BEPS, the logical tax shift

The 15 BEPS actions have profoundly changed our tax and financial universe. They are the logical consequence of crises, and they result from the will to restore more tax equity between countries. It is a groundswell, inevitable and which reshuffles the cards between jurisdictions. It changes the choice between the most interesting locations to establish one’s financial center of decision. The tax element is losing its importance as a determining criterion of this choice, to the detriment of other criteria that should be considered more carefully.

World tax reconstruction

BEPS, an acronym that did not tell us anything and that today speaks to all financiers. The OECD, thanks to the work of Frenchman Pascal Saint-Amans, has played an important role in the modification of tax laws allowing to put an end to banking secrecy in certain countries and to international tax evasion. However, there is still work to be done in the framework of this long and delicate mission of tax reconstruction. In the space of a few decades, tax laws have evolved considerably to put an end to certain practices such as tax evasion. A lot has happened since the financial crisis of 2008. The framework in which we were evolving until then has been profoundly challenged. The main founding principles of BEPS and its 15 actions were: transparency, substance, and consistency, which were too often lacking. They tackled aggressive tax planning by implementing the “Base Erosion and Profit Shifting” project initiated by the G20.

Harmonized corporate taxation, a myth?

Most recently, the OECD reached a framework agreement on the taxation of multinationals, which imposes a minimum tax of 15% on these companies from 2023 (on October 8, 2021, the Organization for Economic Cooperation and Development announced that 136 countries have adhered to the Declaration on a two-pillar solution to the tax challenges raised by the digitization of the economy). With this latest decision, we have reached the end of a logic of coherence and relative equity. We know that it would be futile to think that we can put an end to all attempts at tax optimization, but at least we now have a sort of safety net against the reduction or avoidance of the tax burden of these structures, which guarantees that they do indeed pay a minimum tax.

Substance

It should be noted that ATAD 3 will target companies or hedge funds without substance or personnel, which have no real activities in the country, and which exist essentially for tax reasons. Hedge funds have understood this in Luxembourg, for example, by increasing their staff and local presence to avoid recharacterization. It will certainly take some time for all players to react and get up to speed. Time is also needed to obtain clarifications on the rules adopted. Progress has been made. However, we still must hope for the publication of documents interpreting the rules and case law to see how the authorities react. It does not seem that outsourcing 100% of these regulatory, accounting, tax and other activities and obligations is the way to go. Hiring experts for part of the financial and treasury activity, for example, is a way to protect against this tax risk and at the same time to develop more efficiency and reduce costs. If there is one thing to control internally, it is this. 

No more tax havens?

Some countries that are rightly or wrongly called “tax havens” have cleaned up their tax organizations. But it remains particularly difficult to change their reputation. However, each country has to think about where to place the regulatory cursor to allow the development of business without facilitating tax evasion. It is a delicate balance to find. We must accept the idea that this work is linked to a macroeconomic evolution: the transition from a globally closed economy to a globalized open economy. In this context, to achieve more effective regulation, most large countries have agreed to lose some of their fiscal sovereignty to international rules. Of course, there will always be some small countries that will jump into the breach by proposing more attractive tax regimes, which has obviously been taken very badly by the large countries, which are obliged to respect more restrictive rules. We have also seen that the trade wars launched by certain giants are in nobody’s interest. For small countries, it is therefore much more interesting to also comply with international regulations, to avoid suffering even more damaging consequences. So, in this context, some people ask whether tax optimization is still possible. It remains possible and advisable. However, as we know, some countries are still trying to exploit loopholes in the current regulations to make themselves more attractive, using optimization maneuvers that are not based on any legal provisions.

Game changer

There is also an element that has changed the game completely, it is information technology. It will undeniably have a role to play. It has already done so within the framework of the BEPS project, with the implementation of the automatic exchange of information, particularly regarding rulings, inter-company operations and other international tax structures. So, it is difficult to claim that the world will be more just and more balanced socially and economically. However, it is understandable that from an ethical point of view and to protect the public finances of states that have suffered some serious crises in recent years, such measures were finally adopted quite easily. This fight against tax evasion may be perceived as partisan but unfortunately it is very real, and it is therefore necessary to adapt to it because it is only the beginning at a time when we are talking about BEPS 2, DEBRA and ATAD3. This is a tax dimension that has a significant impact on the finance function. The purpose of international tax regulation is to regulate what cannot be regulated spontaneously and self-disciplined. There is an emergence of populist movements, whether we like it or not, that are pushing for more transparency and tax fairness. Companies have had to adapt to and accept this. The tax factor has become minor, or less preponderant, in the choice of the location of a cash center. It is true that regulations always bring their share of constraints and reports to be issued or audits to be carried out. However, all this tends to ensure the sustainability of the system and its resilience to future crises. We must accept that international taxation continues to evolve for more justice, say its supporters, and more constraints, say its opponents. It is up to us to adapt. In a more standardized world, in terms of financial and tax regulations, the determining criteria for choosing the location of cash centers, funds and other structures will change and priority will be given to the expertise and competence of the places. It will be necessary to distinguish oneself in a different way by know-how, political and legal stability, multiculturalism, and flexibility.

François Masquelier, Simply Treasury – Luxembourg December 2021

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).