Survey: CFOs Remain Wary of New Foreign Tax Incentives

The number of countries adapting their tax legislation to attract corporate investment over the past few years is "unprecedented" according to tax advisory firm Taxand. In a survey Wednesday it said CFOs are seeing an increasing focus by governments on tax policy changes, such as making friendlier acquisition structures. But CFOs don’t always trust that the tax benefits will last forever.

"To position themselves for the eventual deployment of these reserves, countries are striving to appear attractive. In the indirect tax arena, a number of governments are increasing [value added tax] to finance the decrease in [corporate income tax], simultaneously ensuring the double whammy of increased investment and increased tax revenues," Taxand wrote in the survey.

"In practice when you see companies making long term investment decisions, they will look at the current tax rates, but also look at the evolution of the tax system over time and put an assessment of stability in there as well," said Keith O’Donnell, an international tax advisory and member of the Taxand board. Companies, particularly in the technology space, are considering tax policy more carefully in choosing where to develop their intellectual property now, he added.

Governments believe that luring corporate investment will improve their local economies, but companies’ evaluation of whether corporate tax policy is effective toward that end is markedly different. The survey of 70 multinational CFOs around the world found that finance chiefs are hesitant to believe that tax policy can change overall economic problems. Of the CFOs polled, only 13% from the U.S., 29% from Asia and 30% from Europe felt that tax policy changes could help resolve major economic turmoil, like the issues facing the Euro zone.

The survey also revealed that CFOs feel that governments are uncoordinated in their approach to tax reform, trying to attract investment on one hand, but trying to raise revenue through tougher tax collection efforts on the other. The CFOs in the survey perceived a rush among governments with tighter budgets to pursue higher tax revenues through the audits, and that has led to policy disarray. More than three-quarters of the multinational companies polled said they were seeing an increase in the number of tax audits undertaken by local tax authorities this year.

"There’s a real paradox in what governments are trying to achieve on tax policy," O’Donnell said. "What we’re seeing everywhere is a fairly knee jerk reaction of governments when they are facing revenue issues which is to go where money seems most available, and on the ground there’s very little coordination between tax collection and tax authorities at the central level." He noted that it can take years for countries to work together to coordinate tax policy with each other, but an individual country could typically raise revenue through tax collections on a national basis in just six weeks.

The tax landscape differed greatly from region to region, according to the survey. Helped by maturing corporate tax departments in Asia, 73% of the multinational CFOs reported improved relationships with their local tax authorities this year. But figures were much lower in other regions, with just 29% of CFOs saying their relationship with tax authorities in Europe had improved this year and 57% saying they had seen improvements in America.

"If a country is short of money the first thing it thinks about is its own national budget," O’Donnell said.

One in five of the CFOs polled said transfer pricing was their most challenging tax issue from a global perspective, down from 23% who said that last year, while 17% said international tax was their most challenging issue, up from 12% in 2011.