Corporate tax in 5 1/2 minutes - YouTube

Almost every day you can pick up a newspaper and see the word tax in the headlines.

So why has the issue of corporate tax become so contentious?

We met with Wilbert Kannekens from KPMG, and asked him to explain.

Well I think we first need to answer a simple question.

And that’s a question I will admit even tax professionals like myself don’t often consider… and the question is:

What is tax? Of course, we can find the definition in the dictionary but the dictionary only tells half the story. In reality, the definition of tax is better understood through a tax-payers relationship to it.

What do people get for their money?

People living in China, for example, may have a completely different view of taxation to people living in France or Germany.

The nation’s cultural background and history will surely influence the way people see the role and the responsibility of the government.

However, I do believe that tax around the globe can be defined by three general characteristics.

First, all taxes are levied through laws.

Second…taxes are not voluntary payments. If a payment is voluntary, we should call it something else.

And finally, tax is not a payment for a particular service. You can’t link what you pay to how you want it to be spent.

Once we appreciate that tax means different things to different people, we can move on to trying to better understand corporate tax.

If we consider a history of tax we can see that corporate tax is only a fairly recent development...

In the simplest terms, when a business sells goods and services to a customer, you deduct the business costs from the sales, and what is left is what we call the profit. And it is only from this profit that a government can take a prescribed percentage for corporate tax.

Seems fairly straightforward, right? So what is it about corporate tax that causes this confusion?

When corporate taxes were introduced in the early 1900’s this was the model. And because businesses were largely based in a single country there was a very clear supply chain.

Taxes were simple to collect, they were easy to legislate, easy to explain and easy for everyone to understand….

However as we move ahead in time, the corporations began to change.

Traditional bricks and mortar businesses began to evolve… and they become multinationals with a desire for cost efficiency, different functions of a business could now be operated across many different countries.

Also, it became possible to buy and sell internationally.

And what we see is that all of a sudden these corporations were dealing with more governments, with different regulations, different incentives, and with different tax systems.

We need to understand that the government of each country is now claiming their own percentage of the profit, and this potentially could lead or even would lead to double taxation.

To avoid this, governments and international organizations developed tax treaties.

These tax treaties provided tax income between countries, and many of these treaties still govern today’s corporate tax payments in the world.

But over the last 25 years the nature of corporations has continued to evolve and it drifted away from these traditional models.

The rise of I.T.-led corporations, and the development of digital products has drawn further attention to the way that corporations are currently taxed.

Intangible assets such as know-how and Intellectual Property are becoming a critical business asset.

So now, as you can see, the global and local Corporate Tax systems has become extremely complicated, with large, highly evolved, international corporations being held accountable by the same old legislation, based on what in many cases is no longer relevant and corporate income tax rates.

Let’s not forget, they are also a tool used by jurisdictions to compete for more business or to attract specific industries and this further adds to the confusion between corporations and governments, which in turn fuels headlines and public distrust.

So if you ask me, will this complexity be reduced in the future?

My simple and truthful answer is no, it will not!

But what I can say for certain is that corporations will continue to evolve, and individual governments will continue to have different political, social and economic priorities that shape their own tax policies.

Now look, what corporations, governments, international organizations but also tax professionals like myself can do, is to work together to develop up-to-date tax treaties.

And this will have to be based on new, agreed principals that better reflect todays multinational and digital world, and that can be more easily communicated and understood by everyone… and, I think, that is the right thing to do.