Guest Column: Asker Ali of Grant Thornton on how 10 years on the credit crunch is still driving change
By Asker Ali, director at Grant Thornton North West
The 10th anniversary of the credit crunch falls this year. There is no single milestone to mark this pivotal economic event but the warnings were flashing across the Atlantic from as early as April 2007.
By the summer the severity of this global crisis was all too apparent. In the UK it was led by the now defunct Northern Rock, which had queues of worried savers outside its branches in Manchester, Liverpool and elsewhere.
The implications of that financial crisis reached far beyond banking and property – and continue to be felt.
They affect anyone applying for a mortgage, which is now an exhaustingly rigorous process, and they also impact businesses with international tax arrangements.
In the aftermath a new consensus developed amongst governments around countering some of the tax strategies used by multinationals that operate in the modern global economy.
Specifically, recommendations have been developed to counter tax avoidance and approaches that exploit gaps and mismatches in international tax rules. These have often been used to artificially shift profits to low or no-tax locations – in doing so creating the phenomenon of BEPS, base erosion and profit shifting.
Why does it matter? The tax take is an important part of what makes any economy tick and is a foundation of fiscal sustainability. Excessive global imbalances create or prolong economic inequality.
The international community charged one body, the Organisation for Economic Co-operation and Development (OECD), with bringing forward measures to prevent BEPS. It subsequently came up with 15 recommendations which have been approved by the G20 nations.
A key focus of BEPS is addressing mismatches between where value is created and where profits are taxed. If a business has one of these mismatches it will have to act. That means matching profit outcomes to value creation – in other words changing its transfer pricing framework to better reflect the underlying economic reality.
These changes are already being fed into UK law and the implications go beyond tax matters and affect, for example, M&A activity. Due diligence now has to factor in the OECD changes.
So far the biggest single change is that governments and tax authorities have embraced country-by-country reporting as an opportunity to enhance transparency and promote greater information sharing. Buy-in from the US is especially significant.
This level of reporting gives tax authorities useful new information about which businesses to target for investigation and audit by revealing the level of tax paid alongside the size of the workforce (and other characteristics) in each major operating territory. Australia and the UK have gone further by requiring large businesses to disclose their tax strategies and governance around this.
There is a long way to go with BEPS but we are talking about the biggest package of changes to international tax policy in history.
Our own research suggests that the majority of North West businesses have a lot of work ahead. A survey we carried out last year revealed that more than three-quarters of participating businesses across the UK had not changed their approach to taxation to take account of BEPS. Given the amount of strategic re-evaluation, financial restructuring and other heavy lifting that’s likely to be needed, it’s important to get into gear as soon as possible if you haven’t already.