International taxation for businesses shows no sign of getting easier, only more complex. Why is that? An illuminating survey was recently published, the Global MC Tax Complexity Survey, which discusses the tax complexity faced by multinational corporations (MNCs) in 2020. (Harst, S., Schanz, D., Siegel, F. & Sureth-Sloane, C. (2021). 2020 Global MNC Tax Complexity Survey. TRR 266 Accounting for Transparency.)
About the Survey
TRR 266 Accounting for Transparency is a trans-regional Collaborative Research Center funded by the German Research Foundation. It has a team of more than 80 researchers. It aims to collect information about the drivers of tax complexity across countries and over time. The survey had 635 respondents, including tax consultants from all the big 4 accounting firms and other well-known firms from 110 countries who work with MNCs.
Following are some key findings of the tax complexity survey.
Overall Trend
First, in 58 out of 110 countries surveyed, tax complexity for MNCs has apparently increased in the last two years prior to 2020. Nevertheless, 72% of respondents did not think tax complexity will force MNCs to shift their business activities to other countries.
Biggest Issues
Of all the areas of taxation reviewed, transfer pricing rules (market pricing for related party transactions) are perceived as being the most complex area of tax legislation in 69 out of 110 countries. The extent of complexity of transfer pricing was rated at 60%. The runners up and their complexity scores were: general anti-avoidance rules (49%), controlled foreign corporations (49%), corporate reorganizations (48%), investment incentives (47%), interest and thin capitalization (45%), royalties (43%) and capital gains (42%).
Causes of complexity include record-keeping rules, ambiguity/interpretation issues and computational difficulties.
Tax law enactment
The survey found problems with the tax law enactment process. A lack of quality tax legislation drafting is perceived as the main problem of the tax enactment process in 85 out of 110 countries. In addition, the time between announcement and enactment of time changes, and the effective dates can be problematic.
Also, in more than a third of the countries surveyed, various substantial business issues are not codified in the tax law, and many tax authorities seek to resolve these issues by issuing guidance. Therefore, only a marginal number of countries leave MNCs without any “orientation.”
Tax Appeals
The survey reports problems with tax appeals. Regarding both administrative and judicial tax appeals, the unpredictable time period until the resolution of an appeal is perceived as the most problematic aspect for MNCs in the majority of countries.
Tax audits
Here there is good news. Several aspects of tax audits became less complex in the period between 2018-2020 in 60% of the countries surveyed. For instance, the lack of experience of tax officers or the communication of topics to be covered in an audit is perceived to be less problematic in OECD countries.
Nevertheless, in 85 countries, the inconsistency of tax officers’ decisions is perceived as a serious problem, because tax audit guidelines often leave discretion to tax officers.
Overpayment of Corporate Taxes
In 83 out of 110 countries, the refunding of overpaid corporate taxes is perceived as the most problematic aspect in the process of paying taxes. Tight application deadlines, complex requirements and a long processing time complicate the refunding process.
Digitalization
In 95 out of 110 countries, filing and payment have become more standardized due to the use of digital technologies.
Comments
Additional sources of complexity are emerging. The OECD and the Biden administration are currently trying to wrap up a new Two Pillar reform package aimed at multinational corporations. This will almost certainly be a complex compromise due to political considerations, and the need for countries to protect their tax revenue base during and after the expected reform.
E-commerce is also starting to become challenging because sales tax/VAT/GST is being imposed on marketplaces and online sellers in many cases now. And income tax treaties are being modified to catch fulfillment houses and distribution subsidiaries.
Israel - Comments
Israel was one of the countries surveyed but was not singled out for praise or criticism. We would comment that Israel shares many of the complexities outlined above. Proposed legislation had to be put on hold until the recent formation of a new coalition government and the drafting of budget proposals. The Israeli Tax Authority has therefore adopted practices, not always documented and sometimes open to alternative interpretations. Israel also lacks a tax tribunal system, which helps resolve complexities fairly efficiently in some other countries.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd