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Tax, Contracts & Commercial Policy

February 4, 2013

Governments appear serious about levying more corporate taxation and this has significant implications to commercial professionals.

Since last October’s G20 meeting, there have been frequent public pronouncements by senior politicians. In the words of Jeffrey Owens, Senior Tax Policy Adviser at Ernst & Young: “Governments have given corporations attractive tax regimes – and now they want to see people complying with the rules.”

In reality, of course, they want more than compliance with the rules, since the issue appears to be related to moral judgment rather than strict legality.

On one level, this is just a traditional battle between stakeholders arguing over how the cake will be divided. But it is also part of a wider social debate over fairness and sustainability. For example, to what extent should a corporation contribute to the national economies in which it does business?

Creative tax avoidance has increased the profitability of many contracts. But now those approaches have to be measured for their possible adverse impacts on business reputation. In addition, those managing long-term contracts may face a decision to change tax assumptions during the life of the contract. For example, the royalty schemes or off-shore passing of title that minimized the tax bill may be abandoned or outlawed. What is the best negotiation strategy to deal with this uncertainty?

As emerging markets also get into the action on tax, companies will find themselves exposed to more varied and often unpredictable rules. Again, it is necessary to consider how such an environment might be tackled within the terms and conditions of contract.

At a strategic level, tax planning now has a need for much wider consideration and therefore becomes a key element of commercial thinking.



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