Monday 06/04/2020

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Outlook 2018: Tax evasion (IV)

Responsible Investment Strategist

Business ethics has been a topic of many debates and controversies in the past two years. The regulatory developments on the European and global level, such as the Anti-Tax Avoidance Directive (ATAD) and the Base Erosion and Profit Shifting Action Plan (BEPS) continue to feed the debate on responsible taxes. Those two initiatives have led to a series of measures to, on the one hand, avoid double non-taxation and, on the other, foster transparency in order to mitigate tax evasion.

Companies are impacted at all levels, from business model operations and cash operations to intra-corporate risk management and financing structures, such as holdings or intra-company loans in more tax-friendly countries. Hence, companies need to prepare for new reporting requirements (in particular the country-by-country reporting), review their current tax positions and adjust their strategy based on the new framework while making sure the latter is clearly communicated.

The recent statements by Facebook, which acknowledged the generation of advertising revenue in 25 countries instead of applying a centralised model at its head office in Ireland, shows that the mindset of multinational companies is shifting as a result of pressure coming from civil society in particular. Multinationals are increasingly being encouraged to be fiscally transparent by adopting a local sales structure, rather than funnelling revenues to the most fiscally attractive countries. That is the objective of the country-by-country reporting.

The European Commission is closely monitoring this type of development, and aims to publish some proposals in March 2018, mainly for multinationals which are active in the digital industry, such as Google, Amazon and Facebook. On 13 December 2017, the European Parliaments also adopted various recommendations in order to oblige the European Union and the member states to reinforce their legislation in terms of tax evasion and money laundering.

All countries across the globe are facing budgetary constraints, and tax measures represent an important tool to leverage additional revenue sources. In this way, multinationals are being confronted on all sides and their profitability is being tested to the limit.