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Out-Law News 2 min. read

Multinationals warn of tax hit on earnings


The number of multinational companies warning investors about the risk of higher taxes doubled in the past year, according to analysis by the Financial Times. 

Nearly a fifth of the US companies who warned on taxes were technology companies, the Financial Times found in a study of company filings.

A third of the US warnings were from the pharmaceutical, insurance and asset management sectors, the newspaper said, while others included the footwear company Crocs, auction house Sotheby's and Hyatt Hotels.

An increased number of European companies also warned on higher tax risks, the Financial Times said. Swiss agribusiness Syngenta said greater transparency on the allocation of taxable profits, "may lead governments to restrict or disallow currently legitimate and accepted tax planning strategies", the newspaper reported.

Tax expert Catherine Robins of Pinsent Masons, the law firm behind Out-law.com, said: "This is not surprising given the significant changes to the international tax system that are on the horizon."

The research follows an agreement by the leaders of the world's 20 largest economies to endorse the Organisation for Economic Cooperation and Development's (OECD) proposed Base Erosion and Profit Shifting (BEPS) project to reduce tax avoidance. BEPS refers to the shifting of profits of multinational groups to low tax jurisdictions and the exploitation of mismatches between different tax systems so that little or no tax is paid.

In its final reports published in October last year, the OECD recommended a number of measures to prevent international tax avoidance. These included restrictions on interest deductions, more restrictive regimes for intellectual property, a tighter definition of 'permanent establishment', increased transparency about profits earned and tax paid in each country and a tightening of the transfer pricing rule.

As part of its Budget earlier this month, the UK government published its 'business tax road map'. As well as setting out proposals to keep the UK corporate tax rate competitive by reducing it to 17% from April 2010, this contained an update on the UK's plans to implement the BEPS recommendations made by the OECD.

In particular, the chancellor confirmed that the UK will be introducing a fixed ratio rule limiting corporation tax deductions for net interest expense to 30% of a group’s UK earnings before interest, tax, depreciation and amortisation (EBITDA) from April 2017.

Robins said: "Many businesses will have been disappointed to hear that the UK is determined to be an early adopter of the BEPS recommendations in relation to interest deductions. Given that there has been no detailed consultation so far on the implementation, an April 2017 date looks challenging and with limited detail available it is difficult for businesses to assess the implications of the proposals."

"Working out the implications is particularly challenging for businesses involved in highly geared infrastructure projects, where the details of the scope of the promised 'public benefit' exemption are still unclear," she said.

Changes to the Irish tax code are referred to in filings by several companies including data storage companies EMC and San Disk and social network LinkedIn, the Financial Times said.

The Irish government announced in its 2015 budget that all companies incorporated in Ireland will be automatically resident in Ireland for tax purposes. This ended a controversial structure known as the 'double Irish' that companies have been accused of using for tax avoidance.

The UK’s diverted profits tax is also seen as a potential risk by companies including LinkedIn, Facebook, Computer Sciences Corp andQLogic, the Financial Times said. 

The 25% tax diverted profits tax applies where a foreign company "exploits the permanent establishment rules" or where a UK company or a foreign company with a UK-taxable presence creates a tax advantage by using transactions or entities that "lack economic substance".

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