Navigating Global Tax Uncertainty Means Returning to Core Values

The global tax landscape has shifted dramatically since last October. Consider just a few major developments:

• The US withdrew from its previous commitments under the OECD/G20 Inclusive Framework, a global effort to standardize international taxation and address tax avoidance by large corporations.
• Under US pressure, Canada withdrew its proposed digital services tax, potentially creating pressure for other countries to do the same.
• The EU proposed a new corporate tax framework in its 2028-2034 multiannual budget, sparking opposition from fiscally conservative countries such as Germany and The Netherlands.

These actions, and others like them, affect not only revenue authorities who must plan for the future but corporate tax departments as well. With such uncertainty for multinational companies, how should they react to a rapidly changing environment?

As a Boy Scout many years ago, I learned a critical lesson: When lost, it’s always best to return to the last point of certainty. This is true for both revenue authorities and corporate tax departments.

It means focusing renewed attention on core values—transparency, certainty, stability, predictability, and overall competitiveness. All are equally important for both taxpayers and tax authorities.

Start with transparency. The US’ action withdrawing its commitments under the Inclusive Framework has thrown implementation into confusion. The world’s two largest economies—the US and China—haven’t adopted Pillar Two, but many countries are pressing ahead with implementation.

Under Base Erosion and Profit Shifting Action 13, multinational enterprises must report country-by-country data on profits, taxes paid, and economic activities. This makes the most sense in an environment in which virtually all countries adopt the Inclusive Framework in full.

By contrast, implementing any one portion of the Inclusive Framework becomes a challenge if broad implementation is impeded or threatened. But there are areas in which transparency benefits both revenue authorities and multinationals.

Consider, for instance, the Extractive Industries Transparency Initiative. Its reporting requirements serve to dissuade attempts at corruption while helping revenue authorities and the public markets. Here, greater transparency assists smooth and honest tax administration and an investment climate that welcomes foreign participation that leads to economic growth.

Certainty and predictability of revenue streams become even more important, and even more challenging, when the uncertain state of implementing the Inclusive Framework and trade policies put revenue assumptions in question.

In this environment, countries are wise to adopt systems with predictable and stable tax rates with exemptions (such as value-added taxes) kept to a minimum. Investors will want to know with as much certainty as possible what their tax obligations will be before committing to long-term projects and investments at scale.

In this way, certainty and predictability can reinforce fiscal stability in an uncertain policy environment—another reason to question digital service taxes, which have uncertain revenue streams.

Consider the overall competitiveness of an economy, and the role tax policy plays in that. The EU Commission’s proposed corporate tax in its 2028-2034 budget may be a response to other ideas that would have disproportionately targeted large US technology companies.

But as the EU expands its budget and seeks to expand its role in tax, it should consider some basic principles.

The Corporate Resource for Europe, or CORE, proposal includes a bracketed fee based on turnover, without regard to actual profit, which could create incentives to keep turnover rates in a lower bracket. And yet, the sums it would raise (58.5 billion euros) are relatively small.

Fortunately, some voices in Europe recognize the danger of this approach. Monika Hohlmeier, vice chair of the European Parliament’s budget committee, stated in July that the new tax “stands in stark contrast to our efforts to strengthen the competitiveness of European companies--particularly mid-cap firms.”

New corporate taxes, however tempting from a revenue perspective at a time of policy uncertainty, can deter economic activity in a region, thus making revenue assumptions from the new tax questionable.

It would require all 27 EU member states to agree to CORE, so there is little possibility of it being adopted, as some countries oppose it for its negative impact on their private sector. But this shows the importance of returning to first principles—such as doing no harm in imposing new taxes, particularly corporate tax—at a time when policy uncertainty drives uncertainty of revenues.

The goal (which I hope will be prominent among the discussions at the International Fiscal Association conference in Lisbon this year) is to develop and implement tax systems that are fair to taxpayers, predictable so that taxpayers understand their obligations, promote high levels of compliance, and easy for revenue authorities to administer.

Taken together, transparency, certainty, stability, predictability, and overall competitiveness offer an additional benefit: To build genuine partnerships between revenue authorities and multinationals’ tax departments based on constant discussion, clear communication, and mutual trust.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Daniel A. Witt is president of the International Tax and Investment Center headquartered in Washington, D.C., and has worked on tax policy and administration reforms in transition and developing countries since 1993.

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