At the same time, governments are seeking – quite rightly – to ensure their tax systems generate the revenues they expect. But equally they want to remain competitive internationally. In combination, these developments have fuelled a widespread perception that large corporations are not paying their ‘fair share’ of tax, in turn contributing to a loss of trust in tax systems themselves.
It would be useful to look at some elements of the current debate from a different perspective. All too often, we hear people call for ‘fairness’ or ‘morality’ in tax policies without defining what these terms actually mean. The discussion also tends to focus almost exclusively on corporation tax, which makes up only a small proportion of a company’s Total Tax Contribution (TTC) – a more complete and useful measure of taxes paid as it takes into consideration value added tax (VAT), goods and service tax (GST) and employment taxes.
However, a more fundamental problem is that the debate as currently framed confuses two components. The first is the tax system itself; are the rules by which people pay tax fit for today’s world? The second component is the way taxpayers behave within that system; for instance, how are taxpayers complying with the rules? Though both issues are related, they need separate responses.
There’s no question that taxation has become an increasingly important focus of attention in our clients’ boardrooms. As our 17th Global CEO Survey confirms, the need to manage the total costs of tax – both tax payments themselves and the cost of compliance – is seen as an increasing challenge: 70% of CEOs cite the impact of tax and its potential to affect growth as a concern, up from 62% in the previous year.
This shift reflects the fact that our clients are dealing with a growing range of issues and risks in the tax arena. Addressing these issues requires not only proficiency in the technical aspects of tax, but also a solid understanding of the business context – and the commercial and reputational impacts – of any decision they take. Clients know their tax affairs can affect their brand as well as their reputation, and are being closely watched by an expanding array of stakeholders – from shareholders, to NGOs, to the public and the media.
As tax advisers, our role is to help our clients navigate through the complexity of the applicable rules and make informed decisions with respect to the tax risks they face. And to do this while balancing their diverse responsibilities to multiple stakeholders both within and outside their organisations. Businesses need to think through how their tax profile would be perceived by all stakeholders if the glare of the media were to be turned on it. This test should not shape a client’s tax policy – but if a company cannot articulate clearly why it’s taking a particular approach, then it’s a sign that the approach itself may be the wrong one.
Drawing on – and enhancing – the insights and experience we build up through our client work, a further vital aspect of our role in the tax arena is supporting governments in the developing world as they endeavour to create and manage tax regimes and operations that are fit for today’s world. Particularly in emerging economies, this role includes advising on the development of tax policy and the efficient administration of tax systems.
In developed economies, our role with governments focuses more on helping to provide policymakers with insights on the potential impacts of decisions they may take. This activity takes many forms in different countries. In Australia, for example, the PwC Australia tax reform site has proven to be very popular. A related video – highlighting the country’s ageing population, growing government debt and threat to the provision of benefits, and which calls for improvements to the tax system – has had more than 104,000 hits on YouTube. This all underlines the Australian firm’s leading role in the public and government debate on reforming the country’s tax system.
Another good example is in the UK, where our ‘Paying for Tomorrow’ initiative is contributing to the debate on how the UK tax system needs to change for the modern and future economy. This is about undertaking a fundamental review of the tax system and how it will sustain future government revenues. The initiative was launched in June 2014 with a ‘Citizens’ Jury’, at which 22 representative members of the British public spent two days considering the shape and structure of the UK tax system, bringing to bear their own perspectives on tax ‘morality’ and ‘fairness’.
The findings from the Jury – such as its call for the integration of income tax and national insurance, a radical shake-up of value added tax (VAT) and the setting up of a new independent advisory body to reduce the influence of political short-termism – have been reported across UK print, online and social media. This has given a voice to people who wouldn’t normally be heard in a debate on public policy. Other aspects of the ‘Paying for Tomorrow’ initiative include a business forum and a student competition. For its part, PwC UK ultimately produced a paper bringing together its collective thinking on tax reform.
The third major strand of our tax work globally is collaborating with multilateral organisations in their efforts to help build a new and better international tax system. An important development in this context is our involvement in the review by the Organisation for Economic Co-operation and Development (OECD) of ‘base erosion and profit shifting’ (BEPS) – a term referring to the reduction of a company’s tax liabilities through the interaction of different countries’ tax rules.
We’re closely monitoring the OECD on BEPS and other initiatives. We want to see changes that will rebuild public trust in the tax system while enabling global trade and business to thrive. While the BEPS review is ongoing, and the findings are only now beginning to emerge, our clients are already taking its potential impacts into account when making business decisions for the medium term.
We are helping clients prepare for these outcomes. In our view, the changes that business will face post-BEPS will come from three different places: first, international rules, such as tax treaties; second, changes to national tax laws; and third, behavioural change among tax authorities, such as greater information-sharing and a more robust approach to where value, risks and profit are actually located. We’re helping our clients plan ahead for all these types of change.
A further aspect of our work with multilaterals is enabling better communication with national tax authorities. This role is showcased in the accompanying case study about the meeting we facilitated between the OECD’s Business and Industry Advisory Committee and China’s State Administration of Taxation.
The efforts to build momentum for the reform of tax systems globally are gathering pace. If we’re to help sustain this progress, it’s vital that we’re seen as acting fairly, openly and consistently with all stakeholders, and are therefore trusted by all parties. An important enabler of this trust is the way we, as a global network of firms, hold ourselves consistently to account through our Global Tax Code of Conduct, originally implemented in 2005 and revised in 2013.
Ultimately, our vision for tax globally is to have a system that builds public trust while encouraging – not hampering – global trade. Turning this vision into reality will demand unwavering commitment from all participants, and difficult trade-offs in every country. But clear progress is being made – and we’re determined to play our part in helping tax systems globally complete the journey.