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Taxing questions for multinationals

Taxing questions for multinationals Anthony Harrington

The rules of residency for multinationals are extremely complex and not a little fuzzy and getting them wrong could cost big time. Instead of being taxed in what you fondly believe is a low or reasonable corporate tax regime, you could find one of the world's steeper tax regimes claiming that actually, for tax purposes, you are domiciled in their domain. How could such confusion arise? Relatively easily, according to Frédéric Donnedieu de Vabres, Chairman of Taxand, the world’s largest independent global organization of specialist tax advisers to multinational businesses.

It all comes down to where a court might deem a crucial business decision to have been made. If a key decision maker has joined a video conference from a base in the high tax regime, and it can be shown that they swayed the decision, the regime could plausibly argue that the business, from a control point of view, was "really" located in their jurisdiction. Fun, isn't is?

Donnedieu was addressing the Taxand Global Conference 2013, which took place on 25th April. The backdrop for the conference is the OECD's move to put in place its "Action Plan" for tackling tax avoidance and profit shifting by multinationals. He warned his audience that the laws governing tax residency "have seen little change since they were formulated in the early 1900s", despite the fact that the world and business processes have changed radically over the intervening period. He noted:

"The paradigm shift in technology, travel and international markets makes it almost impossible to apply these laws to modern business. Companies run the risk of heightened scrutiny, increased investigations, the potential of double taxation scenarios and huge financial penalties imposed by tax authorities for not abiding by rules of around residency, beneficial ownership and permanent establishment."

Most companies, if challenged as to where control resides, would point to their board meetings as the locus of control, and in most instances these meetings will take place "where both central management and the company itself resides for tax purposes," he says. But this is not always the case. As industry moves more and more to a flexible and remote working model, key management may well be scattered across different geographic regions. 

Donnedieu suggests that "in the context of a board meeting, where a key participant is joining by telephone or video conference, it might be that their exact location at the time will become critical in determining where a business decision was taken." 

OK, it's a statistically unlikely scenario he's painting, but the basic point, that residency rules are fuzzy and that multinationals need to put in some time and effort to align their tax structure and their business operations so that they do not run foul of either the law or, as happened in the UK recently, public opinion. The general public are easily moved to anger when the newspapers start trumpeting the fact that a company like Starbucks is making plenty of profit in their country while using clever accounting to pay far less tax in that country than most would deem fair. This goes to reputational risk, as Starbucks found out to its cost. The OECD's drive to tackle tax avoidance and profit shifting is a good thing, most members of the public would say, and if it causes multinationals to shape up, step up and do the right thing by the countries in which they have a presence, that too, will be a very good thing.

Further reading on tax issues

  • Transparency could take the heat off tax havens, by Anthony Harrington
  • Economic Ebb and Flow, a World of Challenges and Opportunities, by Hamish McRae
  • Understanding the Implications of Japan’s “Two Lost Decades”: Lessons for Europe and the United States, by John Vail

    Tags: domicile , multinational , Robin Hood tax , tax , tax advisor , tax avoidance , tax management , Tax Research UK , tax residency , Taxand , taxation , UK , video conference
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