By Daniel Hunter
A report launched this week found that among 1,000 European company tax directors, almost half (44%) of respondents thought more certainty about the future of the tax system, followed by simplification of the tax system (36%) were the two most important changes to their country’s tax legislation.
Deloitte asked them about the challenges they face doing business in Europe and the majority of respondents (61%) thought it was due to a high degree of tax uncertainty in their own country. They cited frequent changes to legislation (75%), and ambiguity, weakness and reversals in the tax authorities’ doctrine of publicly available guidance (50%) as the main challenges.
Companies may be subject to new and sometimes conflicting pressures when it comes to tax. In some countries, action groups and media campaigns have woken public interest in both how much tax companies pay and where they pay it. In the UK companies have been questioned by the House of Commons Public Accounts Committee over their tax affairs in the past year and this scrutiny is likely to continue.
Andrew Hodge, head of tax at Deloitte in the UK, said: “Above all heads of tax want stable tax legislation, as they believe it will have the most positive impact on their country’s commercial competitiveness. They do not like uncertainty and they cite frequent legislative change as the thing that they would reduce in order to make their own countries more competitive.
“Of course, there is major change coming soon with the OECD’s objective of providing comprehensive, balanced and effective strategies for countries concerned with base erosion and profit shifting, and this inevitably adds further uncertainty even if the goals of the OECD are well understood.”
Attracting businesses to the UK is important and the UK (31%) and Netherlands (40%) are seen as the preferred large tax jurisdictions in Europe for inward investment.
Hodge added: “Both the UK and Netherlands have worked hard to become more attractive to multinational companies, and this seems to be working. This appears to be as much about predictability and stability as it does about underlying rates of tax.”
When asked which were the most challenging and difficult countries for their business to operate in, over a quarter (28%) selected Russia, a fifth chose Italy and only 6.5% selected the United Kingdom. Russia is viewed by tax directors as the most challenging of the large jurisdictions due to rapid legislative changes, ambiguity and changes to how tax positions should be interpreted.
Respondents were more critical of their own than of foreign jurisdictions. A third of French respondents picked their own country as most challenging versus over 15% overall. Over a third (37%) of German respondents selected their own country versus 17% overall.
Hodge continues: “This may reflect the fact that for many respondents their local jurisdiction is where their group, regional or worldwide headquarters are based, and therefore their local tax affairs are likely to be more complex than those of their subsidiary operations.”
The biggest issue many cite is that already complex tax systems are being further complicated by rafts of new laws. Aside from the burden of keeping up with the changes and educating their teams, this is the main cause of tax uncertainty. Frequent change is also the thing that most would reduce in order to make their own countries more competitive.
There is a dramatic difference between Western Europe, where pressure is high and tax has become a platform for public debate and scrutiny, and Eastern Europe, where it is not on the agenda.
Over half the respondents (51%) have not had to justify their tax strategy to any of their internal stakeholders and 67% have not been asked to justify it to any of their external stakeholders. Non-executive directors (15.7%) and corporate affairs departments (17.4%) were most likely to ask them to justify their tax strategy.
Hodge concludes: “The most common responses to increased scrutiny are developing additional disclosure around tax in the financial statements and ensuring there is buy-in to the tax strategy.”
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