The International Fiscal Association (IFA) is set to hold its annual conference in Seoul, South Korea, on September 2-8 2018. The congress will focus on seeking anti-avoidance measures, particularly the general anti-avoidance rule (GAAR) and withholding taxes in the era of BEPS.
As part of this focus, the congress will look at collective investment vehicles and the digital economy, Clayson told ITR before embarking on the 5,500-mile trip from London to South Korea’s capital city.
“Ten specialist seminars will follow over technical issues, as well as cultural and social events,” he added. “After Thursday the stamina will have run out and we’ll go hunting for a plane home.”
The annual IFA conference has become a notable event in the diaries of tax professionals worldwide, offering a platform to exchange views on policy reform and the comparative study of different tax models.
“I would say the key strength of IFA is its neutrality. We zealously guard our neutrality, not least because we treasure the engagement of governments and supranational organisations,” Clayson said with pride. “It gives IFA a unique position as a platform for businesses, advisers, governments and academics.”
The hottest topic around today is digital tax, and this has not escaped the attention of the IFA, which will be discussing how to determine the value of a digital activity by the use of data, the number of clicks or advertising.
Taxing the tech giants
Some of the world’s biggest technology companies have come under fire for allegedly not paying their ‘fair share’ of tax, driving governments to find a fix.
“The EU may become a major proponent of digital tax, but the different EU countries are divided over the proposal. Some EU member states have become keen enthusiasts for digital taxation, whereas other countries are much more resistant,” Clayson said.
“It’s going to be interesting to see how this evolves. Will the European Commission take a step back from its proposal for a directive and substitute a less-binding ‘recommendation’? No doubt the EC will try to encourage member states to find an agreement,” he continued. “This runs a little uneasily alongside the OECD’s efforts to reach a consensus on taxing digital profits by 2020 or sooner if possible.”
In this hugely contested area, there are “radical differences” between the countries who regard themselves as ‘revenue winners’ and the countries who see themselves as ‘revenue losers’, Clayson said, pointing out that the US is in danger of “being alienated in the process” despite the US tech giants being the ones that will be hardest hit from the changes.
“If a certain European country goes after the revenue or profits of an American tech company, this would deplete US tax revenue. It would be regarded as a ‘grab’, and that might not be healthy,” he said.
However, he accepts that unilateral action may be inevitable.
“The instinct is to favour harmonious global solutions. If one can arrive at an international consensus through the OECD’s inclusive framework that would be a fine thing. But, as we all know, a growing number of countries have taken unilateral measures.”
“You have to respect the democratic process and their sovereign right to take such action. It’s down to the economists to figure out the effect on business and who exactly picks up the bill for such measures. For example, we might see the cost of a digital services tax passed onto the consumer in the host state. This would mean higher prices for your own nationals if you take unilateral action. Then you have the impact on compliance for business.”
A digital company based in a certain jurisdiction serving a worldwide market could face a much greater compliance burden if it is deemed to have a digital presence in more than 190 countries. “It’s an enormous challenge to come up with a sensible proposal,” Clayson said.
“One’s instinct is to see unilateral, uncoordinated measures as awkward ways to address these issues. At the same time, you can understand why a country might see it as their best economic interest to pursue unilateral action,” he added.
However, the dust is unlikely to settle for some time as national governments attempt to change their tax rules to compete for investment and revenue from digital businesses. “It’s going to keep going for a while. The OECD originally said they were aiming for a digital consensus by 2020 but may choose to accelerate because of the signs that the EU might reach a proposal sooner.”
While the OECD may be motivated establish some agreement by 2020 and not be left behind while the EU presses ahead with its plans, Clayson believes that “there is clearly going to be greater international appetite for a profits-based tax than for turnover taxation”.
“This might be developed through the extension of the concept of a presence or permanent establishment,” he added.
“The business world is going to find it easier to acclimatise to a reallocation of taxing rights between the resident state and the state of the PE, including a digital PE,” he continued. “By contrast, the turnover tax is much more controversial. It was first put forward as a transitional measure, but there is always the worry that interim measures can go on and on.”
The new era of tax norms
The rollout of BEPS to the inclusive framework has increased the tendency towards standardisation, while the common reporting standard (CRS) and automatic information exchange have expanded tax transparency.
“We’re seeing the ever-continuing rise of what we might call tax morality, the idea of a ‘fair share’ for example. People with a legal mind-set might be a bit irritated with this vague notion, but equally if you are a democrat you believe in the rule of law and the importance of the democratic process,” Clayson said.
“So if politicians influenced by the media and the public decide to extend taxing rights in a certain way, you have to respect that,” he continued. “Even if the proposals on the table, like the turnover tax, tend to go against the grain of traditional tax thinking.”
There is also a crossover into the world of corporate social responsibility. “The last thing the CEO of a major company wants is to see himself on the front-page of a newspaper for tax avoidance however fair or unfair the allegations might be,” Clayson noted.
This concern trickles down to the tax functions of corporations and the ways that professional advisers conduct themselves.
“The norms take a soft form in some areas and a very sharp form in others. And this applies in international law: the rollout of treaty amendments via the multilateral instrument is a good example of a new legal norm,” Clayson said.
“If you look at the Seoul congress, the subject of withholding tax sounds like a standard topic that’s been around forever – except this is in the context of BEPS and anti-abuse concepts like GAAR, phenomena such as funds as a measure of investment and the digital economy. We have notions of equalisation taxes and attempts to expand taxation on a source country basis.”
The world of tax may be entering a new era, and the result may mean ever-higher standards and compliance demands for taxpayers and more work for advisers. But, whatever the pace of change, IFA looks set to keep up at every turn.