A clear case for transparency

Debbie Payne, director, PwC, gives an overview of how the global tax landscape is changing

The last few years have seen a seismic shift in the global tax landscape. Whilst the changes are complex and can be difficult to follow businesses now need to start to assess the impact of these changes on their business models to ensure that they are fit for purpose.

One of the key themes of the OECD BEPS initiative is transparency.

The consequence of this is that data will be exchanged between tax authorities and regulators far more frequently. This includes the publication of tax rulings and transfer pricing documents and tax authorities contacting regulators where they believe that they may hold information which could assist them. All this means if you have a requirement to report information to any government body or organisation you should assume that this will be exchanged and ensure that your commercial, compliance, tax and reward strategies are aligned.

So with this in mind where do you start?

The first action is to set a framework for the review and to consider some key questions:

• How will data be interpreted by tax authorities and other stakeholders? The increased focus on transparency means that in many cases “perception is reality” and how the media or a tax authority reacts is at least if not more important than the reasons put forward by business in support of its tax strategy. So consider how your business model could be viewed from the outside.
• Do you have the technology and systems in place to gather and report the data required? The reporting required under US and UK FATCA is only the start. Going forward you can expect the reporting requirements to align more closely with the figures expected on tax returns and certainly preparation of figures using estimates or proxy data will not be acceptable. This means that new IT systems should be designed to capture the data required to undertake accurate tax reporting including future proofing to avoid duplication of costs. There is also the opportunity to provide additional services to your clients by preparing the data they need for their tax returns.
• Do you have adequate governance and control frameworks to ensure accurate reporting and execution of transfer pricing policies? Groups need to articulate more clearly than ever what the critical risks are for their business and how those risks are managed on a day-to-day basis. This includes a tax policy document setting out how the risks are identified and monitored both for the business itself and for your underlying clients.
• How is cash repatriated to a parent company in Jersey? The proposals on treaty abuse may restrict or prevent access to treaty benefits, such as the reduction or elimination of withholding tax on dividends, interest and royalty payments. This may impact on a group’s ability to establish group finance companies and/or repatriate cash or reserves to its parent company in Jersey.

Jersey businesses should review their existing holding structure and cash management/repatriation strategies to identify:

• Areas which may be susceptible to challenge under the proposed wide anti-abuse rules or more rigorous application of existing rules; and
• Potential exposure to withholding taxes.
• Do your staff regularly travel abroad? Jersey companies with employees who regularly travel abroad are exposed to an increased risk of creating a taxable presence in those countries. You should identify arrangements that could give rise to heightened permanent establishment risk under both current and proposed rules and develop operating guidelines and processes/controls to monitor and mitigate permanent establishment risk.
• Finally but not least is your reward strategy aligned with your tax strategy. All too often this is overlooked and gives a tax authority and easy way to attack an intra-group pricing policy.

Whilst none of the OECD actions specifically focus on substance it is theme that runs through a number of the action points. The key to a robust operating model is to ensure that the business has sufficient presence in any jurisdiction to support the profits retained in that territory. In this respect Jersey is well placed but it is not simply about head count what is required is the that the individuals who are the key value drivers of a stream of revenues and profits work for that entity in the country where the profits are subject to tax. Whilst many businesses have a strong presence on the island you should consider whether the position can be improved. It will be essential to be able to demonstrate where risks lie. Groups should revisit their intragroup contracts and update them to reflect the OECD’s revised approach.

Once you have a framework in place you can start to look at the more detailed points in line with your agreed policies and goals.

From a Jersey perspective the changes in the tax landscape present a number of challenges not least because it is not a full member of the OECD so cannot directly influence the outcomes. However, its history of transparency around tax reporting under FATCA and entering into tax information exchange agreements means that if a company’s business model is robust and properly document it should be able to deal with the challenges posed by the new environment.

This does mean that action needs to be taken to review your operations and documentation to ensure that all the challenges can be met.