Corporate international tax planning is a major challenge for companies that do business in multiple countries. To be aware of pitfalls such as international double taxation — being taxed for the same income in two different countries — they must plan strategically. Such planning is also crucial for staying compliant with tax laws in each country in which they operate, laws and regulations that are complex, vary widely among each country’s jurisdiction, and are often changing. To further complicate things, many countries’ regulations are increasingly subject to digital e-filing requirements.
The Organization for Economic Cooperation and Development (OECD), an intergovernmental organization aimed at stimulating trade among countries, coordinates policies for international tax management among its 38 member countries. The organization has discussed changes to international tax standards that will have wide-ranging consequences for multinational companies, including a global minimum tax and stricter documentation requirements for transfer pricing.
Top 4 tax planning strategies for multinational corporations
Your direct tax team bears the burden of keeping up with international tax management for your corporation — a task that involves a significant strategic effort to keep up with the upcoming changes from the OECD and other regulatory bodies. In planning your approach, consider the following international tax planning strategies:
1. Prepare your company for international regulatory changes
Ongoing international tax and regulatory changes are sure to provide global tax teams with new tax planning challenges. Those regulatory changes include the following:
- The OECD’s Base Erosion and Profit Shifting (BEPS) initiative creates policies for taxation in the digital economy and introduces a global minimum tax.
- The EU is proposing country-by-country (CbC) reporting requirements, a Mandatory Disclosure Regime (MDR), and a directive for reporting for cross-border arrangements.
- In the United States, the implications of the Tax Cuts and Jobs Act of 2017 (TCJA) on multinational corporations are still being worked out, with the IRS and Department of the Treasury rolling out new rules and guidance on a regular basis.
- Many countries have developed tax agreements with other countries that influence whether and how much tax a company needs to pay in other places. This is an attempt to address double taxation, which discourages international trade.
- E-filing is becoming mandatory for the filing of taxes in many countries, as well as for many of the documentation filings that are required by BEPS.
Staying compliant with these standards and regimes will require greater transparency — one of the essentials of corporate tax planning — which means ensuring that you have control over your tax data. Consider updating your tax technology to gain control and transparency by taking advantage of automated data management and easy access to relevant tax content.
2. Inform yourself about the new BEPS rules
The new BEPS rules laid out by the OECD include 15 actions that tax teams handling international business must stay ahead of. The actions equip governments with domestic and international rules and instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created. These actions range from digitization to MDRs to prevention of tax treaty abuse. The challenge for tax teams is meeting all of the new MDR and master file, local file, and country-by-country requirements, which drastically complicate tax assessment.
It’s essential to analyze your company’s risks around reporting regulations. Because taxes are unavoidable, the best strategy is preparation and total transparency. This analysis will help you develop a strategic plan and ensure that you have the right systems and tools in place to automate processes and gain the clarity needed to navigate evolving regulations.
3. Prepare for the global minimum tax of 15%
The BEPS initiative consists of two pillars: Pillar 1 covers where large companies pay taxes, and Pillar 2 introduces a global minimum tax of 15%. Pillar 2 includes three rules, which will apply to companies with €750 million+ in revenues.
- Rule #1: Known as the “income inclusion rule,” this rule is designed to determine the circumstances in which a company’s foreign income should be a part of the taxable income of its parent company.
- Rule #2: This rule, the “under-taxed payments rule,” permits companies to manage how cross-border payments are taxed.
- Rule #3: This “subject to tax rule” is intended to be used in tax treaties to allow countries to tax payments that might otherwise be subject to a low rate of tax. The tax rate designated in this rule is 9%.
A major challenge to tax teams is that BEPS and the global minimum tax rules are still under negotiation and are continuously changing during that process. The rules are also complex, requiring companies to take much care and coordination in reporting across jurisdictions.
When dealing with international business, you will want to streamline your management and reporting processes to prepare for compliance under these new rules. Consider using dedicated CbC tax reporting and analytics software with deep and broad international tax experience and expertise, which can go a long way toward helping you ensure consistent compliance.
4. Perform what-if planning for penalties, fines, and fees
Business decisions can have consequences that leaders don’t anticipate, particularly where they meet the complex and frequently changing world of international tax law. Before committing to a decision, your organization should consider its effects on international tax obligations, which can include noncompliance penalties and unexpected fines and fees.
Check the potential impacts of each business change using an international tax calculator to perform “what-if” planning before you act. An international tax calculator is a trusty companion for executive teams looking to ensure that the changes they are contemplating will have acceptable outcomes in terms of international tax.
The right technology is key for international tax management
Corporate tax law and planning — especially on an international level — is far too complex to manage properly without powerful, effective software on your side. Staying on top of changes in e-filing requirements, deadlines, penalties, and international agreements to prevent double taxation requires robust technology tools that can keep up with these changes. Read our white paper about corporate tax management to learn how next-generation tax technologies help tax professionals deliver valuable analysis, insights, and guidance to their companies.