5 October 2015 was a good day for companies operating across borders, with agreements on global transfer pricing rules (Base Erosion Profit Sharing or BEPS) and the Trans-Pacific Partnership (TPP). With TPP there are finer details to iron out, not least ratification in the US congress. And with BEPS it is now all about implementation. As my colleague Francesca Lagerberg points out: the OECD doesn’t implement tax policy, national governments do.
If both deals are substantially implemented in a number of countries there will still be major improvements to the regulatory landscape. The EU and the US might even seal a meaningful trade deal in 2016 (the Trans-Atlantic Trade and Investment Partnership or TTIP), a deal which could help turn the global economy around at a time of heightened uncertainty and stuttering growth.
Global tax reform
BEPS is a set of recommendations from the OECD which will have a profound impact on the taxation of businesses trading across borders. The OECD and the G20 deserve much credit for the progress they have made in the past two years. It is the biggest shake-up in international tax rules in a generation.
BEPS matters because tax is a cost of doing business. Inconsistent and/or incoherent tax rules across borders impair export opportunities and therefore impair economic growth.
Boost to global trade
TPP is the largest trade pact agreed in two decades. It covers 40% of the global economy including Australia, Japan, the US and some of the more outward-looking Latin American and ASEAN economies. Asian giants such as China and India are not currently party to TPP but Mike Froman, the US Trade Representative who negotiated the deal, recently referred to the indirect influence such deals have on neighbouring countries. And TPP may well attract more signatories in the future.
Trade agreements seek to address inconsistent rules and thereby open up access to more markets. We know from our Beyond Borders campaign around international expansion this year that conforming to local legislation and regulatory requirements are the number one challenge business leaders face when operating overseas. Just think about the TPP member countries, and the scope for different approaches to workers' rights, tariffs, protection of certain cherished sectors, regulation and environmental protection.
There is a side benefit to global agreements too: if you are talking to countries about trade, you are building diplomatic relationships, understanding and common good. As we see in the EU, that reduces the chance of conflict.
In the coming weeks and months the TPP details will enter the public domain. In each country there will likely be winners and losers. There will be scrutiny of quality safeguards. On BEPS some governments have already taken unilateral action, and there will be some who are tempted to tinker with the BEPS recommendations as they get implemented. Before we criticise elements of TPP or BEPS, we should first consider the whole.
Benefits for all companies, large and small
BEPS does not just benefit multinational companies. And TPP does not just suit 'big pharma' or 'mega agri'. Those companies are already trading successfully across borders, and are resourced to cope with regulatory complexity. TPP and BEPS will be of greatest benefit to those companies which are seeking to expand and invest across borders from a zero or small base – it is these companies that will be the engine of global growth.
However, as much as these are game-changing agreements, we should not expect too much too soon from business leaders. Psychology plays a key role in business expansion decisions. Data from our International Business Report reveals that the number one reason businesses choose a specific market is simply because it ‘feels right’. But global agreements boost business confidence. They are a signal that governments are getting together to make it easier for them to operate across borders; that politicians are trying to mitigate the complexities facing business leaders.
By their nature, negotiation and consensus require give and take. You give up some things for the greater good. The BEPS recommendations and TPP are rare moments of international collaboration where the negotiators have kept their eyes on the big prize. We should all celebrate.