From the blog: As demands for companies to be more tax transparent have built momentum, international reforms are being formulated that could impact tax strategies and dramatically change sponsor covenant.
While these reforms might present a headache for some C-suite executives, they could also make the job of a pension plan trustee easier when assessing the value and strength of the sponsoring employer, particularly where that employer is part of an international group of companies.
While these reforms might present a headache for some C-suite executives, they could also make the job of a pension plan trustee easier when assessing the value and strength of the sponsoring employer, particularly where that employer is part of an international group of companies.
Recent developments include:
November 2015 – the G20 endorsing the OECD action plan, which has involved a group of 80 developing countries, to tackle base erosion and profit shifting by large multinationals. This aims to target the estimated loss to global tax revenues of between $100bn (£73.7bn) and $240bn a year.
From April 2016 – a European Commission directive obliges large multinationals to publicly disclose their taxes and earnings in the EU. Separately, EU member states have also agreed to automatically exchange tax information on the activities of multinational companies.
In June 2017 – more than 70 jurisdictions signed up to a multilateral instrument that will implement measures to update international tax rules and reduce the opportunity for tax avoidance by multinationals.
The combined effect of these developments is that executives in large companies will be under increased pressure to ensure tax strategies employed in relation to their corporate and personal wealth are fair and reasonable. Even if no change of approach is necessary, they may need to comply with additional requirements.
While this might present a challenge to corporates, increasing financial transparency could make the job of a pension plan trustee a little easier. A key role of a defined benefit trustee is to understand the ability and willingness of the sponsoring employer to make good any funding deficit.
It is often hard to identify the value of the employer covenant, particularly where the sponsoring employer is part of a group of companies, of which some have no direct obligation to the UK pension plan.
Even if these developments only result in greater corporate transparency, they will help trustees undertake an analysis of where the value sits in the group, and how easily it could be moved beyond the reach of the pension plan. The outcome of this analysis could be to agree a monitoring process or preventative measures.
If the impact is more dramatic and multinational groups become less inclined to shift profits to lower tax jurisdictions, it could mean more profits remain in the UK and funds are more available for UK pension plans.
Matthew Giles is a partner at law firm Squire Patton Boggs
