European Union leads tax reform, Ernst & Young finds

European Union member states are driving tax reform with the implementation of recommendations made by the Organization for Economic Cooperation and Development under its base erosion and profit shifting (BEPS) project, a new Ernst & Young report states.

Chris Sanger
Chris Sanger

BEPS aims to address weaknesses in the international system of taxation, in particular when the interaction of tax rules from different countries results in the non-taxation or unduly low taxation of income from cross-border activities or when rules designed to prevent double taxation effectively lead to double-non taxation.

EY’s outlook for global tax policy in their 2016 report notes, for instance, that of the 14 jurisdictions that reported or forecast legislative changes to address BEPS action recommendations on hybrid mismatches, 12 are EU member states.

The final BEPS regulations were released in October 2015, and related draft legislation was introduced by the European Commission earlier this year.

Yet many countries appear to be waiting for early adopters to set the pace before introducing national tax rules, and the majority of countries still have to begin implementation of most of the 15 BEPS recommendations, EY said.

More than two third of the countries examined by EY are focusing on greater tax transparency, such as the requirements of BEPS Action 13 as their first or second BEPS implementation priority.

Transfer pricing reform, a key part of the BEPS project, will also feature strongly in 2016, with 18 of 38 jurisdictions surveyed indicating changes in this area that will result in increased tax burden.

Changes in tax enforcement approaches, meanwhile, are forecast to increase the overall tax burden in 14 of the 38 countries in the year ahead.

“The lion’s share of BEPS-driven change appears to be ahead, and not behind us,” Chris Sanger, EY’s global tax policy leader. “Given the sheer number of variables reflected in the final BEPS recommendations, and the complexity inherent in coordinating between domestic tax systems globally, there may be significant distance between agreement in the OECD process and national adoption in 2016 and beyond.”

Mr. Sanger said although Europe’s drive for increased harmonization is increasingly placing it at the center of BEPS implementation, the numerous initiatives led by different EU bodies could create an uncoordinated approach.

“It will, therefore, be more critical than ever that business closely monitors what has been recommended and implemented in order to manage increasing levels of complexity,” he added.

Overall, the tax report found that a third of jurisdictions are forecast to lower their tax burden in 2016, and 45 percent project no change at all.

Seven of the 38 jurisdictions surveyed globally have either announced or are forecast to announce falling corporate income tax rates in 2016.

The report further highlights that Brazil and Singapore are projecting the largest number of changes that will result in an increased burden for taxpayers.