The impact of the potential reform might not be that significant for UK companies. A UK parent company with a subsidiary outside the UK is already subject to Controlled Foreign Company rules whereby if the subsidiary hasn’t paid a certain level of tax – which the UK defines as three quarters of the UK tax rate and which is already around the 15% suggested by the G7 – the UK parent company may already have to effectively top up that tax in the UK, says Matthew Rose, Director of Tax, Treasury and Investor Relations at De La Rue speaking in a personal capacity.
Under existing OECD proposals known as “Pillar Two” rules, any extra corporate or withholding taxes might only apply to companies with a worldwide turnover of €750m or above. It might be that groups under this threshold may also not be subject to the full force of the future reform. Companies need to stay alert to see if the reform applies to subsidiaries of all sizes and if it does, as per indications from the G7, how it relates to the margins that each subsidiary makes. For example, you can have subsidiaries with low revenue but large margins or with large revenues making low margins. It may be that not all the rules bite, so treasury and finance need to work closely with tax teams, he says.
Companies should look at the entire flow or chain of their profits and taxes too. For example, some territories may have low taxes on profits but then they have high taxes when it comes to trying to extract profits out of the country. Under the new rules if introduced, some countries may choose to increase their headline tax rate because they won’t want another country to obtain any amount above their headline rate up to the 15% or whatever level is finally selected.
Companies also need to understand the existing but expanding rules around country-by-country reporting. Many companies with a turnover of €750m or above may already have to send a detailed breakdown of each of their subsidiaries’ results by country to their parent company’s tax authority – like in the UK. Under the new rules, this may become a requirement for many more companies.
Treasury teams should prepare for the likelihood that companies will pay more tax but be aware that not every country will bring in the same rules at the same time. Whilst some initial responsibility will fall to tax teams because treasury and tax are usually sister departments and have direct reporting lines to the CFO, the impact will spread to treasury, especially if there is more pressure on company cash flows and payments, or if there are different ways required to satisfy tax authorities with any bonds or guarantees. More proactive treasury teams should already be thinking about what additional cash headroom they may need in the future.