The interconnectedness of the international tax system has been brought home sharply to me over the past fortnight by events both internal and external to KPMG.
This week has been an enjoyable one for me, with Australia hosting KPMG’s International Tax Steering Group’s (ITSG) bi-annual strategy meeting, the first time this has happened in seven years.
The timing was fortuitous, with the OECD’s final Base Erosion & Profit-Shifting (BEPS) Action Plan being published last week. Our global tax practice, whose leaders have been in Melbourne this week, has rightly described BEPS as representing the biggest shake-up in international tax since the first tax treaties were set up in the days of the League of Nations.
In 2008, when the ITSG was last held in Australia, the Global Financial Crisis was headline news, while tax was not. But one has led to the other, because governments facing the recessions and deficits which followed the GFC have redoubled their efforts to ensure they get every cent of tax revenue owed to them.
It was this financial driver which led to the OECD setting up its BEPS plan, which was again endorsed by the G20 finance leaders last week in Lima, Peru.
KPMG also endorses the BEPS plan. It has been a remarkable feat to keep so many countries in the tent over the last two years, although it could be argued that the real hard work starts now, with national governments having to implement the measures into national law. Pascal Saint-Amans at the OECD’s press briefing last week placed great emphasis on implementation and monitoring.
This week, our global head of tax, Greg Wiebe, along with EMA head of tax Jane McCormick and ASPAC head of markets Brahma Sharma told Australian media ahead of the ITSG meetings that BEPS was a huge but necessary updating of international tax rules which had failed to keep pace with modern business developments.
BEPS, Greg pointed out, aims to eliminate ‘double non-taxation’ in certain parts of multi-national enterprises’ value chains. It is true that BEPS will see governments in increased disputes over taxing rights, with an arbitration mechanism needing to be established.
But, he said, it is also important to point out that there is nothing wrong with honest tax competition and that BEPS does not prevent this. In fact we are likely to see more pressure on countries, like Australia, which have uncompetitive corporate tax rates.
The nature of the work of tax professionals has changed since the GFC led to the BEPS agenda. No longer is purely complying with legislation enough. We now have to advise clients on reputation issues, with tax being at the centre of public and media debate and high on boardroom agendas.
The public trust that was lost post-GFC can be rebuilt with increased transparency and a perception of fairness. So BEPS and efforts by governments to increase transparency in the tax system should be applauded, while being careful to ensure that the benefits are proportional to the cost of compliance. Citizens are expected to be transparent with their tax authorities – the same expectations should apply to corporations as well.
It is intriguing to speculate where the tax debate will be another seven years. Maybe some of the current heat will have gone by then. But I am sure that the interconnectedness of the international tax system will have only grown.
It is important that Australia, which has been quick off the blocks in adopting many of BEPS measures, maintains a strong regional and international focus. As a country which imports capital, we cannot afford to be uncompetitive and I would hope that by the time the ITSG is hosted again in Australia, our corporate tax rate will be considerably lower than its current 30 percent and that some of the much-needed domestic tax reform ideas put forward by KPMG and others in recent months will have happened.