What a Tangled Web!

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Fancy a peek at Facebook’s earnings and tax bills? Tax Eurocrats certainly do.

So keen are they to compel the world’s largest multinational corporations to open their tax arrangements with EU governments to full public scrutiny that the European Commission is expected to table the necessary legislation in April.

Tax legislation in the EU requires the agreement of all 28 governments. However,  sources said the new rules would be effected by amending one of two existing directives. That would allow them to push through the measures with a qualified majority, or 16 of the 28.

It will come as no surprise that the US is concerned about the “basic fairness” of the proposed arrangements which will have ready application to US companies. In support of  this view by Robert Stack, the US Treasury’s deputy assistant secretary for international tax affairs,Tove Maria Ryding, tax justice coordinator for the European Network on Debt and Development , a group of 46 NGOs fighting for a fairer global financial system, said that if the commission chooses to limit public reporting to large companies – those with more than €750m in annual turnover – then 85% of the world’s multinationals would be unaffected.

“That would obviously be a very big problem,” she said. “If you want to have a situation where small and medium-sized enterprises who don’t use these tax structures can compete, then we can’t leave 85% of the multinationals with very obvious loopholes that mean that they can avoid taxation.”

It is curious to note that Jean-ClaudeJuncker President of the European Commission was both the Prime Minister and Finance minister of Luxembourg during the time when that country reportedly ” rubber-stamped tax avoidance on an industrial scale.”

 

Quest Means Business.

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No, not the popular Richard Quest from the CNN show. The other Mr. Quest  –  Director General for Taxation and Customs Union, European Commission, Stephen Quest – who apparently also ‘means business’ when it comes to piloting the EU’s aggressive package of tax avoidance measures through the Economic and Financial Affairs Council of the European Union .

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His department is responsible for the package of draft anti-tax avoidance measures to ensure increased tax transparency and effective taxation within, and outside of, the EU. The package includes:

  • a proposed Directive on tax avoidance practices;
  • amendments to the Directive on automatic information exchange in order to gather and share information on Multinational Enterprise Groups to ensure they pay their fair share of tax where profits are made;
  • a recommendation paper on how Member States should reinforce their tax treaties against abuse by aggressive tax planners,
  • and a communication on external strategy for effective taxation in countries outside of the EU and
  • a study on effective taxation.

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(Image;) Martin Schulz re-elected President of the European Parliament.)

The proposed Directive on tax avoidance focuses on some of the proposals set out in the Base Erosion and Profit Shifting (BEPS) project. This is to ensure that these proposed measures are enacted uniformly across the EU in order to strengthen its collective stance on tax avoidance. Some of the specific measures include:

  • limiting interest deductions to 30% EBITDA or €1 million (whichever is higher) in order to mitigate the bias against equity financing. ( NOTE: EBITDA is a measurement of a company’s operating profitability. It is equal to  earnings before interest, tax, depreciation, and amortization divided by total revenue. Because EBITDA excludes depreciation and amortization, EBITDA margin can provide an investor with a cleaner view of a company’s core profitability.)
  • introducing an exit tax on capital gains on assets transferred out of a Member State whether or not the gain is realised
  • introducing a “switch over” clause, meaning that foreign income received from a “low tax” jurisdiction (which imposes tax at below 40% of the recipient Member State’s tax rate) will be taxable, with a credit for any foreign tax paid
  • a general anti-abuse rule (GAAR) to tackle artificial tax arrangements
  • controlled foreign company (CFC) rules in relation to foreign entities subject to corporate tax at below 40% of the Member State’s tax rate
  • hybrid mismatch rules to prevent taxpayers benefitting from a double deduction or a deduction with no corresponding inclusion in taxable profits

 

For more insights click here and here.

Africa & BEPS Value-Added: A Reality Check.

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Africa

The OECD BEPS project has been marketed to developing countries, primarily those on the African Continent, as a way to re-balance the bargain often struck between government and multinationals operating in, our through their countries.

BEPS, has been vociferously articulated by the OECD, international NGOS, and perhaps a little less boisterously by African governments themselves; as a effective multi-pronged solution to much of what is wrong with the Continent’s relationship with ‘big’ business’.

The modulated response by African governments is of course explained in the delicate, balance between tax and investment which is the often their main economic driver; and the realisation that the comprehensive package of international reform mandated by BEPS, is not only resource intensive but comes with a price-tag, which is likely beyond the limits of yearly, national budgetary allocation, for international tax diplomacy.

It is expected that BEPS will benefit Africa primarily in these four (4) ways:

  • Limit base erosion via interest deductions and other financial payments (Action 4);
  • Prevent tax treaty abuse and the artificial avoidance of Permanent Establishment status (Actions 6 and 7);
  • Address  transfer pricing issues, in particular base eroding payments (Actions 8, 9 and 10), documentation,country-by-country reporting (Action 13); and the lack of transfer pricing comparable; and
  • Prevent the use by government of  of wasteful tax incentives. 

How BEPS works in practice and how its MNE taxpayers perceive the consequences of BEPS even now should be of major concern to Africa because of its heavy reliance on various forms of direct and indirect taxes, from MNEs operating in the countries.

It is likely that there will be a mis-match in expected outcomes on both sides. Indeed, MNEs may view BEPS as a death knell to the current model and levels of overseas investment, if as expected, post-BEPS yields contract. While some expect this to lead to a review of investment models by both sides of the development equation; what is more likely, is that rate of permutations in private sector investment modalities to keep profitably in line with share-holder expectations.

On the other hand, governments may presume that existing levels of investment to be maintained during and after BEPS implementation; even as they acquire tools to stem some of the ‘tax leakage’.

That said what is clear now is that the dividends of the BEPS project will not come merely through effecting or coercing behavioural change in the operating methodologies of MNEs. Rather, success (or otherwise)will be measured by how efficiently and effectively Africa can adapt its tax infrastructure to take advantage of the benefits that the BEPS rules promise.

By way of example, here are three areas where infrastructure is currently lacking across Africa ( and indeed in many other developing and developed countries):

  1. The information generated by increased transparency principles contemplated by BEPS means that tax administrations will also have to establish and monitor corresponding protocols and systems for evaluating, collating and most importantly applying the information received in order to protect, or enlarge its tax base while, protecting taxpayers’ confidentiality, preventing tax evasion and aggressive tax avoidance. There are several ways in which tax administrations can use the collected information to change behaviour and to counteract tax avoidance schemes. These include counteraction through legislative change; through risk assessment and audit; and through communication strategies.
  2. With the near global coverage anticipated with full BEPS implementation there is also a significant risk that countries will adopt inconsistent interpretations or approaches to implementation that will lead to a greater number of competent authority disputes. Managing those potential controversies likely will prove demanding, particularly because tax administrations in Africa already face significant resource constraints and poor outcomes in investor-state disputes.
  3. It is likely that in order to benefit from the implmentation of BEPS Africa tax administrators new internal infrastructures will be required. In some cases the changes may be modest but equally in other instances it will require the creation of an entirely new internal infrastructure—statutory, regulatory, and administrative. African administrations may be likely still be at the starting gate and so there capacity to benefit from the avalanche of BEPS-induced information may not yield the promises of international tax reform.

To their credit the OECD has set about provided a laundry list of activities to support the dividends of BEPS implementation by multinationals. The OECD has already started programmes with the following countries aimed at building effective solutions to address transfer pricing and other BEPS risks: Botswana, Ethiopia, Ghana, Kenya, Malawi, Morocco, Tunisia, Zambia and Zimbabwe. Programmes in Nigeria and Senegal in partnership with the European Commission and World Bank Group are about to start.

In conclusion it will be instructive to see how magnanimous the OECD  and others will be in supporting Africa in re-orienting existing relationships with its MNEs as BEPS begins the upset the balance of the bargain between tax and investment in Africa.

Competitiveness, Tax and Unilateral State Action. A Canadian Perspective.

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“For its part, Ottawa must decide if and when it will introduce legislation to implement BEPS and, having regard to the international competitiveness of Canadian business, to what extent it will do so without firm commitments that our major trading and treaty partners will follow suit – in particular the United States, where the legislative process is in disarray.”

Allan Lanthier, former chair of the Canadian Tax Foundation, and a retired partner of Ernst & Young hits the bullseye.

This conclusion is not new and is one which as you know I endorse whole-heartedly.

Although I never reproduce external content in its entirety on my blog,  Allan Lanthier’s piece in today’s Globe and Mail deserves to be considered in its entity.

Here it is.

 

 

 

12 Practical Guidelines for Managing Tax Treaty Arbitration.

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Arbitration

Mutual Agreement Procedure (MAP) provisions in OECD and UN-styled tax treaties do not mandate that the disputes arising from the application of the treaty provisions actually be settled. These clauses merely require that the two tax authorities use their best endeavours.

For some tax payers this ‘toothless’ provision has seen their claims in such a long queue that hope of a resolution in their lifespan is generally regarded as remote.

In many other cases however, the mutuality of interests in resolving such impasses often leads to a resolution. Indeed, without such a commitment it seems unlikely that the over 2,000 tax treaties would exist.

Both the OECD and the UN have proposed the introduction of  binding arbitration in their model tax treaties. Indeed, It is only because India vetoed the idea that such a provision was not included in the latest iteration of the OECD Model text.

However, although arbitration is not in the UN or the OECD model texts, for a number of countries binding arbitration is increasingly becoming part of their policy and practice of tax diplomacy.

In the case of the Netherlands,  one by-product of  that state’s programme of tax treaty renegotiations with developing states ( which is supposed to be about adding anti-abuse clauses,)  has been the insertion of binding arbitration clauses in several of its amended treaties with African countries.

For other countries like the UK, Italy, Switzerland, Jersey and Canada where binding arbitration clauses have been included in their treaties with developing countries, OECD-style provisions are more commonly inserted, although the UN-styled arbitration is generally  as viewed as better for developing countries.

Regardless however,  of whether the UN or OECD text is used, in both cases arbitration can be triggered by either party.Arbitration clauses in African tax treaties

In light of this shift to mandatory and binding settlement of treaty-based, tax disputes, developing countries may wish to revisit the practices and policies which inform their conduct of tax diplomacy, with a view of incorporating these 13 practical guide-lines:

  1. Before concluding new tax treaties or re-negotiating existing ones, developing countries should ensure that their domestic laws and international legal obligations are consistent with their obligations under tax agreements;
  2. Developing countries should ensure that their relevant public officials are aware generally of their country’s tax obligations ;
  3. Formal dispute prevention and management systems established by developing countries should include training about the state’s tax treaty obligations, review proposed, and where applicable, existing measures for compliance with tax arbitration ; consider an early warning system; and coordination of management systems to manage such tax treaty disputes preferably by a designated department;
  4. Counsel experienced international tax and and arbitration should be consulted in treaty drafting to ensure the treaty language takes into account best practices and relevant  cases interpreting tax treaty provisions on arbitration.
  5. When a developing country receives an informal notice of dispute from a foreign tax payer or its home state, it should take stock of the situation and assess the cost-benefit of a settlement if the dispute is susceptible to settlement;
  6. Developing countries should make a preliminary assessment of potential liability, considering also the systemic implications of a potential settlement;
  7. Developing countries may offer non-financial terms of settlement, which may be relevant to keeping the investor/tax-payer operating in the host  country;
  8. Regardless whether or not there is a formal “cooling-off” period, developing countries should engage in preliminary discussions with the tax-payer/investor to learn about the background to the dispute and the source of their claims ;
  9. As tax-payer/ investor claims often involve multiple government entities, developing countries should ensure that all of their relevant entities are engaged in, or informed about, the process, and are effectively coordinated so that the defence in the arbitration represents the overall position of the developing country;
  10. Developing countries should be aware of the suitability of different legal representation models: in-house counsel, outside counsel or a combination of the two;
  11. In deciding case strategy, a developing country should also should consider if its position is tenable and/or consistent with its positions taken in past or other pending cases and if it is in line with the State’s policy objectives; and
  12. Developing countries should determine their media strategy as part of the overall case approach.

 

 

Good Global Tax Governance Requires a Multilateral Organisation.

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Pleasantly surprised to read of this conclusion drawn in the soon to be released University of Toronto compilation of essays titled,Global Tax Governance What is Wrong with It and How to Fix It”.

Here’s an excerpt from the press release:

‘Tax specialists may think they have little to learn from a book on global tax governance, especially one that concludes that the best solution is to create a new International Tax Organization (ITO). They would be wrong. Anyone concerned with international taxation will benefit from this excellent collection of essays about the nature and possible resolutions of the conflicts within and between states about fiscal sovereignty, tax competition, and domestic and international equity that underlie the international tax discussion. The authors do not always agree with each other and few readers are likely to agree with all of them. But this book makes clear what is really at issue in this discussion and shows why even the recent prodigious efforts of the OECD-G20 BEPS group are most unlikely to produce any lasting solutions. For nation-states and economic globalization to coexist, something like an ITO may indeed prove necessary.’
Richard Bird, University of Toronto

As you know this was my view long before the G20 adopted the OECD’s, aggressive, seemingly all-encompassing agenda for International Tax Reform ( BEPS) 

See blog posts here.

Of course, this is not to discount the work of the OECD’s Centre for Ta Policy Administration and its Global Forum on Transparency and Exchange of Information for Tax Purposes.

Rather it it recognises the progress, successes, and the lessons learned in seeking to create a ‘level playing field’ for non-EU, non-G20, non-OECD members of the Forum who are largely excluded from OECD membership.

Despite the well-documented shortcomings of the Bretton Woods system of global governance, there is still great value that can be added to the International Tax dialogue; especially since tax is now firmly a part of the UN Sustainable Development Goals, and not merely the exclusive concern of capital exporting countries.

Indeed, while the OECD may have a competitive advantage in managing the affairs of  its 34 members;  the UN system has the expertise in attending to the concerns of 194.

 

How the OECD BEPS Project is Re-Writing International Tax Diplomacy.

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(Pascal Saint-Amans Head of the OECD Centre for Tax Policy and Administration)

If you are an International Business and Financial Services Centre whose competitive advantage lies in a network of tax treaties; or you are about to develop an tax treaty network; or you are a developing country (as defined by the OECD Global Forum on Transparency and the Exchange of Tax Information) particularly from the African Continent; the following recommendations related to Action 6 of the OECD BEPS (Base Erosion and Profits Shifting) are of central importance to you.

According to the Report:

“Action 6 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project identifies treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns. Taxpayers engaged in treaty shopping and other treaty abuse strategies undermine tax sovereignty by claiming treaty benefits in situations where these benefits were not intended to be granted, thereby depriving countries of tax revenues. Countries have therefore agreed to include anti-abuse provisions in their tax treaties, including a minimum standard to counter treaty shopping. They also agree that some flexibility in the implementation of the minimum standard is required as these provisions need to be adapted to each country’s specificities and to the circumstances of the negotiation of bilateral conventions.”

Here are the three recommendations which will materially impact the conduct of International Tax Diplomacy:

  1. EFORMULATION OF THE TITLE AND PREAMBLE OF TAX TREATIES

To emphasize that tax treaties are developed primarily to eliminate double taxation and prevent tax avoidance and evasion, the Final Report reformulates the title and preamble of tax treaties to expressly state that the Contracting States intend to eliminate double taxation without creating opportunities for tax evasion and avoidance, in particular through treaty-shopping arrangements.

  1. POLICY CONSIDERATIONS BEFORE ENTERING INTO A TAX TREATY

The Final Report describes the tax and non-tax policy considerations that should help countries explain their decisions not to enter into tax treaties with low or no-tax jurisdictions. These policy considerations will also be relevant for countries that need to consider whether they should modify (or ultimately, terminate) an existing treaty where a change of circumstances raises BEPS concerns.

Two proposals that would specifically address some concerns with the domestic law of a potential treaty partner are included in the Final Report. The first proposal would be to define the term “special tax regime” and to add new provisions that would deny treaty benefits to interest, royalties and other income beneficially owned by residents benefiting from a special tax regime in their country of residence. The second proposal provides a new general treaty provision that would “turn off” the treaty provisions on dividends, interest, royalties and other income if certain changes to a country’s domestic law are made in the future. The Final Report notes that these proposals will be further considered once the United States finalizes the work on the US Model Treaty.

  1. PREVENTING GRANTS OF TREATY BENEFITS UNDER INAPPROPRIATE CIRCUMSTANCES

Countries have committed to ensure a minimum level of protection against treaty shopping (the minimum standard).

In order to deal with tax avoidance strategies, the Final Report recommends the inclusion of anti-abuse provisions in tax treaties and in domestic tax laws. New treaty anti-abuse provisions include the adoption of a specific anti-abuse rule in the OECD Model Tax Convention, such as the LOB rule that limits the availability of treaty benefits to entities that meet certain conditions. Where the LOB rule cannot apply, a more general anti-abuse rule based on the principal purposes of transactions or arrangements (the principal purposes test or PPT rule) will be included.

The Final Report acknowledges that the anti-abuse rules need to be adapted to the specificities of each country and to the circumstances surrounding the negotiation of tax treaties. Thus, alternatives and a certain degree of flexibility in the implementation of the minimum standard are offered through: 1) the combined approach of an LOB and PPT rule; 2) the PPT rule alone; or 3) the LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.

Anti-abuse rules targeted to address specific forms of treaty abuse are also recommended, particularly for: (1) dividend transfer transactions; (2) capital gains from alienation of shares of companies that derive their value primarily from immovable property; (3) dual-resident entities; and (4) low-taxed permanent establishments in third states.

In cases where tax avoidance strategies seek to circumvent provisions of domestic tax laws which could not be sufficiently addressed by treaty anti-abuse rules, the Final Report recommends that domestic anti-abuse rules should be included. Changes to the OECD Model Tax Convention aimed at ensuring that treaties do not inadvertently prevent the application of such domestic anti-abuse rules are likewise proposed.

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These developments represent the most substantial revision of bilateral tax agreements designed to not only provide certainty for those involved in the free movement of goods, services, capital and people; but also how countries so align their domestic tax affairs to attract and retain investment.

Will BEPS Affect China’s $60B Africa Investment Programme?

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Most of  China’s pledge of  $60 billion in Africa investments announced at the Forum on China-Africa Cooperation hosted in Johannesburg from December 4-5, last year; which attracted delegations from 50 African countries, and the African Union; will come in loans and export credits.

Only $5 billion is to be in the form of grants and interest-free loans.

This method does not meet the traditional definition of foreign direct investment (FDI); and differs from the OECD-defined  ‘official development assistance’; since Chinese ‘investment’ is often tangled with other financial commitments.

Indeed, most of the large China-Africa deals are carried out via loans financed by Chinese policy banks. As such they are not FDI, in which a company or entity from one country invests in another country’s company or entity, and has the foreign investor owning at least “10% of the voting power of the direct investment enterprise.” Unlike other investments, such as portfolio investments, FDI includes investors actively looking to influence how the enterprises are managed.

China recently announced that its cumulative Foreign Direct Investment (FDI) into Africa from 2000 to 2014 is $30 billion. However,  as of 2012, however, China has been investing a little more than $2 billion annually into Africa.

It’s not clear whether China’s official accounting includes investments from Hong Kong and Macau, which have some autonomy from Beijing but often serve to channel both official and unofficial Chinese finance back into mainland China to take advantage of tax benefits, a process called round tripping.

How China will deliver its its $60B pledge to Africa in the context of its commitment to the BEPS, as part of the G20 and the OECD, remains to be seen; especially in the context of the sub-programme within the OECD Global Forum on Transparency and Exchange of Tax Information which focuses on increasing the tax base of  the these African developing countries.

Round-tripping or ‘Lazy Susan’ structures involve the channelling by direct investors of local funds to Special Purpose vehicles (SPVs) abroad and the subsequent return of the funds to the local economy in the form of direct investment.

SPVs have long been used as a means to deploy efficient, invest-friendly funds for a variety of reasons. As such they fall squarely within the ‘cross-hairs’ of BEPS.

 

 

 

EU Parliament Outlines 2016 Plans to Fight Aggressive Tax Avoidance & Evasion.

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(Image;) Martin Schulz re-elected President of the European Parliament. MEPs re-elected Martin Schulz as President of the European Parliament on Tuesday morning for another two and a half year term. The 58-year old German MEP will lead Parliament until January 2017).

(Image: Martin Schulz re-elected President of the European Parliament. MEPs re-elected Martin Schulz as President of the European Parliament on Tuesday morning for another two and a half year term. The 58-year old German MEP will lead Parliament until January 2017)

Here is the EU’s 2016 ‘Work Plan’ as effectively adopted by EU Parliamentarians; as prepared the Economic and Monetary Affairs Committee of the EU Parliament.

  • Country-by-country reporting on profit, tax and subsidies by June 2016.
  • A “Fair Tax Payer” label.
  • A Common Tax Base (CCTB) as a first step, which later on should be consolidated as well (CCCTB).
  • A Common European Tax Identification Number.
  • A proposal for the legal protection of whistle-blowers.
  • The adoption of measures to improve cross-border taxation dispute resolution mechanisms.
  • A proposal for a new mechanism to require member states to inform each other if they intend to introduce a new allowance, relief, exception, incentive, etc. that may affect the tax base of others.
  • Preparation of an estimate of  the corporate tax gap (corporate taxes owed minus what has been paid).
  • Strengthen and improve the transparency of the Council Code of Conduct Working Group on Business Taxation.
  • Provision of guidelines regarding ‘patent boxes’ so as to ensure they are not harmful.
  • Define common definitions for “permanent establishment” and “economic substance” so as to ensure that profits are taxed where value is generated.
  • Come up with an EU definition of “tax haven” and counter-measures for those who use them, and
  • Improve the transfer pricing framework in the EU.

According to the EU:

“This report shows the determination of both the European Parliament and the people of Europe to see real legislative change to prevent companies jumping across borders to reduce their tax bills to almost zero. The ‘Luxleaks‘ scandal showed how much these corporations have been getting away with, dodging tax that could have been used to build schools, hospitals or pay down national debt.”

The Commission will have three months to respond to the recommendations, either with a legislative proposal or with an explanation for not doing so.

 

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