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:
- 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.
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:
- 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.
The European Parliament recently voted unanimously for public disclosure rules to fight tax evasion, tax avoidance and establishing fair, well-balanced, efficient and transparent tax systems. A copy of the press release is provided for reference:
- All countries to adopt country-by-country (CbC) reporting, with all information available to the public
- Beneficial ownership information to be made publicly available
- Call for coordination to combat tax evasion and avoidance by the European Investment Bank, European Bank for Reconstruction and Development and EU financial institutions.
- Request to the Commission for an ambitious action plan, without delay
The outcry for public reporting, currently underway by the OECD, European Parliament and European Commission is increasing exponentially within Europe. Other countries will obviously follow the EU approach, with perceptions of complicated international tax rules increasing disparity between application of the transfer pricing arm’s length principle.
The CbC reporting, and beneficial ownership detail, should be expected to be in the public domain if this trend continues. Currently, it is a sign of an incoming tsunami that cannot be completely avoided.
The European Commission published a package of tax transparency measures on 18 March 2015. The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:
- The concepts of tax evasion, corporate tax avoidance, “pay their fair share,” aggressive tax planning and abusive tax practices are summarily stated, although corollary concepts for avoidance of double taxation and effective dispute resolution are noticeably absent.
- Tax rulings will be automatically exchanged every 3 months.
- Feasibility of public disclosure of certain tax information of MNE’s will be examined.
- The EU Code of Conduct on Business Taxation will be reviewed to ensure fair and transparent tax competition within the EU.
- The Savings Tax Directive is proposed to be repealed to provide efficiencies and eliminate redundant legislation in the Administration Cooperation Directive.
- Next steps: The tax rulings proposal will be submitted to the European Parliament for consultation and to the Council for adoption, noting that Member States should agree on this proposal by the end of 2015, to enter into force 1/1/2016.
- Common Consolidated Corporate Tax Base (CCCTB) proposal will be re-launched later this year.
Tax Transparency proposal:
- Existing legislative framework for information exchange will be used to exchange cross-border tax rulings between EU tax authorities.
- The Commission will develop a cost/benefit analysis for additional public disclosure of certain tax information.
- The tax gap quantification will be explored to derive more accuracy.
- The global automatic exchange of information for tax rulings will be promoted by the EU.
Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:
- Mandatory automatic exchange of basic information about advance cross-border rulings and advance pricing agreements (APAs).
- Article I definition of “advance cross-border ruling:
- any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:
- is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;
- concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;
- relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person int he other Member Sate create a permanent establishment, and;
- is made in advance of the transactions or of the activities in the other Member State potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
- Automatic exchange proposal is extended to valid rulings issued in the 10 years prior to the effective date of the proposed Directive (Article 8a(2)).
- In addition to basic information exchanged, Article 5 of the Directive should provide relevant authority for the full text of rulings, upon request.
- EU central repository to be established for submission of information by Member States.
- Confidentiality provisions should be amended to reflect the exchange of advance cross-border rulings and APAs.
Q and A’s:
- Corporate tax avoidance, as explained, undermines the principle that taxation should reflect where the economic activity occurs.
- Standard/template information for the quarterly exchange of information includes:
- Name of taxpayer and group
- Issues addressed
- Criteria used to determine an APA
- Identification of Member States most likely to be affected
- Identification of any other taxpayer likely to be affected
- Commission could open an infringement procedure for Member States not following the disclosure obligations.
- Domestic tax rulings are exempt.
- The EU could be a global standard setter of tax transparency.
- The EU Code of Conduct criteria are no longer adequate, and it lacks a strong enough mandate to act against harmful tax regimes.
The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items. These actions are also intended to be a standard for global setting in the new era of international tax transparency. As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings. Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.
The inconsistent use of (tax) terminology in drafting / enacting legislation and communicating issues re: perceived tax abuse, developing specific/targeted/general anti-avoidance rules (SAAR, TAAR, GAAR), anti-abuse rules, etc. promotes subjectivity, uncertainty, and misguided perceptions in trying to understand complex legal and technical international tax laws and regulations.
The recently drafted anti-abuse rule in the EU Parent-Subsidiary Directive (attached link for reference) is designed as a minimum standard to be adopted by EU Member States. Article 1, paragraph 4 of the Directive states “This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.” This language should be compared to other tax legislation that introduce additional subjectivity and confusion with undefined and misunderstood terminology.
Subjective terminology that accompanies undefined verbiage as a basis for tax laws and regulations, such as anti-avoidance / abuse rules, further complicates comprehension, application, interpretation, and assessment of complex international tax rules.
The phrases “tax evasion” and “tax fraud” clearly set forth bright legal lines for definition and enforcement, whereas inherently subjective phrases of “tax avoidance,” “aggressive tax planning,” “intent of Parliament”, “tax abuse,” and similar terminology result in additional uncertainty for deciphering the true intent of significant tax legislation.
It would be beneficial to recognize the inherent inconsistencies of terminology applied in tax laws and regulations, and commence inclusion of verbiage and definitions that provide clarity promoting consistent application, implementation and enforcement of international tax guidelines.