In today’s globalized economy there are no boundaries, with companies seizing opportunities around the globe. At country level, however, walls are going up to close these borders. Free movement of people is under pressure, Trump is pushing protectionism and old customs duties could see a revival. So we have globalization on the one side and protectionism on the other.
Politicians strive to keep as many people as possible as happy as possible – otherwise they do not get reelected. Their stakeholders include those who do not reap the rewards of globalization. At the same time, they need to generate high tax revenues. BEPS and other regulatory instruments lay down rules that prevent global giants from hiding their tax affairs behind country borders or company names. Rules that radically increase international transparency and cooperation between the tax authorities. The new regulations require tax to be paid where value creation occurs.
Contrary to what many might first think, the greatest value creation does not necessarily occur where revenues or headcount are highest. Imagine a Swiss company that has its products manufactured in Vietnam but develops its strategies in Switzerland. In this example, Vietnam could just as easily be Bangladesh. But Switzerland – where the specialists and strategists work – is not replaceable. So it’s this part of the company that is more important for value creation and competitiveness. Following the rule that taxation should reflect the economic reality, taxes would have to be paid in Switzerland.
Keeping up with the new tax reality requires new methods that go beyond the traditional withholding tax approach. As a result, tax and management consulting is increasingly being combined. A qualitative analysis of companies within their specific industry is needed to give management the best possible decision-making basis.