A rudimentary grasp of arithmetic is all that is required to understand that the crackdown on tax avoidance by multinationals must hit corporate earnings. The OECD estimates that up to $240bn per year in tax is lost due to base erosion and profit shifting, so if the BEPS measures work then earnings will inevitably reduce.
In the longer term, we might expect that some of this will be recovered from customers by higher prices. However the initial problem for corporates is trying to predict what the additional tax bills might be. Gone are the days when a back of the envelope percentage of pre-tax profit will suffice in terms of estimating the tax charge. The interplay of the international tax systems, with governments all chasing a bigger share of the tax take, is a one-way street as far as companies are concerned.
The OECD is clear that the new international tax approach is intended to be even-handed, but at this early stage, as governments start to implement, the multinationals must deal with both increased tax costs and greater uncertainty and volatility in the tax line, with a consequential effect on earnings. Earnings have always been affected by a degree of judgement in the tax charge - deferred tax assets in particular can be subjective. The tax avoidance clamp-down is taking this to another level. Not only are tax authorities questioning more, the changes in the rules themselves represent a major shift in approach, matching tax to value creation is practically much harder than it is conceptually and so investors may have to modify their expectations of certainty as things adjust.
If you would like any more information on this issue please contact Rebecca Reading, or your usual RSM adviser.