The changing business model
There has been a lot of press coverage recently around the pricing and tax arrangements of multinationals, in particular Apple, Starbucks and Amazon.
In this respect, the EU is undertaking in-depth investigates into these companies to establish whether the companies’ tax arrangements have breached EU State Aid rules.
These cases are looking at tax agreements with Irish and Luxembourg Tax Authorities. The issue is that these agreements are generally negotiated with the Tax Authorities and there is concern that they do not follow the “arms length” principle (pricing equivalent to that between unconnected parties).
The investigation is seen as important as it relates to tax competition between EU member states. This in itself is controversial as countries do compete with each other to attract investment in order to promote growth.
The Organisation for Economic Cooperation and Development (OECD) has also been undertaking the Base Erosion and Profit Shifting (BEPS) project, the main aim being to deal with the perceived avoidance or circumvention of tax by multinational companies.
The digital era has had a significant impact on the way business is undertaken, not only by multinational companies but also by Small and Medium sized Enterprises (SME). Increasing numbers of people from all generations are shopping online. This has enabled companies to restructure their business models, such that an online order could be taken and processed in a country far removed from that in which it was placed, and where the end product will be delivered.
A company may therefore have significant business in a country, while filing comparatively small profits in that territory, as the profits are attributed to the country in which the order was taken and processed. There are rules that seek to tax a company’s profits where it has nexus to a country, and to ensure that the “arms length” principle would apply to the inter company pricing where there is “sufficient connection”, however these were generally established well before the digital era.
The significance of the BEPS programme to SME is that it will inevitably mean a change in the rules determining whether there is “sufficient connection” to a particular territory.
This is one of a number of issues that the OECD has in mind to change the rules of international tax. With internationalisation of business any company looking to do business or already doing business outside of the UK should be keeping an eye on the BEPS programme developments.
In addition, the OECD is looking at multi-national companies reporting revenue, profits and tax paid to the authorities in each tax jurisdiction in which they do business. The definition of a multi-national is not clear and it is hoped that this will scope out a number of small and medium sized companies.
It is clear that businesses operating across borders will need to carefully follow BEPS developments.