Q&A: EY on tax planning to TMT success

Accountancy Age spoke to Alan Luchs, EY global media and entertainment tax sector lead, about the importance of tax planning for TMT companies – particularly as tech firms continuously show signs of increasing growth during this year’s pandemic. Whilst the digital takes over and media companies focus on online services, multinationals such as WarnerMedia or Disney now look to restructure their business – but how is tax planning crucial for the success of these firms when the arrival of a digital tax and post-coronavirus tax rises are to be expected?

What are the implications of tax planning to TMT success?

TMT companies typically have an extensive catalogue of intangible assets that need to be protected. It is critically important that companies understand the global landscape and climate, so they can stay current with the latest tax legislation changes across jurisdictions. At the same time, it is important that tax departments across the TMT sector devote their time to delivering strategic advice that increases long-term value.

In response to these growing complexities and demands, many companies are now looking to enter co-sourcing agreements to leverage the technology, process capabilities and talent pool of larger organisations, ultimately allowing them to focus and enhance their strategic tax planning strategy. EY recently worked with Discovery Communications in this way, helping them to reimagine the tax function by realising standardised tax processes and adopting powerful new technologies. Indeed, such arrangements can give technology, media & entertainment, and telecoms businesses access to state-of-the-art tools and technologies that would otherwise be difficult to attain, which overall streamline data gathering, standardise and centralise delivery, and produce deep analytics that allow for much better planning.

How are DSTs going to impact tax planning for these businesses?

The digital services taxes (DSTs) originally proposed in 2015 as part of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative targeted certain activities such as advertising, platforms and data monetisation. The application of DSTs has since been greatly expanded, and in some jurisdictions, DSTs apply to virtually all digital transactions.

Understanding the taxation of the digital economy is therefore an imperative for most organisations. The rapidly evolving digital taxation landscape poses risks to companies in all sectors, and not least TMT organisations for whom digital transformation, technological innovation and digital taxation are central to the growth strategy.

For example, with the advent of 5G technology, telecommunications companies will continue to provide cross-national services to mobile consumers, prompting unique digital service tax implications. Media companies that offer online streaming services and premiere content direct to viewers continue to see an increase in subscriptions. They would subsequently need to consider IP ownership and taxation on the sale of digital content. The rise in software-as-a-service models among technology companies also creates DST implications, so they need to be increasingly conscious of where the end-user is located and where they are advertising these services.

Additionally, there are also considerations around who will ultimately pay for the digital services tax, and whether these costs will be passed down to the vendors or the end consumer.

In response to these evolving challenges and considerations, companies need to stay abreast of the global policy landscape and get to grips with how taxation on digital economy transactions impacts the company’s overall tax profile. Companies also need to re-imagine how they can monetise their business and be ready to quantify the amount of anticipated taxation in relevant jurisdictions.

Governments are likely going to raise taxes to boost revenue post coronavirus, how will this affect the TMT sector? What are the challenges ahead?

In response to the coronavirus pandemic, governments will be looking at various ways to increase revenue through taxation in order to see an economic recovery. For example, it is likely that some countries will accelerate the application and scope of digital services taxes. Governments may also increase tax rates and impose additional taxes on foreign corporations for the use of technology and data in the local country. It is anticipated that there will also be incentives to increase jobs, as well as the introduction of taxes associated with exporting jobs. The risk here is that countries will inevitably have competing interests. Some jurisdictions will redefine their rules around permanent establishments and put greater emphasis on economic presence, which could potentially result in double taxation.

All of these changes could have a far-reaching impact on TMT companies. Not least, government stimulus packages are often directed to industries that are expected to yield the most benefit for citizens. In the case of 5G, the technology, media & entertainment and telecommunications sectors are three of the most favoured suitors given their power to connect people. More countries are now offering 5G incentives as the race for adoption continues to advance, catalysed by an increased appetite for virtual services during the pandemic. Tax teams can add value by becoming more active in helping to identify, obtain and comply with 5G-related tax incentives and reporting requirements.

Changes to the workforce dynamic as a result of the coronavirus pandemic could also impact future tax considerations for companies. Some major tech companies have already announced that they will extend remote-working indefinitely, and this could potentially create nexus exposure and employment tax issues that companies will need to consider and manage.

What are you advising clients in that sector, at the moment?

Given the pace of regulatory change, an increased compliance burden, and the introduction of new government incentive programs, it is mission-critical that companies build an agile tax function to adapt and stay ahead of the shifting landscape.

To do so, EY is advising clients to prioritise improving visibility amid increased risk, adopting tools required to realise the increased value from data, while being bold enough to drive innovation and new ideas and to improve efficiencies. In this regard, co-sourcing arrangements can be a great solution – particularly at a time when resources are increasingly stretched in the face of an economic downturn, and in response to challenges that arise from a remote workforce. In response to our recent Tax and Finance Operate (TFO) survey, which was conducted prior to the coronavirus pandemic, 73% of respondents said they were more likely to co-source some critical activities in the next 24 months.

Co-sourcing gives the company access to a wider talent pool and powerful technologies, allowing the company to efficiently use their resources while lowering costs relating to employee training and maintaining technology to keep up with the fast-changing tax environment. Overall, co-sourcing can help companies stay focused on their growth strategy.