29th March 2021
With international tax requirements and reporting standards becoming ever more complex, recruitment agencies need to understand the differing tax compliance regulations across the globe when engaging with and placing contractors with local companies. While organisations face significant challenges, so too do local tax authorities as they try to clamp down on any breaches and fraudulent behaviour. So, what are the areas that are the most cause for concern?
International tax compliance latest
One of the most difficult aspects for tax authorities to govern has been that of digital taxation and the ability of some organisations to take advantage and avoid taxation on their profits in a territory where they do not actually have a physical presence. This is the point made by Marcello Estevȃo, Global Director for Macroeconomics, Trade and Investment at the World Bank Group in a recent article for International Banker. He explains that “the existing international taxation framework’s design means that, without such a physical presence, many jurisdictions are left with little or no right to tax the profits that MNE digital platforms earn from income generated from their citizens.”
Alongside measures that local authorities have instigated to tax income derived from digital services, Estevȃo explains that heavyweight international organisations such as the EU and the UN – the latter of which has introduced a new article to its Model Tax Convention – have also shown their support for local authorities. They agree that any income gained by digital means must be taxed. In other words, there must be no escaping ‘digital services taxes’ for companies that are solely generating revenue from the digital services they provide.
Some pre-eminent organisations however, actually want to go further in their bid to ensure a more equitable distribution of corporate profits. “Such moves have not been supported by the OECD (Organisation for Economic Cooperation and Development), which has instead spearheaded an initiative to develop a consensus approach that would recognise an enhanced allocation of MNE profits to the markets in which the consumers reside,” continues Estevȃo. “This initiative reaches beyond the digital economy to embrace more traditional customer-facing businesses.”
Whether it’s just targeting digital taxes or extra profits to help out smaller or less wealthy economies, it is clear that the international tax landscape is evolving all the time, in particular where digital revenues and taxes from digital businesses are concerned. The World Bank is also looking into these global tax legislation measures to see how they would impact countries. It’s very much a work in progress according to Estevȃo but organisations need to be aware of the effect the changes will have on their tax compliance position, and that of their international contractors.
International tax transparency and information exchange
How to effectively counter the shifting of profits earned in one country to another for tax purposes is at the heart of tackling the tax issues surrounding digital services. Estevȃo highlights some of those key measures that countries have been implementing, such as “controlled foreign corporation (CFC) rules that enable them to tax ultimate parent companies located in their jurisdictions on some of the profits earned by subsidiaries in low-taxed jurisdictions.” An example he provides is that of the US’s Global Intangible Low-Taxed Income, or ‘GILTI’, to get multi-national enterprises to pay tax on their foreign income, especially where profit has been diverted to other territories.
Another area that has helped authorities be more effective at collecting taxes has been the preparation of transfer pricing documentation – instigated by the OECD – and for companies to pass on relevant information to local authorities if required. Greater reporting and disclosure of activities is key to success. “This is supplemented by country-by-country reporting, also promoted by the OECD, which requires the largest MNEs to report key information and data on their international operations to the tax jurisdictions in which they operate,” adds Estevȃo.
The Global Forum on Transparency and Exchange of Information for Tax Purposes has created a framework to provide guidance on the exchange of information. Working closely with the World Bank and OECD, the Forum has helped countries adopt the new regulations while upholding international tax and transparency standards. As Estevȃo points out, “While the transparency agenda has made enormous progress and has had a clear impact on international tax avoidance, the extent to which the current discussions on countering profit shifting will see similar success remains to be seen.”
While progress is being made, there is still much to do to ensure that there is more consistency around the world as far as taxation of digital services and ensuring that companies pay the right tax in the jurisdiction in which they operate. Developing countries in particular, argues Estevȃo, need as much support as they can get to help them implement new measures to cope with an ever more sophisticated landscape. This will enable them to benefit from the correct taxation of corporate profits and ensure that any monies owed from digital income are recovered.
International tax in countries around the world can be a real minefield, which is why recruitment agencies must ensure that their businesses meet tax compliance standards and follow all local legal requirements. As we’ve seen, the penalties for tax evasion can be severe. Understanding the complex set of rules and regulations for each circumstance will require expert guidance and an in-depth knowledge of local legislation.
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