Global megatrends are changing the way governments and companies see tax.
Speaking at EY’s recent Africa Tax Conference 2015, EY’s tax director Mark Goulding outlined the often unexpected ways in which these megatrends will affect the principles underlying taxation.
Goulding covered three megatrends relating to big data and transparency, emerging markets, demography and talent, and technology.
“These are well-recognised trends, and many people are starting to think through how they will be affected, both personally and in respect of their careers. What the majority have not begun to understand is the profound effect they will have on value/ supply chains and thus on taxation,” Goulding says. “Taxation is one of the key variables in the business environment, so changes that are this profound are likely to have a major–and often unexpected–effect on the way we do business.”
Consider, Goulding says, 3D printing. It will obviously affect manufacture and construction quite dramatically, but consider the taxation implications of being able to download an app for a new mobile cover and print it at home. The app was developed in, say, Finland and the product is made in South Africa – but there’s no intervening supply chain. This model not only disintermediates a lot of businesses, it makes it very hard for either Finland or South Africa to raise tax revenues on this manufacturing process.
“Cross-border taxation for goods is currently fairly easy to determine, but tax authorities are already battling to deal with the taxation of services,” Goulding points out. “Technology-enabled business models will present an ever more significant challenge.”
When it comes to demography and talent, a major shift is that by 2025, 60% of all college graduates will come from leading emerging markets – at a time when access to skills will be paramount. Already, 60 percent of new jobs require skills that only 20% of the population possesses. This implies that know-how (including research and development centres) will shift to those countries whose people can offer the right skills – or that those skilled people could migrate elsewhere, moving the taxes they pay with them.
In such an environment, countries will be competing to provide the educated workforces needed, and then to keep those workers from leaving for greener pastures. In both cases, local taxation regimes and inter-country tax treaties will play a key role in ensuring countries continue to prosper in this environment, both by retaining their investment in skilled people and in attracting R&D facilities.
The growing prominence of emerging markets is shown in the fact that Luanda is currently the most expensive city in the world, and that only ten European countries will be among the global Top 30 economies by 2050. Coupled with the impact of technology, as outlined above, it’s clear that transfer pricing regulation will have to receive major attention.
“We can see this happening already, with the number of African countries implementing transfer pricing legislation doubling every five years,” says Goulding. “The increased transparency and analytics capabilities inherent in the fourth trend, big data, mean that tax authorities have the tools to deal with this much more complex environment.
“However you look at it, taxation is facing a major shake-up.”