Own Your Data,
Control Your Risk

The push for global tax transparency, which began with the OECD’s BEPS initiative, is continuing to evolve and picking up momentum – and increasing risks for multinational companies. At the same time, for those who can master their tax data, transparency generates opportunities.

Historically, “corporate tax transparency” was framed as tax authorities having an increased line of sight into taxpayers’ internal tax planning. More recently, tax authorities have pushed for transparency into business activities, looking at arrangements with nuanced tax implications as well as mundane day-to-day transactions. In the last several years, this trend has resulted in jurisdictions more systematically sharing taxpayer information (increasingly on a multilateral basis). In addition, there has been a push to increase the level of tax advisors’ and other third-party intermediaries’ accountability for their clients’ actions, particularly with respect to potentially aggressive behavior. We have also entered an era in which the number of stakeholders has increased. No longer is taxpayer information a confidential matter between taxpayers and tax agencies; what was historically confidential may become available to the public.

These trends are driven by tax authorities’ efforts to rein in aggressive tax planning, tax avoidance, and tax evasion.  The increasing speed of information exchange, the broader scope of aggregation and analysis of financial data, and the sheer scale of implementation are all enabled and enhanced by digital tools.

The transparency agenda and its ripple effects can be seen playing out with four groups of stakeholders: governments, advisors, non-tax groups within companies, and the public. Our discussion below uses developments in particular areas of tax transparency to highlight taxpayers’ engagement with these stakeholders.

Taxpayers and governments: Electronic invoicing

Electronic invoicing has enabled more consistent and, in some cases, contemporaneous data intake by tax administrations. There are three approaches to invoice auditing, which vary in terms of the level and timing of government oversight.

Post-audit model: In this traditional approach, which remains prevalent in Europe, invoices are not automatically transmitted to tax authorities. They are generally archived by the taxpayer (in either paper or electronic format) and provided during the course of an audit, which generally occurs sometime after the relevant transactions take place.

Real-time reporting: Tax authorities receive reports of transactions immediately or within a few days of transactions occurring and invoices (paper or, increasingly, electronic) being issued. Audits occur shortly after the transaction. This model has had some adoption in Europe, notably Spain and Hungary.

Clearance model: Electronic invoicing is mandated in this model. Tax authorities receive invoices when they are issued by the vendor and validate them contemporaneously. The clearance model is often credited with significantly reducing VAT non-compliance, and is used in Latin America (notably Mexico, which also imposes vendor validation requirements for clearance of invoices.)

France is now adopting e-invoicing requirements. The French Finance Bill for 2020 provides for the gradual introduction of compulsory e-invoicing between taxable businesses. The e-invoicing requirement will be paired with an obligation to transmit the invoice data to the French tax administration as part of a broader digital reporting regime. E-invoicing requirements kick off on January 1, 2023, after which all businesses are expected to have the capability to receive electronic invoices. The obligation to issue e-invoices will be phased in from 2023 to 2025, beginning with large companies.

These expanding digital reporting obligations and demands for transparency are challenging for tax directors in several ways:

• There is a potential for data leaks to other stakeholders, including competitors.
• Increased and overlapping reporting demands require significant internal resources to ensure technical and strategic consistency.
• Variations in e-invoicing mandates across jurisdictions can be challenging and costly to navigate.
• There may be a technology-enhanced gap between the speed at which governments take in and respond to information and the speed at which corporate tax departments can assimilate the same information.

Taxpayers and governments: Global minimum tax

Furthering the OECDs effort to combat Base Erosion and Profit Shifting, two proposals for international alignment of corporate taxation have been endorsed by 130 countries.

One of the proposals establishes a global minimum corporate tax of 15% designed to prevent companies with revenue over EUR 750M from shifting profits to low-tax countries. The other proposal aims to facilitate a fairer distribution of profits and taxing right among countries with respect to multi-national enterprises (MNE) that have global turnover above EUR 20B and profitability above 10%.

This international alignment of corporate taxation will come with unprecedented levels of multi-jurisdictional regulatory coordination and global transparency. Reporting requirements will increase, tax returns filed in one jurisdiction could have trickle down effects in others, and taxpayers could face coordinated or additional disclosures in multiple jurisdictions.

Multinationals will need careful, consistent, coordinated reporting wherever in the world they have operations.

Taxpayers and advisors: Mandatory disclosure regimes

BEPS Action 12 contains recommendations for governments seeking to identify and target potentially aggressive tax planning. Design considerations address:

• Parties responsible for reporting transactions of interest (taxpayers and/or their advisors.)
• The scope of transactions of interest to be reported (e.g., transactions already identified as aggressive or potentially aggressive transactions that tax authorities wish to explore further.)
• The timing of disclosures during the life cycle of a transaction (planning through examination.)
• Consideration of the systematic exchange of information among jurisdictions.

We saw these recommendations crystallize in three Mandatory Disclosure Regimes (MDR) that went live in 2020 and 2021:

DAC6 in the European Union: Under DAC6, and subject to legal professional privilege protection, reporting obligations generally apply to primary and secondary “intermediaries,” (e.g., advisors) but shift to the taxpayer if no EU advisors are available or privilege applies. There is little or no ability to transfer liability between intermediaries and the taxpayer. Reportable arrangements are cross-border arrangements that include at least one “hallmark” identified in the legislation.  Contemporaneous reporting must be done within 30 days of a triggering event. Monetary penalties for non-compliance vary by jurisdiction; Poland, for example, imposes penalties up to USD 5M for a reporting failure. Some jurisdictions may also impose individual director or criminal liability.

Mexican MDR: Tax advisors are responsible for reporting in the first instance, but the obligation shifts to the taxpayer if no Mexican advisors are available, privilege applies, or there is an agreement in place between the taxpayer and advisor. Reportable arrangements are cross-border arrangements that include at least one hallmark identified in the legislation. Contemporaneous reporting must be done within 30 business days of a triggering event; modifications to previously reported arrangements must be reported within 20 business days of a triggering event. Penalties for reporting failures can be stiff, and may include a clawback of Mexican tax benefits from the unreported arrangement plus a penalty equaling 75% of that amount.

Argentine MDR: The taxpayer and tax advisors are both responsible for reporting, unless the advisors are precluded by client secrecy (i.e., privilege) rules. Reporting obligations are independent; reporting by one entity does not fulfill another entities’ requirement. Reportable arrangements are cross-border (“international”) arrangements that include at least one hallmark identified in the legislation, as well as domestic (“national”) arrangements that will be identified on the tax authority’s website. Contemporaneous reporting for international schemes must be done within 10 business days of triggering event; a national scheme must be reported by January 31 of the year following the year of implementation. Monetary penalties are relatively small, but Argentina imposes significant commercial penalties, such as denial of VAT refunds and revocation of import/export certificates.

Understandably, MDR has created tensions between companies and their advisors, triggering significant discussions about advisor communication and coordination with, and accountability to, clients and other advisors regarding MDR analysis and filings. For corporate tax leaders, this raises additional sensitivities regarding already costly and complex tax planning. These sensitivities are exacerbated by the lack of uniformity across rules – including among EU jurisdictions.