By Chris Sanger, EY Global Tax Policy Leader
Our Megatrends 20181 report noted that “executives and board members are focused on disruptive innovation as never before, recognizing it as both an opportunity for differentiation and an existential threat. Companies have stopped wondering whether it merits serious attention and are focusing instead on how to best respond. Business transformation has become the new mantra as companies adapt to the era of disruption with digital strategies, new business models and more.”
The report concludes that the vast majority of disruption originates from some combination of three primary forces: technology, globalization and demographics. These three forces apply equally to the world of tax policy. Attention at the global level can help taxpayers and governments make certain that the changes that will arise are managed in a way that provides for everyone, allowing the international tax environment to benefit from these forces, rather than risk being swept about by them.
Two areas for the G20
As the base erosion and profit shifting (BEPS) agenda moves through into implementation, the new focus of the G20 could be on, first, taxing rights and, second, digital tax administration.
New business models are challenging taxing rights
Globalization has enabled new business models that have created new products and services, driving wealth, as well as disrupting those working within existing business models. Existing ways of taxing companies were built for brick-and-mortar businesses and many of these continue to work well in this new environment, a true testament to the strength of the principles behind the rules.
But the ability for a company to instantly scale up without physical presence in a country, heavy reliance on intellectual property, and new and novel ways in which users create value for a business are leading to questions about whether the agreements on taxing rights, first determined in a brick-and-mortar age, still provide the right outcomes for those with characteristics that were unfathomable at the time the original agreements came to be.
The G20 has had success in driving the BEPS agenda, including the adoption in principle of the minimum standards by more than 120 jurisdictions. The differences in views on who should have taxing rights over the profits made by new business models should also be aired in a truly global context, rather than considered by each jurisdiction alone.
New compromises need to be worked out, if we are to avoid taxation acting as a barrier to further development, innovation, profits, prosperity and tax revenues. And businesses themselves must be involved early and fully if tax policies are to reach their full potential.
Technology is changing tax compliance and enforcement
Technology has fundamentally disrupted the way relationships form and develop in every facet of life, with communications technology allowing groups and individuals to communicate and collaborate more easily than ever before.
With this, the traditional tax compliance life cycle is being disrupted beyond recognition. Many countries are questioning the whole concept of the annual tax return, and instead the focus on real- or near-real-time data submissions is driving a paradigm shift in the way taxes are assessed, calculated and collected — and in the way in which taxpayer and tax authorities communicate with one another, including when those communications involve disagreements.
Companies may struggle to meet the new demands; digitally submitted data that tax administrations receive in real time is being drawn from systems that would previously have been interrogated and checked prior to inclusion in a tax return. As a result, we see new risks for taxpayers and tax authorities, centered on data that has not benefited from the review procedures that are embedded in historic tax return procedures. This is causing a new friction between taxpayers and tax authorities, driving uncertainty and disruption.
Beyond this friction, there is a real benefit in a globally coordinated approach to the move to digital tax administration. This can help countries avoid repeating the mistakes of others, or just choose slightly different requirements which, while rational in their own right, lead to a patchwork of rules that again reduce the ease of trading globally.
The role of the G20
The G20 has an essential role to play, through its support for the Organisation for Economic Co operation and Development and beyond, in encouraging countries to respond to these challenges in a way that is consistent, efficient and effective. Only by having a coordinated approach will we avoid multiple instances of tax on one side, and diverse, complex and burdensome obligations on the other.
Beyond these two initiatives, perhaps most importantly, now is the time for all parties — taxpayers, their advisors, governments and tax authorities — to look past disruption, and make sure we are all speaking the same language. All stakeholders need to work together to reduce misunderstandings, drive out inconsistencies and show support for what can be achieved as a group. By working more closely together we can find ways not only to improve existing processes and tasks, but to develop new technologies to support new obligations.
This will allow tax policy to support growth, and not be an impediment to it; a way to build a better working world.
(This article first appeared in the G20 Summit briefing book. The briefing book is distributed to all G20 representatives attending the meeting and covers a broad range of topics. Access a full copy here: bit.ly/G20BuenosAires.)