Striking a Balance in Tax Planning

August 10, 2017
With some sort of tax reform on offer, avoid looking like cheats when it comes to tax planning.

Falling dollarCompanies have been under the microscope globally for several years now when it comes to paying taxes. This is evident in recent initiatives like the OECD’s BEPS (Base Erosion and Profit Shifting) action plan, which attempts to coordinate tax policies within Europe (and ostensibly around the world – parts of Asia and the Middle east are adopting BEPS or creating similar rules). It’s also looking to snuff out special arrangements companies might have made with countries like Ireland (Apple) and Luxembourg (some 350 companies, according to LuxLeaks).

While the effort to wrangle together hundreds of countries’ tax policies has is ongoing (the OECD says about 100 countries have signed on to BEPS), for corporations it is probably wise to start thinking of new strategies or at least prepare for a new paradigm. Any changes to the US code could be could be a game changer to international tax. If the US adopts a territorial tax system, it may lessen the need for BEPS countermoves; nonetheless, plan for it.

Whatever the outcome in the US or with BEPS, there is a big push for companies to do more self-examination when it comes to planning their tax strategies. “Companies should assess whether aggressive tax planning is legal and whether it is legitimate or perceived as legitimate by their stakeholders,” writes Jermyn Brooks, in a blog post on the FCPA Blog. Mr. Brooks, chair of Transparency International’s Business Advisory Board and a founding member of the World Economic Forum’s Partnering Against Corruption Initiative, says a good start in attaining these goals are the UN’s Principles for Responsible Investment, (PRI), which he says has issued “helpful guidance” on corporate tax responsibility.

The guidance includes asking several questions for investors to ask companies, including, “To what extent does your profit after tax rely on your presence in tax havens or incentives and structures that enable very low taxation (e.g. <15%) of profits?” and “Have you reconsidered your tax planning strategies, or do you intend to reconsider them, in light of changes following the BEPS project?”

Whether companies go for this is debatable. There’s transparency and then there is revealing complicated, sometimes proprietary tax strategy; as in Kipling’s Ballad of East and West, it’s likely “never the twain shall meet.” Two notable companies that have are Unilever and Grupo Nutresa, both of which have received the good corporate citizen from PRI.

So with US tax change in the works (there is still a possibility of nothing happening), now might be a good time to consider making a change in a nod to the global climate on taxes. According to NeuGroup research, companies are already planning and modeling for the prospect of tax reform and its implications for capital structure, capital and cash forecasting.

Tax advisors presenting to members at one NeuGroup meeting encouraged a “no-regrets” planning approach; that is, taking actions to review or revise tax structures that will bring benefits no matter what form tax reform takes, or even if it does not come to pass at all. This included shifting out of offshore cash positions and efforts to minimize earnings and profits subject to a repatriation tax. Or harvesting tax losses from subs in high-tax pools and/or planning to accelerate interest deductions while you can.

Whatever the strategy, treasurers and tax planners should keep checking the pulse of the anti-corporate tax planning movements afoot.

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