Challenges for international tax planning
→ Michaela Petritz-Klar
International tax planning structures came into the focus of the public eye due to developments on the OECD level regarding aggressive tax schemes.
BEPS — Report
The OECD report “Adressing Base Erosion and Profit Shifting” (BEPS) caused an echo on a worldwide basis when it was published in February 2013. The focus of the BEPS report was to target the aggressive tax planning structures widely used among multinational groups with the aim of reducing the tax basis in high-taxed jurisdictions by shifting taxable income to low-taxed jurisdictions or tax haven locations. For this purpose, the BEPS report identified several selected tax arrangement schemes commonly applied in practice to take advantage of non-harmonized national tax laws.
Although the BEPS report yielded high consent, particularly in the media, it was concurrently also subject to heavy criticism.
In July 2013, the OECD published an Action Plan thereby (i) identifying draft proposals for measures intended to fight/avoid tax planning structures aiming at base erosion and profit shifting, (ii) providing for a timeframe in the course of which these actions shall be implemented, and (iii) identifying potential measures and methods and provide necessary resources to implement these actions.
The focus of the Action Plan is on introducing 15 different action proposals targeting aggressive tax planning structures. These action proposals address inter alia the following topics:
- avoiding the abusive use of tax treaties, in particular with the aim of achieving double non-taxation
- limiting base erosion by restricting deductibility of interest or similar expenses
- neutralizing effects of hybrid mismatches leading to double non-taxation, double deductibility, or a postponement of tax liability by virtue of applying tax-optimized hybrid instruments
- strengthening the effects of CFC rules
- adapting tax provisions to take account of the particularities which come along with electronic commerce for both direct and indirect tax purposes
- adapting transfer pricing rules to take account of the particularities of intellectual property and other intangibles
- adapting transfer pricing systems to adequately take into account value creation considerations in light of risk and capital attribution
The actions proposed can be divided into four categories:
- aiming at a standardization on an international level either by providing for multinational treaties and by harmonizing general anti-avoidance rules
- harmonizing provisions on the taxation of corporates, eg by introducing linking rules for hybrid instruments
- adapating transfer pricing rules to avoid base erosion and profit shifting
- introducing an internationally binding standard for transparency and disclosure, eg by obliging taxpayers to disclose aggressive/abusive tax planning structures upfront (irrespective of a tax audit)
Challenges for international tax planning
Considering the international developments that have occurred over the past few months at the OECD level, it is not surprising that the pressure on corporates applying aggressive tax planning structures is steadily increasing, all the more in light of a potential reputational risk involved in case their tax schemes become public.
Despite the fact that it is rather questionable at this stage whether, how and to what extent these proposed actions will actually be implemented in the individual states considering the deviating particular interests the states may have (which are not necessarily in line with the OECD approach), it is fair to say that international tax planning does not per se aim at shifting profits from high tax to low tax jurisdictions. Reducing a company’s tax burden is a legitimate means that may indirectly (eg by increasing funds available for investments, etc.) improve the company’s productivity and thus its economic basis. However, in view of increased co-operation and interconnection of tax authorities on a cross-border basis, setting up an international tax structure will be subject to increased scrutiny. In order to avoid tax risks and a potential reputational risk for clients, careful planning in tax structures upfront will be key and thus a challenge for advisors.