Five tax issues facing multinational companies in 2021

As the COVID-19 pandemic upended the economic world, an astonishing US$14.9 trillion (£10.7 trillion) was committed to stimulus packages by 30 of the world’s biggest economies in less than 12 months.

It has left a lasting impression on Government coffers. The UK reported late last year that its borrowings had reached £394 billion and that figure is about to escalate even more.

People may never interact in the same way again, such are the long-term changes descending on the way they work, consume, and socialise. To meet the challenge of paying for the pandemic and reconstruct the economy in this new environment, governments will need to innovate.

But governments must also be aware of the message that tax changes send to businesses and potential overseas investors. Small changes in tax rates in either direction can influence behaviour more than they impact revenue.

Fiscal responses to the pandemic

Multinationals are likely to face a myriad of changes in their markets, from hikes in headline corporation tax rates to new taxes, such as windfall taxes, digital services taxes and online sales taxes.

Taxing an increasingly digitised world, with the expedited shift to online shopping that has left traditional bricks and mortar outlets struggling in their wake, will be a priority.

Governments will look to increase revenues through bringing forward tax payment dates and more rigorous enforcement, with anti-avoidance measures and an increase in data analysis as tax returns themselves become more digitalised.

This will put the finance teams of multinationals under increasing pressure as the tax compliance burden swells, in additional to the risk of reputational damage from doing business and not ‘paying a fair share’ of tax in that market.

There may also be increased incentives to encourage investment in infrastructure, innovation and carbon-reducing technologies.

Negotiation on international tax rules

The move to tax the digital economy is gathering momentum, with the US backing down on its insistence of a ‘safe harbour’ in the OECD’s proposal for a digital services tax.

The fundamental driver is ensuring that profits are taxed where the economic value is created, which should ensure tax revenues from multinational businesses are more evenly spread across the markets in which they operate, including in developing countries.

The OECD is aiming for mid-2021 on an agreement that will provide multinational businesses with a clear understanding and a basis on which they can structure their business models.

With a new international framework, expect to see a ‘levelling up’ with tax revenues in developing countries increasing to reflect the economic value that is being created in those nations.

Indirect tax

As global economies start to rebound over the coming year, there will be an increasing focus on indirect taxes such as VAT/GST, sales taxes, and customs duty to raise tax receipts.

It is possible that changes may include adjustments to the rates of tax that apply, particularly where those rates have been temporarily reduced during the pandemic. 

But given the inflationary impact that increases in transaction taxes have, it is more likely that there will be a focus on perceived ‘tax gaps’ to maximise revenue.

Measures may include identifying compliance errors, a renewed emphasis on avoidance and evasion, ensuring tax is paid in the country of consumption, and applying stiffer penalties for errors. 

For traders between the UK and the European Union, the compliance obligations that now exist post-Brexit adds an additional layer of complexity.

Multinational businesses should review the controls in place to manage their indirect tax risk and create a testing program to ensure those controls are both operating effectively and accounting system updates have been implemented correctly. 

Remote working across borders

The COVID-19 pandemic has led to many businesses adopting remote working, initially by necessity but increasingly by choice.

As the global crisis continues to subside and vaccine programs are rolled out, remote and hybrid working models will become more commonplace, even across international borders.

While there are benefits to remote working cultures, extra care must be taken before endorsing remote working for employees between countries.

Employees that work remotely across international borders may trigger income tax and social security compliance obligations for the employer, as well as administrative costs in respect of work permits.

Employees working remotely in an overseas location may also create a Permanent Establishment (PE) in that jurisdiction, which can lead to compliance and tax obligations for the employer at the corporate level.

While many countries hold some form of Double Taxation Agreements (DTA) or Social Security agreements with their international neighbours, it should not be assumed that this will alleviate compliance obligations in all scenarios.

Businesses should establish robust remote work policies to navigate a complex compliance environment and ensure the company can capitalise on the benefits that may flow from having employees working across borders.

Social Security considerations for the EU and UK

The end of the UK’s transition out of the EU on 31 December 2020 also concluded the social security coordination that was so familiar to many businesses working within the EU.

For many businesses with employees working in both the EU and UK, the prospect of a double charge on social security loomed before alternative arrangements were put in place for the post-Brexit period.

UK businesses can continue to work in the EU from 1 January 2021 and social security coverage is governed by the protocols outlined in the EU-UK Trade and Cooperation Agreement, which effectively mirror the protections in place prior to the end of the UKs transition period.

However, there are some important differences between the ‘old’ and ‘new’ regulations that should be considered when looking to expand a business or post employees within the UK or the EU.

Staying across those differences will ensure businesses, and their employees, can continue to benefit from the right level of social security coverage in the right jurisdiction, with only minimal disruption to day-to-day operations.