Tax competition and BEPS

  • April 20, 2015
By Robin Marshall Continued healthy tax competition, awareness of what attracts foreign direct investment, the increasing importance of tax experts in strategic business planning, and the need to prepare for the inevitable impact of the base erosion and profit shifting (BEPS) project were the key takeaways from the 10th annual regional tax conference, hosted this year by the American Chamber of Commerce in Hungary.

“Conferences like this remind us that we are part of a bigger region,” Farkas Bársony, managing director of GE Hungary, told the international audience at the Budapest Marriott Hotel on April 15. Coming together as a region made each individual state stronger, though that did not mean they should act as a homogeneous whole. “We have tax competition that enhances growth in the region; we should maintain that healthy tax competition,” he warned.  Furthermore, “We must understand what are the main elements that influence FDI from a tax point of view.”

For the general public, tax is rarely a subject that sets the pulses racing (except, perhaps when it comes to filling in the paperwork and paying the money!), but it is fundamental to how society, let along commerce, operates. Its importance is also demonstrated by the fact that this annual conference has been running for so long. “It is a truly remarkable event, an occasion for celebration, as this is the 10th regional tax conference, a joint event of four AmChams [the so-called Visegrád Four countries],” said Botond Rencz, AmCham Hungary’s Tax Committee Chair, and one of the main supporters of the conference.

Farkas Bársony, Managing Director, GE Hungary and Botond Rencz, Tax Committee Chair, AmCham Hungary

If there was an overarching theme, though, it was BEPS, which seemed to be mentioned in almost every presentation and panel discussion. As a subject it may sound dry and esoteric, but it will have a huge impact on businesses everywhere. Development of BEPS is being overseen by the Organization for Economic Cooperation and Development, which has been asked by the G20 group of leading economic nations to come up with recommendations “for a coordinated international approach to combat tax avoidance by multinational enterprises by creating a single set of international tax rules to end the erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax”.

Qualified Optimism 

Fifteen key elements form the BEPS Action Plan and have already been outlined. There is no doubt BEPS is coming, there seems little doubt that compliance will mean more work (and costs) for companies and tax authorities, but beyond that there seems little that is certain at this stage.

Balázs Békés, Practice Leader, Hungarian and Central and Eastern European Operations, 
Ryan Tax Services; Robert McCafferty, VP Financial Supply Chain Design, Flextronics; Péter Havai, Regional Tax Manager, Robert Bosch and András Lénárd, Head of Tax Department, Magyar Telekom

“The devil will be in the detail; it could be very good, it could be very bad,” warned Péter Havai, the regional tax manager for Robert Bosch. Robert McCafferty, VP of financial supply chain design for Flextronics, suggested the new regime could boost outsourcing to companies such as his. BEPS, he said, is a “tremendous opportunity for the world economy, and particularly this region”. András Lénárd, head of the tax department at Magyar Telekom, was broadly hopeful, but pointed out “the administrative burden will increase, that is for sure, but we do not know yet what the gains will look like”. And he added one other warning: “Politics can make the project last a lot longer.”

A Race to the Bottom

Earlier, Zoltán Pankucsi, deputy state secretary at the Hungarian Ministry for National Economy, had made clear his government’s position: “We are in favor of implementing the BEPS program, but we are still against real tax harmonization. We want to maintain our very competitive tax environment.” 

Tomas Balco, general state council at the Ministry of Finance of the Slovak Republic, acknowledged that his country could no longer be considered the most competitive in the region, and warned that care must be taken in finding the balance between fighting “aggressive” (i.e. borderline illegal) tax planning and encouraging business. “What are the measures that will kill the business and kill the innocent, and what are the measures that will really actually address the problems that we are facing in terms of the BEPS practices?” 

Tomas Balco, General State Counsel, Ministry of Finance, Slovak Republic; Monika Laskowska, Deputy Director, Department of Income Taxes, Ministry of Finance, Poland and Zoltán Pankucsi, Deputy Secretary of State, Ministry for National Economy

Monika Laskowska, deputy director of the department of income taxes at the Polish Ministry of Finance warned that “In corporate taxation we see a race to the bottom” and said her country, like Slovakia, was going through a process of careful examination of the most beneficial way forward. “We are happy with the BEPS project, but would like implementation to go in very small steps, not to surprise people.”

A Good Plan

Former Hungarian finance minister Csaba László, now a senior partner at KPMG, chaired a panel discussion of regional tax directors that included both Bársony of GE and McCafferty of Flextronics, as well as Zoran Dauntovic, head of group tax planning at MOL Group, one of the largest companies in the region.

Farkas Bársony, Europe & MENAT Tax Director, GE Energy Management; Zoran Dautovic, Head of Group Tax Planning, MOL Group; Robert McCafferty, VP Financial Supply Chain Design, Flextronics and Csaba LÁSZLÓ, Senior Partner, Advisory, KPMG and Former Minister of Finance

McCafferty has been involved in taxation issues for more than three decades, working in both the United States and the EU. “I have seen a lot of changes in development, in particular in this region, that I think are really exciting. I also think there has never been a better time in my 30 plus years to be in the tax arena. You are part of the business; it is on you to drive the business into more efficient, more beneficial structures that’ll drive value to the company. The first thing I’ll say after 30 years in tax: There’s no such thing as a tax plan; it doesn’t exist. There’s a business plan that can include tax in the thinking and in the design, and that’s a good business plan.”

Hybrid Model

Marcin Petrykowski, managing director and head of relationship management for EMEA and regional head for CEE at Standard & Poor’s Ratings Services outlined why, from an investor and capital market perspective, the outlooks for the region look good.

“Central and Eastern Europe today offers a very attractive hybrid between an emerging market and elements of a developed economy. This means that more and more investors that were historically emerging markets investors are turning toward Central and Eastern Europe in a similar way to how developed markets are approached. The mix is very important and the region benefits greatly from it.”

Growth of GDP per capita is far greater than in Western Europe, though starting from a lower base, he noted. “On the other side, as the population becomes more wealthy and there is better allocation and distribution of the wealth, that means there are more opportunities for business development and business growth.”

The regulatory environment is also a positive. “A lot of investors from the emerging markets space are very focused that Central and Eastern Europe offers this blend of the European Unionized approach with, still, upside for development.” 

One other big plus for the region “and in particular important for Hungary and Poland […] is the very healthy and flexible labor force […] and also the efficiency in terms of the cost allocations.” 

There remains “significant differentiation in terms of countries” Petrykowski pointed out, with a spread in risk in terms of sovereigns for the region going from “AA-”, the rating for the Czech Republic, to a single “B”, which is Bosnia and Herzegovina. “It is a huge divergence. That is important to keep in mind: Central and Eastern Europe cannot be treated as one unified region.” Populations – and therefore economies – also differ widely, ranging from 40 million Poles to two million Slovenes, he said.

AmCham Hungary would like to thank those companies that helped make the event possible. Main sponsors: GE and Procter &Gamble; silver sponsors: IBM and Ryan Tax Services; bronze sponsor: EY.

This is an expanded version of an article appearing in the April 24 issue of the Budapest Business Journal.