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.
The Governments of France, Germany, Italy, Spain and the UK (G5) held a meeting on 28 April, 2014 to discuss progress on their mutual objectives to promote tax transparency and cooperation, fight tax fraud and evasion, counter harmful tax practices and respond to aggressive tax planning practices. The following link provides detailed actions that were discussed:
Summary of discussions:
- Agreement to sign the Automatic Exchange of Information (AEOI) agreements in alignment with the new, single, global OECD standard, joining 39 other jurisdictions that will effect exchange of information in 2017 with respect to 2015 data.
- Reiteration of support to the OECD Base Erosion and Profit Shifting (BEPS) project.
- Re: taxation of digital economies, the countries where companies conduct economic activities must be able to receive their “fair share” of tax. To align this initiative, the G5 Ministers agreed on the interest of a flexible interpretation of the territoriality rules, including a Digital Tax Presence concept.
- Transfer pricing rules must be adapted to ensure that profit and value creation are aligned, citing economic justification.
- Tax avoidance re: hybrid mismatch arrangements should be addressed.
- Country-by-Country (CbC) reporting is important, as it should provide all relevant tax administrations with the information necessary to complete a high level risk assessment.
- OECD BEPS developments must be reflected at the EU level, encouraging review of the EU law and its impact on aggressive tax planning practices.
The conclusions set forth are significant for the following reasons: Proposal by the G5, EU focused, collaborative discussions and agreement re: “fair share” of tax alignment, economic justification profit / value drivers, and a presumption that CbC reporting will provide information to complete a relevant risk assessment.
These initiatives should be monitored in alignment with the OECD BEPS proposals set forth for 2014 and 2015.
In a speech by European Council President Herman Van Rompuy, he mentioned energy and taxes as two issues that will be discussed at the meeting in May. Interestingly, the press release states: “The other issue I put on the May agenda for European leaders is tax evasion and avoidance. There we have to seize the current political momentum, especially on improving exchange of information between our countries. Tax fraud is exactly the kind of issue where it is first and foremost for Member States to act, but where they cannot effectively do so on their own.”
- The phrases “tax evasion,” “avoidance” and “tax fraud” all seem be used interchangeably with no distinction in application or meaning. This seems to be a growing trend in public communications, leading to potentially wrong conclusions and inappropriate actions. Ensure the relevant phrases, supplemented by intent, are used to convey the message.
- Ensure one or more members of Tax are keeping aware of these meetings and trends.
- Inform senior management regularly of current trends, as perceived by the European Council and Member States.