Last year was a dramatic period in global history. As a result of the Covid-19 pandemic, the way people and companies interact and do business might never be the same again. This will have behavioural consequences in the way people work, consume and socialise.
Governments will have to react to this changing environment to meet the challenges of paying for the pandemic and rebuilding their economies. The methods they choose to do this will have big implications for businesses whose operations cross national borders. Overall, the pandemic, coupled with government attempts to tax the digital economy and growing public unease with multinationals’ profits, will pose a series of significant challenges for multinational companies. As we reach the end of the first quarter of 2021, it will pay to be prepared.
1. Fiscal responses to the Covid-19 pandemic
Multinational companies will need to keep abreast of fiscal changes. Governments are wrestling with how to pay for the cost of supporting their countries while fighting the virus. The pandemic has also increased the need to consider further societal changes, such as the continued shift to online shopping, the impact of this on traditional bricks-and-mortar businesses, and how to tax an increasingly digitalised world.
Multinationals are likely to be faced with myriad changes, from headline corporation tax rates rising to new taxes, such as windfall taxes, digital services taxes and online sales taxes. They may also benefit from increased incentives to invest in infrastructure, innovation and carbon-reducing technologies.
Governments will also be looking at ways to increase their tax revenues by bringing forward tax payment dates, along with more rigorous enforcement, anti-avoidance measures and increasing use of data analysis as tax returns themselves become more digitalised.
All of this will put multinationals’ finance teams under increasing pressure. They will have to deal with an increasing tax compliance burden and also ensure tax transparency to avoid the damaging reputational risk of not being seen to ‘pay their fair share’.
2. OECD transfer pricing proposals
The OECD’s base erosion and profit shifting review looks at declines in domestic tax bases (tax base erosion) due to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems. Developing countries’ higher reliance on corporate income tax means they suffer from this disproportionately.
Action one of the review’s recommendations is the creation of a unified international approach to tax the digital economy. The fundamental driver behind this is to ensure that profits are taxed in the jurisdictions where the economic value is created. This should ensure that tax revenues from multinational businesses are more evenly spread across the markets in which they operate, including markets in developing countries.
The OECD is still finessing these plans following consultation and debate with relevant stakeholders. Despite Covid-19, the OECD believes substantial progress towards building consensus has been achieved and hopes an agreement will be reached by mid-2021. The new rules mainly target large, highly profitable multinational enterprise (MNE) groups or large MNE groups with low effective tax rates. In practice, MNEs will need to conduct a series of tests internally to evaluate if any part of their operations fall within the scope of the new taxing rights (i.e. automated digital services or consumer-facing businesses) and if there are circumstances that result in potential liabilities for the MNE. Thereafter, multinational businesses will be able to structure their business models in light of the new international framework. Eventually, we should also start to see a ‘levelling up’ as tax revenues in developing countries increase to reflect the economic value that is being created there.
3. Indirect tax
Governments throughout the world have been borrowing to support their economies through the pandemic. As economies rebound over the coming year, it is likely that there will be an increasing focus on indirect taxes such as VAT, goods and service taxes, sales taxes, and customs duty to raise tax receipts.
There may be changes in the rates of tax that apply to help increase receipts, particularly where rates have been temporarily reduced during the pandemic. However, given the inflationary impact that increases in transaction taxes have, a more likely approach will be to focus on perceived ‘tax gaps’ to maximise revenue. Governments are likely to put more emphasis on identifying and assessing compliance errors and renew their focus on avoidance and evasion. International companies can also expect to see measures to ensure tax is paid in the country of consumption, and stiffer penalties for errors. For UK/EU traders, the compliance obligations that now exist as a result of the UK leaving the EU add an additional layer of complexity.
Multinational businesses should review the controls that are in place to manage their indirect tax risk. They should also introduce a programme of testing to ensure control measures are operating effectively and accounting system updates have been implemented correctly.
4. International remote working: a challenge for employers
Even after the impact of the Covid-19 pandemic has abated, remote working will remain commonplace throughout 2021 and beyond. While there are many benefits to a remote working culture, this shift can contribute to tax increases and compliance issues at an international level.
Employees working remotely across international borders may trigger income tax and social security compliance obligations for the employer as well as administrative costs in respect of work permits. Moreover, an employee working remotely in an overseas location may create a ‘permanent establishment’ in that jurisdiction, which can lead to compliance and tax obligations for the employer at the corporate level. While many countries hold some form of ‘double taxation agreement’ or ‘social security agreement’ with their international neighbours, it should not be assumed that this will alleviate compliance obligations in all scenarios.
Therefore, businesses that are keen to introduce remote working internationally for their employees should consider putting in place a robust international remote working policy to help navigate a complex compliance environment and ensure they capitalise on the possible benefits as well as mitigate any risks.
5. Social security considerations for businesses in the EU and UK
The end of the UK’s transition out of the EU on 31 December 2020 also saw the end of the EU’s social security coordination regulations that were so familiar to many UK businesses working within the EU. However, post-Brexit there are alternative arrangements that allow businesses to continue to work in the EU on similar terms throughout 2021. These effectively provide the same level of social security protection as that enjoyed prior to the end of the UK’s transition period.
Notwithstanding, there are important differences between the ‘old’ and the ‘new’ regulations that businesses will need to consider, in particular in respect of employees seconded to work temporarily in an overseas territory (detached workers) because these temporary postings should not now exceed 24 months, whereas previously extensions were sometimes possible. Moreover, the ‘new’ rules do not apply to the European Free Trade Association countries in the same way they do for EU member states.
Businesses from around the globe that are looking to expand or post employees within the UK or the EU will need to consider how the EU-UK Trade and Cooperation Agreement will affect their strategy, and allow for additional time and costs to understand how the ‘new’ rules will apply to them, in particular when looking to enter the European and UK markets for the first time.
Overall, there are many aspects – be they fiscal, governmental, societal, economic or environmental – that will affect the way multinational companies operate as the world seeks to eradicate Covid-19, not just this year but looking ahead to the long-term future. Without robust and strategic plans, businesses risk losing more than just another year of profits.
Home page image by Gabriel Bouys/AFP via Getty Images
Chris Denning head of corporate and international tax at MHA MacIntyre Hudson.