Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘aggressive tax planning’

European Commission: Full speed ahead

The European Commission has clearly announced it’s intent to be the global leader in advancing OECD’s BEPS initiatives, with some proposals exceeding the scope / intent of the OECD.

Copies of the following documents are provided for reference, with subsequent posts addressing highlights of significant initiatives.  It is important to distinguish the documents between Proposals for a Council Directive, Communications, Studies and Recommendations.  

  1. Anti Tax Avoidance Package
  2. Proposal for a Council Directive re: tax avoidance practices
  3. Proposal for a Council Directive re: automatic exchange of information
  4. Annex to automatic exchange of information proposal
  5. Communication on an External Strategy for Effective Taxation
  6. Annexes to the external strategy communication
  7. Communication re: Tax Avoidance Package
  8. Study on Structures of Aggressive Tax Planning & Indicators
  9. Recommendation on implementation of measures against tax treaty abuse

The documents are required reading for all international tax practitioners, as they highlight the complex post-BEPS world and the trend indicators for the near future.  We can assume that some of these developments will proceed for action very quickly, thereby imputing a doctrine that “time is of the essence.”

http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/index_en.htm

http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=COM:2016:26:FIN&from=EN

http://eur-lex.europa.eu/resource.html?uri=cellar:89937d6d-c5a8-11e5-a4b5-01aa75ed71a1.0014.03/DOC_1&format=HTML&lang=EN&parentUrn=COM:2016:25:FIN

http://eur-lex.europa.eu/resource.html?uri=cellar:89937d6d-c5a8-11e5-a4b5-01aa75ed71a1.0014.03/DOC_3&format=HTML&lang=EN&parentUrn=COM:2016:25:FIN

http://eur-lex.europa.eu/resource.html?uri=cellar:b5aef3db-c5a7-11e5-a4b5-01aa75ed71a1.0018.03/DOC_1&format=HTML&lang=EN&parentUrn=COM:2016:24:FIN

http://eur-lex.europa.eu/resource.html?uri=cellar:b5aef3db-c5a7-11e5-a4b5-01aa75ed71a1.0018.03/DOC_3&format=HTML&lang=EN&parentUrn=COM:2016:24:FIN

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/anti_tax_avoidance/swd_2016_6_en.pdf

http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_61.pdf

http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/anti_tax_avoidance/c_2016_271_en.pdf

TAXE’s term ends; a new committee carries on

The term for European Parliament’s special committee on tax rulings and other measures (TAXE) has ended, and the European Parliament has introduced a similar committee for an additional six-month term.  The new committee shall also have 45 members.

As with TAXE, one of the powers of the new committee is “to analyse and assess aggressive tax planning carried out by companies established or incorporated in the Member States, also regarding the third-country dimension including the exchange of information with third countries in this respect.”

A link to the announcement is provided for reference:

http://www.europarl.europa.eu/resources/library/media/20151202RES05870/20151202RES05870.pdf

This new committee signifies EU’s continued focus on aggressive tax planning and transparency, with many countries following its lead.

UN: Corp. tax responsibility

Principles for Responsible Investment (PRI), a UN sponsored initiative, published a report entitled “Engagement Guidance on Corporate Tax Responsibility.”  The guidance is investor oriented addressing the conduct of corporate tax responsibility, disclosure, transparency and good tax risk governance.  Therefore, this report is a valuable reference to understand today’s trend of tax disclosure and transparency from an investor’s perspective, and how multinationals may be queried in the new world of international tax transparency.

A link is attached for reference:

http://2xjmlj8428u1a2k5o34l1m71.wpengine.netdna-cdn.com/wp-content/uploads/PRI_Tax-Guidance-2015.pdf

Key points:

  • Earnings that rely on tax planning vs. economic activity are vulnerable to tax regulatory changes, earnings risk via strategies are increasing, and some Boards may be unaware of the effect that incentives have on tax planning.
  • Corporate sustainability officers should understand tax decisions and their impact on financial results and stakeholders, with alignment between tax strategies and sustainability commitments.
  • ” Companies should be able to defend how they allocate profit to each country both to tax authorities and the general public to avoid reputational risk and investor backlash.”
  • Before engaging with companies on tax practices, investors should understand various strategies, including IP transfers, financing, marketing service arrangements, principal structures, tax havens, shell companies and tax incentives, that are summarily explained. 
  • A step plan to engage companies:
    • Identify red flags, including a formula to measure tax gap
    • Questions for Senior Management/Board re: tax policy, tax governance, managing tax-related risk, effective tax rate, tax planning strategies including structure and IP rights, and country-by-country (CbC) reporting.  

Appendices are provided for additional reference of the OECD BEPS project, examples of good tax practices re: disclosures, summary of findings from discussions with Heads of Tax in eight multinational organisations, and a Glossary / Resources.

The report, in providing formulas and explanations, includes educational material for the investor community re: tax strategies and governance, while also providing examples of tax queries and good tax governance by many multinationals.

Best Practices:

The report should be used as a metric to assess readiness and alignment for these important topics that may be raised by stakeholders, both internal and external.  To the extent such questions have not been a primary focus, this report is an impetus to raise the priority threshold in addressing tax policies, strategies and governance in a very transparent world.  Additionally, it is also worthy to review the names of multinationals cited in the report for awareness and recognition.

 

ATO interim report: Corporate tax avoidance

The Senate Economics References Committee has published its interim report entitled “Corporate tax avoidance.”  Part I, “You cannot tax what you cannot see” provides an excellent frame of reference for the discussions therein.

It is worthwhile noting that there is a section “Government Senators’ Dissenting Report” expressing concerns about some recommendations therein; this should be a additional warning sign of the recommendations put forth.  Conversely, there are “Additional Comments from the Australian Greens” fully supporting the report in its entirety.

The final report is due in November 2015, although this interim release provides an indication of the thought trends currently in process by the Australian Tax Office (AT0).  A link to the report is provided for reference:

http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Report_part_1

Key observations:

  • 17 recommendations provided addressing (1) evidence of, and multilateral efforts to combat, tax avoidance and aggressive minimization, (2) multilateral actions to protect Australia’s revenue base, and (3) capacity of Australian government agencies to collect corporate taxes.
  • Australian government to work with other countries having significant marketing hubs to improve the transparency of information
  • Australian government continues to take the load re: OECD BEPS initiatives; international collaboration should not prevent the Australian Government from taking unilateral action
  • Mandatory tax reporting (transparency) code
  • Existing transparency laws to be identical for private and public companies
  • Public register of tax avoidance settlements reached with the ATO
  • Public excerpts from the Country-by-Country OECD reports, based on the EU’s standards
  • Annual public report on aggressive tax minimization and avoidance activities
  • Section 3.95 discusses a novel concept: “Effective tax borne” effective tax rate formula, a metric that seeks to reflect all of the channel profit derived from business activities involving Australia and the Australian and global tax paid on that channel profit.  Appendix 3 provides additional rules for application of this formula, noting that there has not yet been a consultation with taxpayers or other stakeholders.  The metric envisions that the entire supply chain profit is a profit of the economic group arising from Australian business activities (i.e. intercompany purchases of goods and services from offshore related parties).  Numerator is either the Australian tax paid on business activities by the economic group, or the global tax paid by such group.  Denominator is the total economic profit from business activities which are linked to Australia.  Withholding taxes of economic group profit are includable, whereas royalties and excises are not.  Numerous rules apply for intercompany adjustments.

Australia is still recognized as a leader in the pursuit of the BEPS objectives, using transparency as a weapon to fight ensuing battles.

This report not only extends the strong cry for public disclosure of tax information, it suggests a new concept to examine the effective tax rate of jurisdictions having activities with an Australian related party.  However, it is hopeful the envisaged complexity, cost/benefit and technical nuances of the “effective tax borne” concept are presented to stakeholders with enough time to review, plan and adjust/eliminate the final recommendation accordingly.

As Australia leads, many others follow.  This report is required reading for all interested parties, as the ideas presented have a high probability of appearing in other jurisdictions in a similar form and formulating the same intent for transparency.

BEPS Action 12-Mandatory Disclosure: TEI comments

Tax Executives Institute (TEI) has provided comments to the issuance of BEPS Action 12 Discussion Draft.

A link to TEI’s comments is provided for reference:

http://tei.org/Documents/TEI%20Comments%20BEPS%20Action%2012%20-%20Mandatory%20Disclosure%20-%20FINAL%20to%20OECD%2029%20April%202015.pdf

Key comments:

  • Multiple levels of disclosure options are provided, leading to inconsistency and complexity
  • Information provided is yet another compliance burden for MNE’s, with little cost/benefit to tax authorities
  • Concern about release of information to the public, especially prior to the time that full appeals are exhausted
  • Tax disclosure should only be required upon filing a tax return with a tax benefit from a reportable transaction
  • Limited rules re: who should report
  • Primary purpose or de minims filter process is not recommended
  • Reporting should be limited to new or innovative aggressive tax planning structures
  • Countries with criminal liability provisions should exclude reported transactions with self-incrimination protection
  • Penalty protection for reported transactions

TEI’s comments are well written, concise, practical and relevant.  Their comments should be carefully reviewed prior to implementation of additional disclosures re: BEPS Action 12 that may prove to have little benefit and significant complexity.

BEPS Update / Australia’s DPT timing

EY’s Global Tax Alert of 13 April 2015 sets forth the latest summary of OECD BEPS developments, including the recent discussion drafts under BEPS Actions 3 and 12.

Additionally, the Alert also notes the copycat tactics of Australia re: the UK Diverted Profits Tax (DPT) that went into effect 1 April 2015.  More news on this development should be forthcoming  in the 2015-16 Australian Budget expected mid-May.

http://www.ey.com/Publication/vwLUAssets/Alert:_The_Latest_on_BEPS_–_13_April_2015/$FILE/2015G_CM5365_The%20Latest%20on%20BEPS%20-%2013%20April%202015.pdf

The recent BEPS discussion drafts, Action 3 re: CFC rules and Action 12 re: Aggressive tax planning arrangements, are of paramount importance for all MNE’s and tax administrations.

Australia’s tactics re: a UK DPT mechanism also highlights the controversial manner in which each jurisdiction is fighting for its fisc to the detriment of other tax administrations.  However, what is not transparent in the rules provided to date for the UK DPT is the intent to avoid double taxation.  It is hopeful that Australia will provide a balanced approach to this newfound mechanism for gaining tax revenues in a scheme that asks for full payment by a MNE prior to relevant appeals being filed and discussed.

BEPS Action 12: Disclosure of tax planning arrangements

The referenced PwC summary highlights the latest OECD proposal re: disclosures of tax planning arrangements.  The Action is generally based on efforts to curb aggressive tax planning transactions for which there are not consistent standards for reporting/sharing details for such transactions.

http://www.pwc.com/en_GX/gx/tax/newsletters/tax-policy-bulletin/assets/pwc-proposals-wider-reporting-international-tax-arrangements.pdf

MNE’s and other interested parties should review this proposal to better understand transparency trends and initiatives, as well as implement relevant planning processes and governance.

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