Key International tax developments: what lies ahead? Sarah Fahy - Vice President , Sony Global Tax Office , Europe Guy France – Senior Director, Sony Global Tax Office, Europe Joy Svasti-Salee - Executive Director, Ernst and Young LLP - Visiting Prof. Queen Mary University of London 26 January 2011 Key International tax developments: what lies ahead?

Outline for discussion The principles of international tax Key influencers to-date Issues faced by MNE’s today Key influencers in the future What lies ahead?

Global fundamental principles? Separate entity approach An entity is taxed based on its residence Source countries may tax income and gains – PE threshold Withholding tax may be deducted at source on passive income A parent company can only tax dividends from, and not profits of, a subsidiary Interest is deductible and dividends are not

Emerging global principles? 1987 CFC rules regarded as acceptable / encouraged by OECD 1990’s Thin capitalisation rules become commonplace 1992 LOB concept starts (NL/US DTT) + anti conduit rules 1995 Transfer pricing – OECD guidelines (major revision in 2010 ) 2005 Focus on exchange of information (Art 26 updated) 2010 Update to MTC (including new Art 7)

Key influencers to date “Individually powerful” countries, e.g. USA Japan The OECD Europe and the ECJ

The OECD and Europe OECD Both European Australia Austria Poland Bulgaria Canada Belgium Portugal Cyprus Chile (2010) Czech Republic Slovakia Estonia Iceland Denmark Slovenia Latvia Israel (2010) Finland Spain Lithuania Japan France Sweden Malta Korea (1996) Germany United Kingdom Romania Mexico Greece New Zealand (1994) Hungary Norway Ireland Switzerland Italy Turkey Luxembourg United States Netherlands

Traditional outbound parent jurisdictions Powerful countries Listed Incorporated resident Complex domestic tax rules OECD members Operating globally Tax rules of parent dictate the structure Continuing strong global powers: Complex legislation Anti-inversion rules CFC rules and GAARs Restrictions on interest deductibility But recognition of some that they need to be competitive ....

UK CT reform: delivering a more competitive system Creating the right conditions for business investment and growth Responding to business concerns over instability and unpredictability Reversing the trend of business leaving the UK Principles: Lowering rates while maintaining the tax base Maintaining stability Being aligned with modern business practices Avoiding complexity Maintaining a level playing field for taxpayers

Issues faced by MNE’s today Cost Speed Globalisation Technology Centralisation of functions Rapid growth in emerging markets Increased tax transparency Complex regulation and aggressive tax authorities

People getting wealthier Future – “go East”? Emerging Markets OECD “outreach” People getting wealthier New Stock Exchanges Low cost of labour Large populations attract activity Trading “in” or “with” large markets Increasing experience of international taxation Pick and choose rules? Tax a “toll” to do business?

Key influencers in the future The new “individually powerful” countries India China Brazil Russia Others ... G20 Campaigners ......

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What lies ahead? More competition to be the country of the parent? A shift back to taxation at source? CCCTB in (part of) Europe? MNE’s recognised for their role as collectors of taxes? What should the global fundamental principles of international tax law be?

What lies ahead - in the medium term? Little cohesion? MNE’s need to find new ways to engage with Governments particularly in relation to: Transfer pricing The avoidance of double taxation

Thank you