Ana Cláudia Akie Utumi of TozziniFreire Advogados explores the future of tax planning in light of the increasing focus on tax transparency by governments around the world:
"Tax has always been on government agendas, but the current debate is about more than what taxes will be created or changed. What’s now being discussed is the fundamentals of each tax system, and how limits might be established for companies to have less flexibility to decide where and how to operate."
There has never been so much international conversation about taxes – specifically, tax transparency (in terms of tax authorities’ ability to access information about any taxpayer, anywhere, in the world) and tax planning, which is viewed by governments as a 21st century evil supposedly adopted by multinational companies to reduce the overall tax burden. The result, according to so many presidents and prime ministers, is an unfair reduction in tax revenues.
Tax has always been on government agendas, but the current debate is about more than what taxes will be created or changed. What’s now being discussed is the fundamentals of each tax system, and how limits might be established for companies to have less flexibility to decide where and how to operate. It’s a case of rethinking international taxation.
Since 2012, statements about tax transparency and tax planning have been included in the G20 Leaders Declaration under the headline “Addressing Base Erosion and Profit Shifting, Tackling Tax Avoidance, and Promoting Tax Transparency and Automatic Exchange of Information”.
More than 60 countries have already signed the Convention on Mutual Administrative Assistance in Tax Matters. When fully implemented, this will permit the automatic exchange of information among countries – a process already started by the enforcement of the Foreign Account Tax Compliance Act (FATCA) on 1 July 2014. This enables several countries to automatically exchange information concerning American citizens with the US tax authorities, and to receive information about US-sourced income and/or assets that their own residents may have. In another initiative called “Early Adopters”, more than 40 countries have committed to implementing the new standards of automatic information exchange by 2017.
Regardless of the actual implementation of automatic exchange of information, countries are exchanging information on demand in such a way that it would be foolish to think that the authorities of any country are unable to access information of income obtained or assets held in other countries.
Base Erosion and Profit Shifting (BEPS)
Upon request of the G20 leaders, in February 2013 the OECD issued a report identifying the causes of base erosion provoked by multinational enterprises (MNEs), initiating the Base Erosion and Profit Shifting (BEPS) project. This venture is fully supported by G20 leaders, as highlighted in the 2013 G20 Leaders Declaration:
Tax avoidance, harmful practices and aggressive tax planning have to be tackled… We fully endorse the ambitious and comprehensive Action Plan – originated in the OECD – aimed at addressing base erosion and profit shifting with mechanism to enrich the Plan as appropriate. We welcome the establishment of the G20/OECD BEPS project and we encourage all interested countries to participate. Profits should be taxed where economic activities deriving the profits are performed and where value is created.
The Organisation for Economic Co-operation and Development (OECD) has made a tremendous effort not only to produce reports on the (perfectly legal) measures taken by multinationals to reduce their overall tax (and consequently, according to governments, create an unfair reduction of tax revenues), but also to propose solutions and alternatives that can help countries to eliminate this key issue. This is an ambitious project that encourages governments to review their tax systems.The BEPS Action Plan discusses the following:
• addressing tax challenges in a digital economy;
• neutralising the effects of hybrid mismatch arrangements;
• strengthening controlled foreign corporation (CFC) rules;
• limiting base erosion via interest deduction and other financial payments;
• countering harmful tax practices more effectively, taking into account transparency and substance;
• preventing treaty abuse;
• preventing the artificial avoidance of permanent establishment status;
• ensuring that transfer pricing outcomes are in line with value creation (intangibles; risks and capital; and other high-risk transactions);
• establishing methodologies to collect and analyse data on BEPS;
• requiring taxpayers to disclose their aggressive tax planning arrangements;
• re-examining transfer pricing documentation;
• making dispute resolution mechanisms more effective; and
• developing a multilateral instrument.
Most issues identified as causes for base erosion derive from mismatches among the tax laws of different countries. For example, in the course of a transaction Country A permits a company resident therein to deduct a certain expense from income tax base; but in Country B, the corresponding sum is treated as exempt dividends. Another example is the case of double taxation treaties (DTTs): the taxing power is granted to Country A, determining that Country B must exempt a certain income from taxation; but Country A’s internal legislation grants an exemption that results in double non-taxation.
There is another issue that has arisen within the past two years – one that has affected many multinationals. For the first time, avoiding taxes legally may have an impact on a company’s reputation; it is no longer enough to simply act in accordance with the law.
One of the first prominent cases was that of Starbucks in the UK. While it did not commit tax evasion, the chain’s corporate structure (which resulted in low taxation on UK-based income) generated much discussion. Central to this was the notion that such a structure was, in theory, preventing the company from paying its “fair share” of taxes. Similar debates followed concerning the entirely legal practices of Amazon, Google, Apple and others. Margaret Hodge, chair of the public accounts committee of the UK House of Commons, told executives from Starbucks, Google and Amazon: “We’re not accusing you of being illegal, we’re accusing you of being immoral.”
This discussion of morality brings major uncertainty to taxpayers. The payment of taxes should not come down to being moral or immoral, but rather to complying or not complying with the law. Governments have the right to dislike the use of loopholes, but their role is to close these loopholes by use of the proper mechanism: the law. What’s needed is a change in legislation – not the creation of hostility towards companies that adopt legally available measures to reduce tax.
I am not, of course, defending the use of artificial structures to reduce taxes; these would most likely fall into the category of sham transactions and thereby qualify as tax evasions. Companies must understand that they cannot wave a magic wand and make taxes disappear.
However, I do take the view that, where a government disagrees with practices that exist in accordance with the law, the answer may be to change the law. Chasing companies, and seeking revenge for their legal tax reductions, is not the solution.
What is the future of tax planning? Will there be a way to reduce taxes? I believe so. Companies need to find, in each and every business opportunity, the least expensive way, from a tax perspective, to do business; they must not perform transactions whose sole purpose is to save on taxes.
Companies must understand that the best way to save taxes is always to plan: to work out, in advance, how to do the business that needs to be done, and to establish the minimum amount of tax that needs to be paid.
When companies have business to perform and important deals to carry out, paying the minimum amount of tax is possible – not a penny more, not a penny less. Paying one’s “fair share” is paying tax in accordance with the law.