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The great Jalalludin Rumi once said: “Yesterday I was clever so I wanted to change the world. Today I’m wise, so I’m changing myself.” |
The global economic crisis continues to have a profound impact on many aspects of the society in different parts of the world in varying ways. Amongst others, it has resulted in considerable pressure on governments, particularly those where the fiscal crisis had a deeper impact, to raise their revenues from all available sources.
For many countries, tax is big contributor to the government treasury. Hence it comes as no surprise that there has been such unprecedented focus on tax in recent times. The strong public sentiment clearly played a big part behind the scathing media and public attacks on how the tax affairs are managed by some large corporations, recent debate on “tax morality” and the emergence of a “good corporate citizen” concept, who pays fair share of tax.
The public tirade has been so strong that G20 has joined their heads together and tasked the Organisation of Economic Co-operation and Development (OECD) to come up with an appropriate response and hence the BEPS (base erosion and profit shifting) project emerged. A project, likely to significantly alter the global tax environment. While it is falling short of replacing the current global tax system with a new one, this ambitious project is aiming to address a long list of current tax practices and issues to combat global tax avoidance.
Interestingly, all practices currently within the scope of BEPS project are not considered illegal. While the OECD has set itself a two-year deadline to complete its BEPS related work, some governments have already started to act in anticipation and tightening their domestic tax regimes. It is not surprising that our recent Global Annual CEO Survey indicates that tax features high on the agenda of business leaders.
A few important questions arise. Do these developments have any relevance to the businesses based in the GCC region? If yes, to what extent these developments could impact? And whether businesses need to take any action?
It is generally known that GCC as a region remained resilient in the face of this crisis (thanks largely to year-on-year budget surpluses from generally high oil and gas prices in the last few years) which helped progress the domestic agenda of continued spending on infrastructure as well as fuel the growth of wholly or partially state-owned corporations as well as investments by sovereign wealth funds.
Many countries in the GCC region either have low or no taxation for domestically-owned corporations. Many businesses have historically invested in “friendly” neighbouring countries and therefore didn’t have to deal with “hostile” tax environments. This has germinated a non-tax savvy corporate mind-set even in large GCC businesses aspiring to be regional and global players (though a few exceptions have started to emerge).
It is therefore not surprising for us to discover during discussions with many organisations that tax has never featured in the overall strategy or within the organisational structure. It is also interesting to hear comments like, “this is not in my back-yard so why worry?”, “nothing has gone wrong to date”, etc.
While it is a paradox for economies under pressure to raise tax revenues while at the same time to attract foreign investment (hence remain tax friendly), we envisage that in the wake of the BEPS project and continued public pressure, tax laws around the globe and their application by the authorities, are likely to become more stringent. Therefore business operating outside their domestic boundaries will be forced to deal with an uncertain and aggressive tax environment.
Already some GCC-based businesses have faced tax law suits, worth millions of dollars in some cases, some of which appeared in the press as well. Interestingly, all the right questions that were raised at the time when something did go wrong, should have been raised much earlier but no one had responsibility for raising these questions. For example:
♦ What kind of international tax profile should we maintain?
♦ Are the various business units and current practicesaligned with the intended tax outcome?
♦ What should our approach to tax planning be? Do we care about what appears in the press?
♦ What kind of tax supportdoes the business need and where will it come from?
♦ Do we know how to respond now that something has gone wrong?
♦ Do we have a policy accommodating above challenges and whether the board approved it?
There could be serious financial and reputational consequences if these questions are not considered and addressed at appropriate senior level in the organisation.
The challenges for the GCC businesses on the tax front are likely to increase given the current work undertaken by OECD as part of its BEPS project as well as suggestions to reshape the future global tax system. We consider that GCC based businesses could be impacted in many ways such as:
♦ The notion of conducting all global sales from your home country and having minimal or no tax to pay anywhere in the world is likely to come under threat (the BEPS project is looking at artificial avoidance of “tax presence” and there are already voices favouring a transaction based sales tax on the seller in the country where the customer is based).
♦ Business with globally roaming employees without following any specific protocols for tax purposes could be facing significant risk.
♦ Any “tailor-made” historical tax structures lacking commercial substance should be expected to come under challenge.
♦ Failure on minor compliance issues are likely to result in bigger tax audits resulting in a much wider scrutiny.
♦ Big focus on intragroup transactions, transfer pricing and the arms-length principle.
♦ Tax authorities around the world could target government and quasi-government entities specifically as they suspect that these entities could be shy of public shaming of their tax affairs and their tax mistakes will be “bank-rolled” by the respective finance ministries.
♦ Country-by-country reporting and transfer pricing could dramatically increase the global reporting obligations of businesses in a similar way Foreign Account Tax Compliance Act (FATCA) has impacted financial services industry.
The important point to note is that a failure in pre-emptively managing global tax issues is a failure of effective corporate governance and enterprise risk management. Therefore tax should be fully embedded within these two important corporate functions so that any international tax risks could be identified and proactively managed during the normal course of business.
It is imperative for the business leaders and the boards of large corporates in the GCC to get involved and have an understanding of how these tax trends may impact their organisations and consider whether there is strategy and tools in place to deal with the “morning after”.
Businesses in the GCC region have a choice today. They can either remain “clever” or become “wise”.
♦ Sajid Khan is an international tax partner with PwC Middle East, who moved to the region from PwC UK. He is currently based in Doha.
