Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘GAAR’

Hybrid arrangements: ATO guidance

The Australian Tax Office (ATO) has published guidelines addressing general anti-avoidance rules (GAAR) for restructures of hybrid arrangements.

This guidance is a valuable reference for taxpayers not only operating in Australia, although having hybrid arrangements that may need restructuring.

https://www.ey.com/Publication/vwLUAssets/Australian_Taxation_Office_issues_guidance_on_GAAR_and_restructures_of_hybrid_mismatch_arrangements/$FILE/2018G_011633-18Gbl_Australia%20-%20Guidance%20on%20GAAR%20and%20hybrid%20mismatches.pdf

https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FPCG20187%2FNAT%2FATO%2F00001%22

EU Anti-Tax Avoidance Package: PPT

The EU Anti-Tax Avoidance Package included a Commission recommendation on the implementation of measures against tax treaty abuse.  Specifically, this statement was issued to address artificial avoidance of permanent establishment status as stated in BEPS Action 7 Action Plan.

Re: tax treaties of Member States that include a “principal purpose test” (PPT) based general anti-avoidance rule, the following modification is encouraged to be inserted:

“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capita l if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity or that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”

This subjective phrase, that applies notwithstanding other provisions of the Convention, has already been used in new treaties and will proliferate as new treaties are drafted by a Member State, not necessarily with another Member State.  Thereby, it is important to draft supporting documentation that will provide support for transactions against which it is aimed.  This phrase will elicit additional appeals and court cases as to its meaning and / or intent for which non-consistent answers will be provided.

Questions that may be asked re: this statement:

  • Who is concluding on the reasonableness?  What facts are used for such determination?
  • Which facts and circumstances are relevant?
  • What are all of the principal purposes of the arrangement or transaction?
  • How is a benefit measured, directly or indirectly?
  • What is a genuine, vs. non-genuine, economic activity?
  • How do you determine if such arrangement is in accordance with the object and purpose of the “relevant provisions” of the Convention?

The phrase is purposefully vague, and thereby subject to inconsistent interpretation.

It is hopeful that tax administrations will use this statement wisely to address egregious transactions rather than ordinary business transactions for which the clear intent was not an evasion of tax.  This subjectivity will be important to monitor going forward to further understand subjective enforcement interpretations around the world.  

 

 

EU Anti-Tax Avoidance Directive: Primer

The Anti Tax Avoidance Directive includes six anti-abuse measures to address tax avoidance: interest deductibility, exit taxes, a switch-over clause, general anti-abuse rule (GAAR), controlled foreign company (CFC) rules and a hybrid mismatch framework.  The Directive prescribes a minimum protection for Member States’ corporate tax systems.

A summary of the anti-abuse measures is provided, based upon the European Commission’s presumption and related summary of actions to address such abuses.

Interest

Presumption: Corporate taxpayers incur interest in high-tax jurisdictions, with income reported in low/nil tax jurisdictions, thereby shifting profits.

Summary: Net (of interest income) interest expense is limited to a 10-30% EBITDA basis.

Exit taxes

Presumption: Tax residence is moved solely to benefit from a low-tax jurisdiction.

Summary: Tax on transferring assets cross-border to capture unrealized profits.

Switch-over clause

Presumption: Low-taxed income is moved within the EU to shift profits.

Summary: Foreign income is subject to a tax, with foreign tax credits, vs. an exemption.

General Anti-Abuse Rule (GAAR)

Presumption: Tax planning schemes are abusive.

Summary: Backstop defense rule for “abusive tax arrangements.”

Controlled foreign company (CFC) rules

Presumption: Income is passive and is shifted to low-tax jurisdictions.

Summary: Reattributes income to a parent company that is taxed at a higher rate.

Hybrid mismatch framework:

Presumption: Double deduction situations due to legal mismatches are being sought.

Summary: Legal characteristics of payment country carries over to recipient country.

 

The detailed rules, which require a unanimity of approval by the Member States, are complex and far-reaching.  The breadth of the rules captures the perceived presumptions stated for each measure, notwithstanding the fact that such measures may also produce economically disadvantageous tax situations (i.e. paying interest from a low-tax to a high-tax jurisdiction), and the possibility of a Member State to legislate rules that move beyond the minimum threshold set forth.

These rules are also being legislated unilaterally outside of the EU Market, such that there may be very broad anti-abuse themes globally with each country having deviations from a general rule that will provide complexity and areas of disagreement for many years.

 

 

 

Poland’s GAAR: “Artificial”

The comment period, that ends 20 January, will be followed by an introduction of a general anti-avoidance rule (GAAR) that is broad and subjective in nature.

The Proposal defines tax avoidance as an act (or series of acts) applied in order to receive a tax benefit, which in certain circumstances defeats the object and purpose of the tax act, provided the way of conduct in the particular case was artificial. The determination of an artificial arrangement is further elaborated on via examples, including unjustified split of an operation, involvement of intermediary entities without substance, and a measure of economic vs. tax risk, among others.

This measure should be followed closely, as it can be applied very broadly, inconsistently and subject to the tax administration’s view of what is considered “artificial.”  It also is focused on the use of holding companies without substance.  EY’s Global Tax Alert provides further details on this development.

http://www.ey.com/Publication/vwLUAssets/Polish_Government_publishes_draft_amendments_to_Tax_Code_including_new_GAAR_provision/$FILE/2016G_CM6150_Polish%20Gov%20publishes%20draft%20amendments%20to%20Tax%20Code%20including%20new%20GAAR%20provision.pdf

Tax disclosures: Global / BEPS incentivized

Jurisdictions are legislating global tax disclosure statements as a separate filing requirement or included with the respective local corporate income tax return.  Recent examples seem to highlight this new initiative, including France and Chile.  Examples of information requested include entities with legal ownership of IP, entities that have no assets or substance (i.e. holding companies), etc., irrespective of intercompany transactions with the local entity.

These new disclosures have added additional risks for operational compliance, as well as a need to centralize such information.  Some multinationals (MNEs) have placed this compliance responsibility with a local / regional team for efficiencies.  However, this new reporting trend will require closer coordination of headquarters that has relevant knowledge of the global ownership of IP and legal structures.

Answers to these dislosure questions will pose new audit risks as tax administrations will make further inquiries and/or initiate an audit to assess potentially high risk transactions. This emphasis will include a vigorous challenge to treaty based positions with holding companies, including any general anti-avoidance or anti-abuse rules within the treaty or domestic legislation.

Additionally, audit queries based upon global disclosures will require seamless coordination with headquarters or the individuals possessing this information.  Therefore, audit teams and ways of working will need to be strategized for information that is not generally retained by the local business team.

MNEs should monitor new disclosures and ensure there is an efficient governance process to accurately address the BEPS incentivized queries.  This may involve a shift in responsibilities within the transfer pricing documentation process.

The post BEPS era signifies a new way of thinking, including the respective documentation responsibilities and structure of an internal transfer pricing team.

 

 

UK Autumn Statement: 2015

UK’s Autumn Statement 2015 has been announced, with several measures aimed at changing corporate tax behavior and promoting transparency with the objective to achieve a modern and fairer tax system.  A link to the Statement is provided for reference:

https://www.gov.uk/government/publications/spending-review-and-autumn-statement-2015-documents/spending-review-and-autumn-statement-2015

Key points:

  • A 60% penalty of tax due for successful general anti-abuse rule (GAAR) cases, to be implemented in 2016.  The revenue impact of this measure is highly uncertain, as it is also meant to be an incentive to change corporate tax behavior.
  • A desire to be to the most digitally advanced tax administration in the world.
  • New criminal offense for corporates failing to prevent tax evasion; failure to prevent their agents from criminally facilitating tax evasion by an individual or entity.
  • Hybrid mismatch rules to be effective 1/1/2017, following the OECD’s BEPS Guidelines.
  • Corporates to publish tax strategies as they relate to, or affect, UK taxation.
  • Cooperative compliance framework.
  • “Special measures” regime to tackle businesses that persistently engage in aggressive tax planning.

A carrot, stick and transparency approach is contained within the Statement, and thus important to follow as other countries will surely review UK’s leading initiatives to gauge impact on their respective economy.  The GAAR related penalty, which is inherently subjective, will be dictated in some fashion by HMRC’s aggressiveness to assess GAAR and a willingness to pursue it through the respective appeal avenues or court.  The tax strategy initiative will also be interesting to monitor as to its breadth and potential impact upon a company’s risk rating.

Spain’s tax law changes

Spain’s tax law changes have been published, effective as of October 2015.

http://www.ey.com/Publication/vwLUAssets/Spain_amends_its_General_Tax_Law/$FILE/2015G_CM5807_Spain%20amends%20its%20General%20Tax%20Law.pdf

Key observations:

  • The Law introduces a new penalty for a specific anti-abuse provision in cases for application of GAAR.
  • The statute of limitations period of CIT years in which an entity has generated losses and tax credits has been extended from 4 years to 10 years. The Law now extends this provision to all other taxes.
  • Duration of an audit has been extended from 12 to 18, or 27, months.
  • A Statute of Limitations period of 10 years has been established for EU State Aid cases.

As new penalties are being legislated, in Spain and elsewhere, for subjective provisions in the tax law it is becoming mandatory to assess such provisions in the tax planning stages for significant transactions.  This is especially true when the subjective interpretations of GAAR, and the tax authorities, are inherently uncertain and potentially leading to double taxation.

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