The last year saw its fair share of big tax stories. The Organisation for Economic Cooperation and Development (OECD) unveiled its final Base Erosion and Profit Shifting (BEPS) Project guidelines, a set of tax reform proposals designed to modernize the corporate tax code on a global basis. The huge crop of candidates for U.S. President touted plans for rewriting the tax laws of the land. A number of regional tax authorities around the world started implementing Netflix Taxes to capture revenues on content streamed from the cloud. And, the threat of corporate tax inversions loomed large as several large corporations hinted at plans to relocate their corporate headquarters to lower tax regimes.
The common bond in all of these, however, has been that none of the issues are resolved yet. In a sense, 2015 was the coming attractions reel for some serious tax topics that will come to a head in 2016. How will they play out?
Based on a review of the big tax stories I followed last year and hundreds of conversations I’ve had with tax and finance professionals at multinational corporations, following are my predictions for what will become the biggest tax stories of 2016.
Tax inversions will force U.S. corporate tax legislation to the top of the agenda
We’re in the midst of a perfect storm for tax inversions. According to Thomson Reuters data, worldwide M&A activity broke all records in 2015, with a total of $4.7 trillion in total deal activity, up 42% from 2014. That’s just part of the story, but it’s an important part. In the current economic environment, companies are finding the scale and efficiencies they need by swallowing up rivals and aligning with strategic players in their spaces. It’s worth noting that 52% of the total deal activity last year was driven by “mega-deals” of over $5 billion in value. Big companies are getting bigger and more global.
Add tax to the mix, and the recipe for an inversion becomes clear. Indeed, two of the mega deals announced in 2015 – Pfizer’s acquisition of Allergan and Dow’s bid for DuPont – have cited tax efficiencies as a major driver. In pitching the Dow/DuPont deal to shareholders, DuPont CEO Ed Breen explained: “The whole structure of this is very, very tax efficient and one of the reasons we are doing it this way, so very beneficial from that standpoint to the shareholders.”
The U.S. Treasury Department tightened tax rules in September of 2014 in an effort to make tax inversions less attractive, but critics have suggested that these stop-gap measures won’t be enough. The elephant in the room that Congress will need to address sooner than later is the 35% tax on corporate profits that’s currently keeping $2.6 trillion in offshore income from coming back into the U.S. and tempting many companies to consider relocation to more tax-friendly regimes.
BEPS will spark new conflict
Although the governing spirit of the BEPS initiative was to foster global harmonization on corporate tax policy, a more likely result in the near-term will be an increase in global tax conflict. That conflict will be multi-tiered, with large corporations butting heads with regional tax authorities and regional tax authorities engaging in a great deal more conflict within their own ranks.
For all of its good intentions, BEPS gave tax authorities around the world the license to probe deep into corporate tax filings in their own jurisdiction and within other tax jurisdictions globally. In theory, this country-by-country reporting scheme fosters transparency. In practice, it is likely to provoke acrimony. If, hypothetically, tax authorities in Italy see that a company is reporting higher revenue in Switzerland, despite having a larger physical presence in Italy, they are going to challenge the company. It won’t matter if the employees in Switzerland hold more intellectual property or generate more revenue; tax authorities will see a line item and seize it as an opportunity to challenge a corporate tax return.
The other major source of conflict likely to emerge around BEPS will focus on the U.S. and its support, or lack thereof, for the initiative. Though the U.S. Treasury department has vocally supported BEPS, Congress has been less enthusiastic. Suggesting that some of the information that would be shared as part of a country-by-country reporting initiative could contain information that would undermine the security of U.S. companies, members of Congress have openly challenged the Treasury department on BEPS and that debate is certain to continue in 2016.
The cloud will be taxed
Never underestimate the creativity of a cash-strapped municipality when it comes to finding ways to tap into new revenue streams. As cable companies around the world have started to panic about the cord-cutting phenomenon, whereby customers eschew their cable TV subscriptions in favor of Internet-based services such as those from Netflix, Amazon, Google, Apple and others, tax authorities have seen dollar signs. Their solution: Tax the cloud.
So far, tax authorities in New Zealand, Australia, Japan and South Korea, as well as a number of individual cities, such as Chicago and Buenos Aires, have all either implemented or announced plans to implement so-called “Netflix Taxes” on streaming content.
With Netflix streaming currently accounting for about 70% of peak evening hour Internet traffic in North America alone, it’s little surprise that tax authorities have been quick to jump on this bandwagon. Expect to see more in the year ahead.
Tax looms large in U.S. presidential election
It’s only January, but tax has already emerged as one of the hottest issues on the 2016 campaign trail. So far, the candidates’ proposals have ranged from relatively benign tweaks to the current code – such as those from Donald Trump, Marco Rubio and John Kasich – to more radical suggestions to literally and figuratively blow up the current U.S. tax code.
To make his point stick in the latter category, Republican candidate Rand Paul filmed a promotional video clip of himself at a shooting range unloading an AR-15 assault rifle into a copy of the U.S. tax code. Paul’s plan, like those of his Republican rivals Ted Cruz and Mike Huckabee, is based on a Value-Added Tax (VAT) concept, which has historically been a political taboo in the U.S., but is wildly popular with tax authorities throughout the rest of the world. At its root, a VAT is imbedded into the supply chain, applying tax whenever value is added at a stage of production, without increasing retail sales taxes.
There are dozens of nuances and caveats that differentiate the various candidates’ plans. To help you keep track, I’ve developed a cheat sheet outlining the key points. The common bond across all of the candidates’ plans, however, is that they are all filled with jabs at the current system. Whether it’s the top marginal corporate tax rate, the repatriation of overseas profits or consumer income taxes, the one thing the candidates can agree on is that we’re not doing it right today. Stay tuned for 2016 to be the year of a thousand campaign promises and 2017 to be the year of tax compromise.
Carbon taxes will continue to roll out in pockets around the world
What’s the one issue on which Tesla Motors Chief Elon Musk, the world’s largest oil companies and the International Monetary Fund (IMF) can all agree? Carbon taxes are the best path forward for developing clean energy alternatives.
If you think that list looks like a strange group of bedfellows, you’re on your way to understanding why taxing carbon has become such a vexing issue for tax authorities around the world. The landmark global climate accord in Paris, in which 195 nations have pledged to reduce their carbon emissions, has thrust the idea of a carbon tax back into the global spotlight.
To-date, carbon taxes have been implemented in pockets around the world. Some of the most notable programs have been rolled out in the Canadian province of British Columbia, Ireland and the UK. Carbon taxes are also currently under consideration throughout China, Brazil and in the U.S. states Washington and Oregon.
While anecdotal successes have been reported in some of these initiatives, others – notably an attempt in Australia – have become highly politicized and ultimately fell apart. Expect this trend to continue in fits and starts throughout 2016. Despite best intentions for a globally-coordinated approach to CO2 regulation, the conflicting agendas of the various parties will make it hard for a consistent solution to be rolled out around the world.
This post originally appeared on Forbes.