Challenges for international tax planning

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.

Action Plan

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.

In light of the developments at the OECD level during the past few months targeting base erosion and profit shifting schemes, clients and their tax advisors are faced with increased challenges when setting up international tax planning structures.