International Tax Structures in the BEPS Era: An Analysis of Anti-Abuse Measures PDF
Preview International Tax Structures in the BEPS Era: An Analysis of Anti-Abuse Measures
International Tax Structures in the BEPS Era: An Analysis of Anti-Abuse Measures Editorial Team Madalina Cotrut (Managing Editor) Aleksandra Bal Rijkele Betten Ridha Hamzaoui Belema Obuoforibo Ola Ostaszewska Volume 2 IBFD Tax Research Series Visitors’ address: Rietlandpark 301 1019 DW Amsterdam The Netherlands Postal address: P.O. Box 20237 1000 HE Amsterdam The Netherlands Telephone: 31-20-554 0100 Fax: 31-20-622 8658 www.ibfd.org © 2015 IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: [email protected]. 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Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher. ISBN 978-90-8722-333-5 (print) ISBN 978-90-8722-334-2 (eBook) ISSN 2452-2104 Foreword The tax world is in a state of flux – certainly the BEPS project has seen to that. The former certainties are no longer sure, and questions abound everywhere. It is against this backdrop that this book was conceived. Its aim is a simple one – to clarify the finer and wider points of the BEPS story, casting this narrative against a thorough analysis of relevant anti-avoidance rules. This book does two things. First, in picking up the key themes of the BEPS project, it provides a solid critique of the main proposals set out by the OECD. Each chapter draws its authority from in-depth research carried out by its author, not only into the OECD proposals, but also into existing domestic and international tax measures. This approach provides the reader with a clear view on how the BEPS proposals would, or could, work in practice. Second, this book is invaluable for the excellent analysis that it provides on the main anti-avoidance rules currently in force, whether set out in domestic law, or under tax treaties. How these would interact with the BEPS proposals, and where the challenges remain – those are the key themes of this timely publication. This book is written entirely by a team of researchers at IBFD. Drawing upon their own specialist expertise, each author has brought to this book a contribution of ideas, research, and rich experience. Such research activities enrich us in our daily work. It is our expectation that our readers are similarly enriched. Belema R. Obuoforibo CTA ATT (Fellow) Director, IBFD Knowledge Centre General Acknowledgements The editorial team would like to thank the authors for their tremendous efforts in drafting the chapters of this book. Special thanks go to the research staff of the IBFD Knowledge Centre for the provision of valuable input in the initial research phase, to the IBFD Library and Information Centre for their constant support of the research, to the IBFD Production Coordination Department for their work and efforts to ensure the timely release of this book. Introduction Tax planning structures used by some MNEs (where it is considered that low or no tax is paid in comparison with small-sized enterprises and individuals), have become the bane of policymakers nowadays, at OECD level as well as at EU level. This is due to the fact that recent statistics revealed that the public budgets were deprived of billions of euros. The OECD and G20 members initiated the BEPS Action Plan based on the idea that “BEPS is a global problem which requires global solutions”. 1 The objectives of the BEPS Action Plan are to release reports which “will give countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, while at the same time give business greater certainty by reducing disputes over the application of international tax rules, and standardising requirements”. 2 At EU level, the European Commission is working on a Tax Transparency Package where the key element is “to introduce the automatic exchange of information between EU Member States on their tax rulings”. 3 The next step is to launch an Action Plan on Corporate Taxation to “focus on measures to make corporate taxation fairer and more efficient within the Single Market, including a re-launch of the Common Consolidated Corporate Tax Base (CCCTB) and ideas for integrating the work of OECD and G20 members to combat BEPS at EU level”. 4 Within the context of these developments, this book examines the anti-abuse measures that already exist in different countries and scrutinizes how effective these measures are in countering abusive tax structures. This book can be considered complementary to the reports issued, or to be issued, by the OECD as it provides practical information on what happens in various countries that encounter abusive tax structures and evaluates the effectiveness of anti-abuse measures. It also discusses the measures proposed by the OECD until 1 May 2015, with some exceptions. Part One provides the reader with a global overview of the most common strategies against tax avoidance by trying to find clear answers to what tax avoidance is and what the conditions are that facilitate and encourage tax avoidance (see chapter 1). The authors agree that, although taxpayers are free to organize their affairs as they consider fit within the law, they should nevertheless pay their “fair share of tax”. Unfortunately, the principle of “fair share of tax” is not defined and policymakers and taxpayers frequently meet challenges, not least due to uncertainty. Part Two focuses on key concepts in international tax structuring, such as the use of PEs (see chapter 2) and the exploitation of transfer pricing rules (see chapter 3) in the current tax arena. Much attention is paid to the problems arising from the narrow scope of the definition of the permanent establishment. However, the authors emphasize that no concrete proposals have yet been put forward as regards the profit allocation to such a PE and recommend that it would be better to consider some form of quantitative profit threshold for deeming the presence of a PE. Furthermore, the arm’s length principle is vital in the quest for more transparency, as intra-group transactions will be increasingly scrutinized by the tax authorities. However, at this stage, there is no clear guidance on how taxpayers and tax authorities will benefit from the new reporting rules. The third part of the book focuses on tax structuring used for financing activities. The authors analyse the state of practice and recent developments in various countries related to intra-group debt financing (see chapter 4), as well as transactions involving hybrid instruments (see chapter 5) and hybrid entity mismatches (see chapter 6). The final four chapters analyse the most common tax structures related to selected business models, specifically related to supply chain management (see chapter 7), IP migration and exploitation (see chapter 8), the digital economy (see chapter 9), and holding companies (see chapter 10). This book highlights the intricacies of the anti-abuse measures that the countries apply in countering abusive tax structures, which are expected to be relevant for EU and OECD work. Similarly, the book highlights the challenges implicit in the recommended measures in the draft reports issued by the OECD until 1 May 2015, with some exceptions. We hope this book will stimulate further discussion and be of use to practitioners, students and policymakers. Madalina Cotrut Managing Editor 1 May 2015 1. About BEPS, available at: http://www.oecd.org/tax/beps-about.htm. 2. Id. 3. European Commission – Press Release, Brussels 18 March 2015, available at: http://europa.eu/rapid/press-release_IP-15-4610_en.htm. 4. Id. Abbreviations and Acronyms BEPS Base erosion and profit shifting BEPS Action Plan OECD and G20 Action Plan on Base Erosion and Profit Shifting CFC Controlled foreign company ECJ Court of Justice of the European Union EC European Community EEA European Economic Area EU European Union GAAR General anti-avoidance rule /general anti-abuse rule G20 Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States and the EU IP Intellectual property MNE Multinational enterprise PE Permanent establishment OECD Organisation for Economic Co-operation and Development OECD Model OECD Model Tax Convention on Income and on Capital SAAR Specific anti-avoidance rule/specific anti-abuse rule TFEU Treaty on the Functioning of the European Union (formerly EC Treaty) UN Model United Nations Model Convention on Income and Capital VAT Value added tax Table of Contents Foreword General Acknowledgements Introduction Abbreviations and Acronyms Part One Recent Developments in International Tax Structuring Chapter 1: Common Strategies against Tax Avoidance: A Global Overview Lydia G. Ogazón Juárez and Ridha Hamzaoui 1.1. Introduction 1.2. Tax avoidance: General 1.2.1. Scope of the term 1.2.1.1. Tax avoidance versus tax evasion 1.2.1.2. Tax avoidance versus tax planning 1.2.1.3. The role of policymakers in defining clear boundaries 1.2.2. Conditions facilitating tax avoidance 1.3. Tax planning schemes: Domestic law and treaty provisions 1.3.1. Domestic law rules 1.3.1.1. Regimes allowing for exemption of foreign-source income 1.3.1.1.1. Patent box regimes 1.3.1.1.2. Participation exemption regimes 1.3.1.1.3. Holding company regimes 1.3.1.1.4. Territorial tax systems 1.3.1.2. Regimes allowing the use of mismatches between tax rules in different countries 1.3.1.2.1. US check-the-box regime 1.3.1.2.2. Use of hybrid financial instruments and entities 1.3.1.3. Provisions relating to residence 1.3.1.3.1. Dual resident companies and stateless companies 1.3.1.3.2. Tie-breaker rule for companies 1.3.2. Tax treaty rules 1.3.2.1. Tax sparing clauses 1.3.2.2. Modification of treaty classification of income 1.3.2.3. Circumvention of thresholds found in treaty provisions 1.4. Countering aggressive tax planning 1.4.1. Domestic legislation: General anti-avoidance rules 1.4.1.1. General anti-avoidance rules generally 1.4.1.2. The concept of “arrangement” or “scheme” 1.4.1.3. The concept of “tax benefit” or “tax advantage” 1.4.1.4. Compatibility of domestic GAARs with tax treaties 1.4.2. Domestic legislation: Specific anti-abuse rules 1.4.2.1. Specific anti-abuse rules in particular 1.4.2.2. Controlled foreign company rules 1.4.2.2.1. CFC rules: Main features 1.4.2.2.2. Strengthening CFC rules: BEPS Action 3 1.4.3. Tax treaties: Anti-abuse provisions 1.4.4. Another approach: Exchange of information and cooperation between tax authorities 1.4.4.1. Convention on Mutual Administrative Assistance in Tax Matters 1.4.4.2. Standard for Automatic Exchange of Financial Account Information 1.4.4.3. OECD Aggressive Tax Planning Directory 1.4.4.4. United States: Foreign Account Tax Compliance Act 1.5. Conclusion Annexes Part Two New Roles of the Concepts in International Tax Structuring Chapter 2: Permanent Establishments in International Tax Structuring Rijkele Betten and Monia Naoum 2.1. Introduction 2.2. Use of permanent establishments for tax structuring purposes 2.2.1. Avoidance of permanent establishment status 2.2.1.1. Commissionaire arrangements 2.2.1.2. Splitting up of contracts 2.2.1.3. Undertaking activities of a preparatory or auxiliary nature 2.2.2. Limited attribution of profits to permanent establishments 2.2.3. Intentional creation of a permanent establishment 2.2.3.1. Exemption regimes 2.2.3.2. Financing structures 2.3. Approach of countries to tackling abuse structures 2.4. BEPS Action Plan 2.4.1. Artificial avoidance of permanent establishment status through commissionaire agreements and similar strategies
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