An admirable new world in international tax accounting: tax accounting 4.0?

Certain less attentive readers might not have noticed the “ongoing revolutionary process” in international tax accounting. A “revolution” which involves great medium- and long-term challenges and implications for tax compliance, planning and tax litigation. More than ever, companies, investors and advisors need to be familiar with and, in due course, know how to react to the innumerable legislative changes occurring (or foreseen), product of a renewed context in the matter of international tax accounting.

We do not intend to analyze in detail at this point the reasons behind this reforming spirit, which include the negative effects of the financial crisis, certain tax rules failing to be in line with the effects of globalization, and the perception of the intensification of the use of tax planning instruments by multinational groups. These and other factors have been the driving forces behind the projection and impact that the OECD, with the political support of the G20, attained with the BEPS Project (Base Erosion and Profit Shifting).

Studies performed show that the estimate of the loss of revenue as a result of tax base erosion and profit shifting comes to between 100 and 240 billion dollars per year, equivalent to 4-10% of corporation tax revenue globally. Naturally, such perception and the reinforcement of instruments available exert increasing pressure on States to implement measures combatting these practices. With these measures, a significant increase in court cases is foreseen.

The OECD is not alone in this fight, as shown by the agenda of the European Union (EU) to include its own package of anti-abuse measures (directive against tax avoidance practices), use of the rules regarding State aid as “political weapon” against certain harmful tax competition practices, the relaunching of the Common Consolidated Corporate Tax Base (CCCTB) proposal, and the more recent digital economy taxation proposal.

Apart from this, certain States, through unilateral measures, have adopted systems to protect their own tax bases, as in the case of the United Kingdom and Australia, with the Diverted Profits Tax, India, with the Equalization Tax and, more recently, the United States, with BEAT and GILTI, which represent significant changes, with an impact on certain types of international tax planning.

We should also mention that, as we are undergoing an important global economic transformation instigated by technological and digital advances, it is only natural that reform proposals should arise to respond specifically to the new challenges of the digital economy (as happened with the EU proposal). The digital economy represents one of the great challenges of global tax policy, especially in view of the lack of consensus on suitable measures within the OECD, it being of note that the United Kingdom just announced in October its intention to introduce a tax on profit triggered locally by large-scale technology companies.

Arising from one of the 15 actions of the the BEPS Project, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (or MLI), which came into force on July 1, 2018, enables the application of changes suggested in bilateral agreements seeking to avoid double taxation, through a single negotiation and automatically. The MLI already has 78 signatory States (not including the United States), and is a pioneering tool for updating and standardizing more than 1,200 bilateral agreements, including with its scope important measures such as the reinforcing of the prevention of abuse in the use of the agreements themselves.

Another item of great importance in the renewed design of international tax accounting is the Common Reporting Standard in which Portugal, along with a further 100 jurisdictions, undertakes to carry out the automatic reciprocal exchange of financial information, in particular regarding revenue paid to non-residents and the respective financial wealth.

We are in the presence of a significant change in the international tax system, the foundations of which date back to the 1930s. Knowledge of these changes is essential in order for all economic agents to adapt.