5 reasons why tax compliance will be a success factor

Published 11 February 2016 by RUF UND SCHLENKER

In the past, international businesses with subsidiaries abroad might not have focused so much on compliance with local (tax) regulations but on reporting and integration issues. Due to many newly introduced treaties and future developments in the area of taxation in general this might change in the near future. I picked 5 reasons:

1.     BEPS (Base erosion and profit shifting). 
Crises have made governments more and more „greedily“ towards tax money – every Euro/Dollar matters, nowadays. OECD BEPS with all its measures will tighten tax rules and make tax planning aiming towards zero-taxation-strategies more and more complicated. Hybrid structures are planned to disappear – however will be possible in smaller dimensions. It will be interesting to see how upcoming countries will deal with OECD regulations by the time they enter international tax competition between countries.

2.     Resources of the tax authorities.
By using information provided through international exchange of information and cooperation agreements, local tax authorities will step up their game in terms of international taxation. Today’s tax authorities are better trained and equipped than they have been ever before (e.g. OECD’s tax Inspectors without borders program). If this tendency keeps up its pace, non-compliance of international corporations will in the near future cause major negative consequences both for the business itself as well as for the competent tax manager in charge.

3.     Cooperation vs. hostility. 
More tax authorities around the world are entering into cooperative compliance agreements with large corporations. This model, which debuted during the past decade in countries such as the Netherlands, Australia and Ireland, is now being tested through pilot programs in many other markets, including Norway, Italy, France and Russia. The aim is to reduce uncertainty and make the tax filing process more efficient as taxpayers provide full disclosure for tax assessment in due course.

4.     Transparency as a marketing tool.
By using “ethical tax payment strategies” and compliance with local regulations as a marketing tool, corporations can avoid negative impact on their image caused by its tax strategy: Major corporations have recently taken heavy criticism for using loopholes especially in the European tax systems and pursuing a zero-tax strategy. By using a full-compliance tax strategy and using it for marketing purposes, corporations could show their customers that they are contributing their fair share to local society/market. This might in total even be beneficial for its market share in the respective countries.

5.     Certainty in tax matters. 
By taking aggressive positions in tax matters and spending much time fighting tax audits afterwards, a multinational organization might be kept paralyzed and detained for other (tax) projects. Further, time consuming tax audits will not only take much of the finance departments time but also high consulting fees for specialists. Certainty in crucial tax matters on the other hand will lead to a position where short term adjustment reactions to short term changes in tax legislation are possible.

Multinationals will have to realize that the sooner tax compliance is achieved the sooner important resources can be used to develop a perfect business strategy for the future.