestic legislation.

Credit: Swiss Confederation

What are the complexities there? Some countries are saying that they want to cooperate fully, but we are not sure that they will do it in practice. And, of course, this transparency applies to everybody and to all kinds of legal structures. To what extent will Delaware really implement this new ­standard? Or Jersey? Or the Cayman Islands? It will be of great importance. The OECD has no legislative mandate. How, in fact, do you get countries to follow through on the rules and principles they have agreed to? The system operates by a sort of peer pressure among countries. And the OECD has various committees for ­examining cases of noncompliance with its principles as well as various combinations of carrots and sticks to encourage ­adherence. It’s what we call a “soft-law” system, but very powerful. EY – Tax Insights for business leaders №12

Does Switzerland have a vision of how it would like to be known vis-à-vis tax competitiveness? We want to be a country that respects and implements international standards and that contributes to developing them. That is what we are doing in the OECD and in the BEPS project. And we are ­moving now to the automatic exchange of information. That said, we still do attach great importance to the protection of the private sphere. We have here in ­Switzerland roughly 25 percent of the world’s business in cross-border asset and wealth management. We have several ­centuries of experience in this business, and a long tradition and a lot of know-how that we want to continue to build on. But fully respecting international rules.

Jacques de Watteville Switzerland’s State Secretary for International Financial and Tax Matters in the Federal Department of Finance.

“We want to be a country that respects and implements ­international standards and that contributes to developing them.”

Has the change toward greater transparency negatively affected the economy? No. We are currently in the process of regularizing previously undeclared assets. Take the example of Germany. By far the largest portion of the German funds in Switzerland are now declared and taxed. And what is interesting is that most of those assets have remained in Switzerland. They did not flow back to their country of origin. In other words, although we are moving toward transparency, the business in the field of wealth management ­continues to perform well. Which for us is positive because it would be logical to fear the opposite. How do you see the future of Switzerland as a business location? We are fully aware of the importance and challenges of international tax ­competition. But Switzerland is ­attractive in terms of infrastructure, political stab­ility, legal certainty, its stable and convertible currency and multilingualism. We have ­excellent cooperation between research universities and companies. We sit in the middle of the European Union. And now we have shown that we can successfully ­implement international standards. This is a good basis for companies ­involved in ­research and development or in innov­ation, as well as for holding ­companies and ­service companies. Half of the American holding companies in Europe are located here. That is not the result of chance. We want, as government, to continue to ­follow a policy that makes Switzerland ­attractive for these kinds of companies.ı

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Credit: Thomas Koehler, Getty Images

Where do your tax dollars go?

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Governments are increasingly finding themselves under the spotlight as the tax ­transparency debate continues to evolve. While multinationals may be challenged on how much tax they pay, governments are challenged on how they spend their revenues. By Joe Dalton and Aidan Manktelow

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razil’s Football World Cup  in 2014, billed as a way to showcase the country’s ­culture and growing stature as the world’s seventh- largest economy, instead kicked off with controversy over ­unfinished  infrastructures and protests outside ­resplendent  stadiums by thousands  demanding ­better health, transportation and education services. In the United Kingdom, the activist group UK Uncut pairs its criticism of corporate tax avoidance with protests against reduced government services in the budget. The EU has faced calls to create an  investment fund to pay for infrastructure. Government inspectors in the United States regularly make  headlines with lists of wasteful spending projects. Around the world, scrutiny of how governments spend tax revenue is the flip side of the additional transparency demands on taxpayers, leaving many ­officials feeling pressure to respond to constituent c­ oncerns. “As many governments are facing economic crisis and imbalanced budgets, there is much more ­focus on the efficiency of the dollars that they spend on certain programs. And, of course, these issues  are being discussed much more than they were in the past,” says Jean-Pierre Lieb, EY ’s EMEIA Tax Policy Leader and former Director General of the tax  authority in France.

Are governments opening up on spending? While many taxpayers may see voting to remove an ­incumbent government from office as their primary means of holding them to account for misspending tax revenues, the rise of the tax transparency agenda  may ultimately mean that citizens get a greater say over how tax revenue is spent. International transparency initiatives are driving some countries to become more transparent about where revenues are spent. The Extractive Industries Transparency Initiative (EITI ), for instance, has  led to the increased disclosure of payments made to governments by the extractive sector and, therefore, increased the accountability of tax-collecting ­authorities and governments. In the Democratic ­Republic of the Congo, for example, recent EITI  reports helped identify a shortfall of US $26 million in  royalty tax collections not properly accounted for by authorities. The EITI also encourages informed debate among citizens about how revenues generated from the oil  and gas sector should be used, putting pressure onto member governments to be more open about how  they spend their revenue. “The increased availability of this data will enable ­extractive stakeholders, analysts, journalists and c­ itizens themselves to engage in debate about  the management of natural resources, the impact this has on the economy, the medium- and long-term ­perspectives of the extractives sector and how ­revenues are shared between owners, operators and all levels of government,” EITI said in a recent progress

Switzerland’s direct democracy Switzerland’s political system has long been characterized by high direct involvement of citizens and decentralized decision-making. There are compulsory and citizen-initiated referendums at all levels of government. At the federal level, a citizen can initiate a referendum to cancel any law voted by parliament, by gathering 50 000 signatures against the law within 100 days. Turnout for these elections averages around 40% but can be higher for controversial measures. This procedure resulted, for example, in the rejection in May 2014 of an order for 22 modern fighter jets to upgrade the air force. Some 60% of the 26 cantons have a mandatory budget referendum mechanism where spending above a certain threshold must be put to a popular vote. In the other cantons, as at the federal level, citizens have the option to trigger a referendum by petition. Mandatory referenda on budgetary decisions are also common at the local level. Each of the roughly 3,000 municipalities has a deliberative assembly – in many villages, citizens vote by show of hands at the town ­meeting; in larger towns, assemblies are elected. This system appears to have resulted in strong fiscal prudence at all levels of government, focused on keeping taxes low and quality of public services high. Studies have suggested that the mandatory referendum system at the ­cantonal level results in lower spending. At the federal level, citizens imposed a “debt brake” in 2001 that in effect requires central government spending to grow no faster than trend revenue growth – since then, government debt has fallen from over 50% of GDP to just 37% of GDP, low by developed-world standards.

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report. “EITI data will also create a better  understanding of the volatility of the sector, optimal taxation regimes and, crucially, how mineral wealth translates into social benefits.” In addition, civil society organizations such as  the International Budget Partnership (IBP ) and NGO s such as the Publish What You Pay (PWYP ) coalition  are also applying pressure on national governments to open their books. The IBP has created the Open B ­ udget Index that assesses the transparency of g ­ overnment spending around the world. Some governments are launching their own ­programs to increase transparency around where tax revenue is spent. As one example of this, in October, the UK Government, for the first time, sent a personal tax statement to its citizens detailing pound by  pound how their tax payments contribute to public spending. EY ’s Jean-Pierre Lieb points out that ­countries such as Australia, Canada and France have appointed judicial bodies to control public accounts and issue a public statement on the quality and  the fairness of public accounts. “These bodies will ­ensure that the money spent on those programs is  well used and that there is a real economic or financial impact,” he says. Citizens being directly consulted on government programs is perhaps the most transparent approach available to deciding government spending and t­ axation policies. Switzerland is one example of a c­ ountry taking this approach, where direct votes by c­ itizens are still held to approve budgetary measures. Why transparency is good for governments While disclosing how tax revenues are spent will r­ equire added work on the part of governments, t­ ransparency could benefit them in the long term.  A government that responds more specifically  to the ­priorities of its citizens will clearly be able to  better ­target spending, which could boost its chances for ­officials’ re-election. “The more transparency  there is from governments about where they are spending ­revenue, the more individuals, electors and ­communities can assist those judgments and hopefully ensure that they align with the expectations and  the aspirations of the people who our legislatures ­represent,” argues David Bradbury, Head of the Tax Policy and Statistics Division at the OECD. New Zealand features at the top of the IBP’s Open Budget Index and similarly scores highest on the ­Corruption Perceptions Index 2013. It could be argued, therefore, that greater transparency from government helps to engender trust among the population. The Open Budget Index suggests several other advantages of governments disclosing its tax receipts and spending: •• It closes the door to waste and misappropriation  of public funds. •• It can lead to more efficient and effective ­ overnment spending. g EY – Tax Insights for business leaders №12

Key action points • Consider the advantages of disclosing tax receipts and spending for building public trust as demonstrated, for ­example, by the IBP’s Open Budget Index

• Study other government models for increasing transparency and consider which elements might be effective in your country

• Understand that greater openness brings its own challenges, too, and anticipate them

•• It helps governments to match national resources with national priorities.

•• It supports government efforts to manage debt. •• It helps governments to secure cheaper international credit.

•• It helps build trust between governments and citizens and empowers citizens by giving them a voice on ­government spending. Of course, open budgets bring their own challenges too. While a small country like Switzerland has proven it is possible to open up key spending decisions to  a public vote, countries with larger, geographically ­dispersed populations or without advanced ­infrastructure and access to technology may face ­ igher barriers to implement such a system. h There are also challenges in determining where to draw the line and how to overcome regional rivalries. For local councils and city administrations, there is also the concern that few have the time, the training or  the inclination to really engage on anything other than fundamental issues. Governments should investigate the potential ­benefits offered by the changing transparency ­landscape. Opening up tax revenue and spending ­information to engage the public in the budget  process can deliver some valuable advantages, not least in ­enabling better targeting of revenue spend. There are clearly significant practicalities that would have to be addressed, but the progress that has ­already been made in countries where a more open ­approach to revenue and budget spending is ­happening makes a case for additional transparency on the part of governments going forward. ı

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“Getting a country’s tax system on its feet is crucial” INTERVIEW by Catherine McLean

Tax Insights: Tax reform is a high-profile issue for governments around the world these days. Is greater attention being paid to this subject at the UN ? Michael Lennard: It’s climbing up the agenda, but a lot of non-tax people still don’t like to talk about tax. However, the importance of tax to development is something that constantly has to be raised. In the last few years, ECOSOC (United Nations Economic and Social Council) has held special meetings annually on tax issues for the first time. It’s quite unusual for diplomats to attend a forum on tax policy and administration. It fits in with the increasing recognition that within the UN ’s Post-2015 Development Agenda, getting a country’s tax system on its feet — including having an investment climate that is good for investors — isreally crucial. Indeed, your section is located within the UN ’s Financing for Development Office.

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While G20 leaders may be leading the call for greater tax transparency, the tax system is also a concern for the rest of the world. Michael Lennard, Chief of the International Tax Cooperation Section at the United Nations (UN ), talks to Tax Insights about the opportunities and challenges for countries around the globe.

What does this indicate about the role of tax within the UN ? The Financing for Development emphasis is that everyone agrees on the importance of reaching the Millennium ­Development Goals in terms of poverty, health, etc. But it needs to be financed somehow. One way is official development assistance (aid). But in the long term, the really important one is revenue generation within a country. Tax departments, tax ­policy and tax administrators are absolutely integral to financing development within a country. The UN ’s Committee of Experts on International Cooperation in Tax Matters ­examines how emerging tax trends could impact member states. What is the committee’s impact on tax policy around the world, in particular in the area of transparency? In the area of exchange of information, there will always be concern in the committee about the cost to developing countries of providing information. I know the OECD is aware of this. In a lot of these developing countries they don’t want their best and brightest tied up in providing information rather than making sense of their own information, and > EY – Tax Insights for business leaders  №12

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“As we’re becoming a much more complex tax world, we have to take a much more global-minded approach to developing the norms that everyone has to live by.” Michael Lennard

Credit: Steffen Thalemann

Chief, International Tax Cooperation Section, Financing for Development Office, UN Department of Economic and Social Affairs

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doing audits, and so forth. I think it’s ­ lways important, and this is part of the a committee’s role, to bring to the fore this issue about the cost of administrative requirements, and the cost of complexity for developing countries but also to ­unlock the un­doubted benefits of ­exchange of inform­ation for developing countries. That can save such countries valuable ­resources by making revenue collection more efficient and quicker. How optimistic are you that new tax ­initi­a­tives, including the OECD ’s Base ­Erosion and Profit Shifting (BEPS) plan, will rectify the biggest issues in today’s global tax ­system? Some critics are concerned that BEPS will not take into account the views of countries beyond the high-tax jurisdictions of the OECD and some of their strategic partners in the G20. What is your view? We have been supportive of work on BEPS , which we’ve been looking at for some time as well. The timeframes, however, are very difficult to get ­sufficiently wide views on. There’s also the cost of ­being involved in the ­discussions to ­consider. I know that with little funding even in the UN , it’s not ­possible to attend all the relevant ­meetings, let alone devote the time to read ­everything that’s coming out on BEPS . It’s really ­incumbent that every ­effort be made to get the ­developing countries’ input into what comes out of BEPS . I’ve always said that something will only be a truly global standard if countries outside the OECD and the G20 accept it. Otherwise we risk having two standards: the rich-country standard and the less-rich-country standard. Everything that comes out of BEPS has to be ­analyzed with a view to how responsive it is to ­developing countries. For it to be a truly global response, it has to react to those needs. In the way it is framed, it must also recognize the realities of ­developing countries in terms of ­administration ­capacity and resourcing priorities. Do you think it would be more effective if there was a global body responsible for overseeing the implementation of transparency-related initiatives, such as country-by-country reporting? Could the UN take on such a role?

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members belong to the Committee of Experts on International Cooperation in Tax Matters at the United Nations. The experts, who are nominated by their governments, are chosen for their experience in tax administration and policy and represent tax systems from around the world. Their tasks during their four-year term include encouraging ­greater tax cooperation globally. For more, see: un.org/esa/ffd/tax/overview.htm

It would be a very good step if ­ ountries agree that there should be such c a global body, and there will no doubt be welcome moves to assist countries ­wishing to implement G20/OECD ­standards, but the most interesting issue going forward is that of the prospects or otherwise for universal bodies that would develop global standards. There’s always the risk in these areas that first movers will set the standards, and the standards may not work for others who are in a ­different ­position. In the long run, that affects the integrity of the standard. Even a formally global body would have to take into account the priorities

and realities of countries generally, and it would have to build confidence that their outcomes actually have a general ­significance. Otherwise it would ultimately still be them and us. In the old terminology, it would be the rule makers and the rule takers. I think as we’re becoming a much more complex tax world, we have to take a much more global-minded approach to developing the norms that ­everyone has to live by. As to whether the UN could take on such a role, whatever the forum we are ­operating in, the UN is of course a natural body for any global discussion. But it’s not a rule-making body on tax issues — it gives guidance. Whether it should have a broader role would be a matter for the member states to decide. You have a truly global view of the world of tax thanks to your position at the UN . How do you think increasing transparency will transform tax in coming years? The question is, will there be greater transparency in practice, and will the benefits be equally shared? I think the fact that tax issues are being sent up to the boardroom is really good. This is happening partly due to the work being done at the moment by external bodies, ­including the OECD, and partly it’s due to companies’ own concerns for reputational issues. In addition, NGO s have played a bigger role than ever before in exerting pressure for change, and committees ­within ­parliaments have begun to question senior executives directly on their ­organization’s tax profile. The companies and advisers most attuned to these ­changes will be best positioned. ı

Michael Lennard Chief, International Tax Cooperation Section, Financing for Development Office, UN Department of Economic and Social Affairs Michael Lennard was appointed to his position at the United Nations in 2007. In this role, Lennard focuses on making tax systems more equitable by strengthening cooperation between countries and ensuring the views of ­developing countries are taken into consideration. Lennard has extensive ­experience in the field of tax. Prior to the UN , he was employed by the OECD ’s Tax Treaty Secretariat and worked for the ­Australian Tax Office. ­Lennard holds a Master of Laws degree from the ­University of Cambridge.

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Imprint Publisher: EYGS LLP, on behalf of EY Global Tax Becket House 1 Lambeth Palace Road London, SE1 7EU, United Kingdom Editor in Chief: Stephan Kuhn Editorial Board: Kenji Amino, Kate Barton, Jim Hunter, Jay Nibbe Marketing Director: Alfred Raucheisen Program Lead: Alexander Lorimer Publishing House: Arnold.KircherBurkhardt AG Laubisrütistrasse 54  8712 Stäfa, Switzerland Publishing Director: Bernadette Costello Art Director: Urs Arnold Editorial Designers: Charis Arnold,  Arno Bandli, Benno Delvai, Daniel Peterhans Printer: Karl Schwegler AG Hagenholzstrasse 65  8050 Zurich, Switzerland All rights reserved. Contents of this publication may not be reproduced whole or in part without written consent of the copyright owner. This issue will be distributed as an insert in the Financial Times globally in December 2014.

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality  services we deliver help build trust and confidence  in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders.  In so doing, we play a critical role in building a better working world for our people, for our clients and  for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal  entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services  to clients. For more information about our  organization, please visit ey.com. About EY’s Tax services Your business will only succeed if you build it on strong foundations and grow it in a sustainable  way. At EY, we believe that managing your tax  obligations responsibly and proactively can make a critical difference. So our 38,000 talented tax professionals in more than 140 countries give you technical knowledge, business experience,  consistency and an unwavering commitment to quality service — wherever you are and whatever tax services you need. © 2014 EYGM Limited. All Rights Reserved. EYG no. DL1093 ED 1015 This material has been prepared for general  informational purposes only and is not intended to be relied upon as accounting, tax, or other  professional advice. Please refer to your advisors for specific advice. The views of third parties set out in this  publication are not necessarily the views of  the global EY organization or its member firms.  Moreover, they should be seen in the context  of the time they were made. ey.com/taxinsights

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“ Developing countries are no different than others: ideas, interests and institutions ­determine tax policy. The best tax system for any country is presumably one that reflects its economic structure, its capacity to administer taxes, its public ­service needs and its access to such other sources of revenue as aid or oil.” Richard M. Bird Professor Emeritus, Rotman School of Management, University of Toronto, and co-author of The VAT in Developing and Transitional Countries (Cambridge University Press, 2007)

Richard M. Bird’s observations on tax policy in developing countries exemplify the focus of the next issue of Tax Insights magazine: developing economies. Visit taxinsights.ey.com to keep up-to-date with the latest tax developments.