International Tax Structures in the BEPS Era: An Analysis of Anti-Abuse Measures

262 Pages·2016·2.54 MB·English

by  Madalina Cotrut et al.

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
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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