Bringing tax into the boardroom

In a recent podcast, my colleague Shay Menuchin (KPMG Private Enterprise Global Tax Policy Lead) and I discussed the impact that major international taxation changes are likely to have on privately owned businesses across the world.

The two-pillar approach to international tax law proposed in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) currently dominates the tax agenda. It’s a major milestone in addressing perceived tax challenges arising from the digitalization of the economy. Pillar 1 expands a country’s authority to tax profits from multi-national companies in the jurisdiction where their revenue is sourced even though they may not have a physical presence. Pillar 2 proposes a global minimum tax rate of 15 percent to ensure that large multi-nationals pay a minimum level of tax regardless of where they are headquartered or operate.

It appears that the implementation of Pillar 1 will likely be delayed until 2024, but we expect to see an increase in disclosure requirements post-BEPS, especially for large private companies with revenues of more than US$750 million, euros or pounds. One of the biggest issues is not about the changes themselves, but the amount of data disclosure that will be required for companies to be compliant.

This is a particular concern for privately owned businesses that generally focus their energy on growing their businesses. The increased disclosure requirements will make it necessary to put more energy behind the collection of large amounts of data for disclosure to their tax authorities.

However, many private companies don’t have the bench strength or ‘head office’ resources of their corporate counterparts to collect the volume and complexity of this data. And it’s likely to present new challenges to ensure they’re doing the right thing at the right time from a tax and regulatory perspective.

We believe that this expanded disclosure will also likely lead to an increase in audits. Tax authorities are eager to find more sources of revenue and they’re enhancing their capabilities to analyze and monitor larger volumes of data. We’re already seeing an increase in audit activity across the world, irrespective of the implementation of the two-pillar approach.

Private companies may not have the same resources as corporates, but they do have the advantage of being able to move quickly to meet increasing disclosure requirements. Maintaining a strong reputation is important to their business. It’s central to their decision making and essential for making sure they don’t put their reputation at risk by falling foul of a fast-changing regulatory environment.

The need to address the reputational issues related to tax – as well as the after-tax flows of revenue as companies expand internationally – creates an opportunity for private companies to bring their tax issues into the boardroom. The required data has real significance, and it needs to be part of a well-thought-out strategic plan. It's important for the company’s leaders to determine the tax risk profile that they want to adopt and then make sure that every action is consistent with that profile. There are crucial business decisions to be made in looking at taxation through a cash and cash leakage lens in addition to meeting new reporting requirements.

Private companies may not have the same resources as corporates, but they do have the advantage of being able to move quickly to meet increasing disclosure requirements. Maintaining a strong reputation is important to their business. It’s central to their decision making and essential for making sure they don’t put their reputation at risk by falling foul of a fast-changing regulatory environment.

The need to address the reputational issues related to tax – as well as the after-tax flows of revenue as companies expand internationally – creates an opportunity for private companies to bring their tax issues into the boardroom. The required data has real significance, and it needs to be part of a well-thought-out strategic plan. It's important for the company’s leaders to determine the tax risk profile that they want to adopt and then make sure that every action is consistent with that profile. There are crucial business decisions to be made in looking at taxation through a cash and cash leakage lens in addition to meeting new reporting requirements.

The potential for a global minimum tax is really important. But the increasing complexity of domestic and international tax legislation is creating wider concerns for private companies. Many are global businesses that have an international footprint, and there are concerns that, inadvertently, they could be taxed twice on their profits or revenue in different jurisdictions. At present, adequate mechanisms aren’t in place for companies to recover the additional tax they have paid, and that could result in increased cross-border disputes.

As Shay Menuchin described during our podcast, “There needs to be more attention on the dispute resolution process, and not just the mechanics of Pillar 1 and Pillar 2. Tax authorities are changing the rules and imposing a lot of requirements on tax payers. But the fundamental concept of ‘no double taxation’ has not been adequately addressed. Tax authorities are increasingly interacting with each other and taxing companies more than once. Right now, there isn’t an appropriate way for tax payers to deal with this issue.”

The OECD is continuing to publish its proposals and draft legislation for comment. This is an opportunity for the leaders of private companies to take a proactive stance on the issues that may have an impact on their businesses. As KPMG Private Enterprise Tax advisers, we believe we have a role to play in helping to bring these issues to light as a coordinated voice for the concerns of privately owned businesses and will share relevant updates and insights as issues progress.

I would be pleased to hear from you at any time at mike.linter@kpmg.co.uk to learn more about your company’s strategic business and tax priorities. I also encourage you to listen to our podcast to help keep your company on solid ground through the shifting sands of the international tax landscape.