Businesses seek cross-border tax clarity, but would they really pay more?

Would businesses really be willing to pay more tax if they had more certainty on what is acceptable for cross-border tax planning?

According to a recent Grant Thornton International Business Report, three quarters of business leaders would in fact be ready to pony up more taxes in exchange for greater clarity from tax authorities.

While few expect a global agreement any time soon, the majority of those surveyed would like to see their governments take action to achieve some harmony. The report is a global survey of 2,580 businesses in 35 economies.

However, tax lawyers question the report’s assertions. They say while international clients might be growing anxious about the Organisation for Economic Co-operation Development’s recommendations on the Base Erosion and Profit Shifting project expected later this year, few really seem willing to actually pay more tax.

“That is so ridiculous it’s laughable,” says Kim Moody, director, Canadian tax advisory with Moodys Gartner Tax Law LLP in Calgary, a firm that acts almost exclusively for business owners.

“I can tell you there is no way any of my clients would grab on to that. It’s a hide-the-pea game; you’re never going to get more clarity with tax laws — it’s just the nature of what it is — it’s complex, probably the most complex body of law there is, and to try and dumb it down has been an ongoing process for 100 years.”

The GT report shows 73 per cent of Canadian respondents, like their counterparts in the rest of the world (74 per cent), want more clarity from the tax authorities, even if it means less opportunity to reduce their cross-border tax burden. In response to the same question asked the previous year, only 46 per cent of Canadian respondents were favourable toward such measures.

“I don’t have any clients who are volunteering to pay more tax in exchange for clearer rules,” says Ted Citrome, of counsel at Dickinson Wright LLP in Toronto.

But he says the increase in those who want more clarity reflects what the firm’s international clients are saying regarding increasing frustration over the uncertainty.

For companies with international operations, the increasingly negative publicity around cases such as Starbucks and Amazon highlight international tax planning issues, and the response to it by the OECD countries has continued the momentum.

“Clients are accustomed to, with help from tax advisers, dealing with legal risk that is always inherent in adopting a tax position, particularly in the international context,” says Citrome. “But they are less accustomed to dealing with the political risk that the law might change on them.

“The BEPS initiative seems to be in the back of the minds of people who responded to the survey, even though only 23 per cent could see the initiatives being implemented.”

Business leaders doubt a global agreement will be enacted to provide clearer tax rules. Just 23 per cent of the survey respondents thought the OECD’s plans for global tax improvement under the BEPS project would likely be implemented. In Canada, this proportion shrinks to 16 per cent.

Unless a client is global in nature, Citrome points out Canada’s tax treaty with the U.S. already incorporates a lot of the concepts being talked about by the OECD. For example, it already has rules to prevent treaty shopping.

Moody says that, around the world, tax laws continue to fail to meet the objectives the report talks about.

“Are countries going to look back at BEPS and say, ‘Yes, this is a success and [it] achieved its objectives?’ I don’t think so,” says Moody.

Dealing with multiple jurisdictions can be expensive and frustrating for clients, says Robert Kepes, a partner with Morris Kepes Winters LLP.

“I imagine many are saying, ‘If there was a common set of rules we could live by, then I will avoid all the hassle in the future of multiple advisers and multiple audits,’” says Kepes. “Maybe some are thinking it would be easier if they paid more tax but had greater certainty as to what the rules are.”

Kepes says business owners look at everything as a cost-benefit analysis and may be fed up and willing to give something up to eliminate some of the fog in dealing with multiple jurisdictions.

“Nobody is going to pay me as a lawyer $100,000 in legal fees to save $50,000 in tax. Business people are going to look at it and say there has to be some benefit in getting certainty in these tax rules.”

Businesses that took part in the survey said they are more supportive of implementing unilateral, individual country actions in lieu of a global agreement: 71 per cent said they would support their own government taking unilateral action to combat the loss of tax revenue in their jurisdiction.

Support for local action is strongest in India (95 per cent), the U.S. (82 per cent), and the U.K. (79 per cent). In Canada, 71 per cent of respondents are in favour of such actions.

“The IBR clearly shows that businesses remain skeptical about the adoption of the OECD recommendations under the BEPS. As the OECD does not have force of law, each member country will need to adopt the recommendations within its own legislative framework, a process that could be very long. This is why the majority of respondents support unilateral action by tax authorities as it will protect the tax base,” says Daniel Marion, transfer pricing and international tax partner at Raymond Chabot Grant Thornton.

Francesca Lagerberg, global tax leader for tax services at Grant Thornton, says international tax standards “clearly need to be stripped down and rebuilt for the world we live in today.

“The existing legislation is creaking at the seams in an increasingly interconnected, digital world in which the definition of a ‘border’ is looking archaic. The research is showing that businesses are asking for more help to enable them to navigate the new challenges of a digital economy.”