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1. The world is changing: The gradual evolution of tax planning...................................................................... 1

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Document 1 of 1

The world is changing: The gradual evolution of tax planning
Author: Anonymous
ProQuest document link
Abstract: Change on a global scale tends to be gradual and that is certainly true when it comes to tax planning.
But as slow as it is, like the continental drift, the change is inexorable. Structures that were once common
business practice now carry with them significant risks, both in terms of challenge from the tax authorities and
reputation. Low tax jurisdictions which offer their clients high degrees of secrecy are finding their economic
model increasingly challenged by the rise of automatic information exchange. The curtain has not been instantly
lifted, but as it is steadily drawn back, the benefits of using tax havens and aggressive avoidance schemes are
diminishing while the risks are growing. Europe's five leading economies last month agreed to automatically
exchange a wide range of tax information multilaterally, while finance ministers from Belgium, the Netherlands,
Poland and Romania backed the creation of a global system of automatic information exchange that could be
based on the US Foreign Account Tax Compliance Act (FATCA). Across the Asia Pacific region, too, authorities
are working closer together to exchange information for tax purposes. n the US, tax reform remains a slow
process, and there remain considerable uncertainties, but taxpayers are keeping a weather eye on how
developments will affect tax planning in years to come.
Links: Check Article Linker for full-text, Click here to request the full text article
Full text: The world of tax planning is changing, bringing new risks and challenges for taxpayers. The change
may be gradual, but companies should not ignore how significant it is.
Three hundred million years ago, all the continents of Earth were joined up in one great landmass called
Pangaea. The continents have been pulling apart across the aeons since, ever so slowly forming the world we
know today.
Change on a global scale tends to be gradual and that is certainly true when it comes to tax planning. But as
slow as it is, like the continental drift, the change is inexorable.
Structures that were once common business practice now carry with them significant risks, both in terms of
challenge from the tax authorities and reputation.
Low tax jurisdictions which offer their clients high degrees of secrecy are finding their economic model
increasingly challenged by the rise of automatic information exchange. The curtain has not been instantly lifted,
but as it is steadily drawn back, the benefits of using tax havens and aggressive avoidance schemes are
diminishing while the risks are growing.
Europe's five leading economies last month agreed to automatically exchange a wide range of tax information
multilaterally, while finance ministers from Belgium, the Netherlands, Poland and Romania backed the creation
of a global system of automatic information exchange that could be based on the US Foreign Account Tax
Compliance Act (FATCA).
Across the Asia Pacific region, too, authorities are working closer together to exchange information for tax
purposes.
In Latin America, there is an increasing focus on transfer pricing. Chile introduced its transfer pricing legislation
last year, while Ecuador has been introducing more laws into its tax system to stop companies making use of
low tax jurisdictions to siphon profits away from the country. Strategies include making it impossible for
companies whose shareholders are located in tax havens to participate in public procurement, charging
additional taxes on dividends and presuming related-party relationships between transacting parties.
In the US, tax reform remains a slow process, and there remain considerable uncertainties, but taxpayers are

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keeping a weather eye on how developments will affect tax planning in years to come.
The gradual pace of change in the global tax planning market should give companies time to adapt, but the
change is inevitable and taxpayers must ensure they do not get left behind as the world moves towards
accepting automatic information exchange as its new gold standard.
Tax planning and the risks involved is increasingly becoming a boardroom concern. But companies continue to
depend on tax advisers to help them plan their tax affairs. That the challenges are greater than ever reinforces
the need for companies to get the right advice, not simply for short-term tax minimisation, but for creating longterm substantial structures with solid business justifications that can stand the test of time in a changing world.
Methodology
In December and January, International Tax Review asked its readers, and the tax directors of the world's
leading multinational companies, to vote for their top three tax planning firms in more than 50 jurisdictions
across the world. The votes were added up to produce the survey results. No votes from advisory firms were
counted and firms could not send submissions to improve their chances of being ranked. The objective was to
find out if there are other firms that did not appear in our World Tax directory that the market regarded highly
because they had a particular specialty. Or if there were firms that appeared in World Tax and were known as
dependable groups of tax advisers without having any star practitioners. Would they be rated for their
excellence in tax planning? This survey should be seen as complementary to World Tax, which looks at the
whole profile of a firm, not just its size and its deal flow.
Contents
Asia Pacific Where Asia-Pacific authorities draw the line on tax planning
Across the Asia-Pacific region, tax authorities' concepts of what constitutes acceptable tax planning differ
substantially. It is therefore important that taxpayers try to understand the approach of the authorities where
they are operating. Joe Dalton speaks with John Nash, manager of international revenue strategy at New
Zealand's Inland Revenue Department (IRD), Carmel Peters, head of international tax policy at the IRD, and
Mark Konza, deputy commissioner of the Australian Taxation Office's (ATO) large business and international
unit, to find out where they draw the line on tax planning. Europe, Middle East and Africa The end of the
beginning for Europe's tax havens
Europe's tax havens including Cyprus and the Channel Islands have faced a number of serious challenges in
recent months, tarnishing their attractiveness for multinational companies and high net worth individuals looking
to plan their tax affairs. Salman Shaheen finds out why it may not be the end for their economic model, or even
the beginning of the end, but it is the end of the beginning. Latin America How transfer pricing in Latin America
can affect your company's tax planning
The transfer pricing environment in Latin America shows a number of contrasts from country to country. Sophie
Ashley looks at the differing levels of implementation, along with some of the biggest developments in the
region and explains how these aspects can affect your company's tax planning. North America US companies
keeping an eye on tax planning implications of reform
While there has not quite been the same media interest or public backlash against companies' tax contributions
in the US and Canada as has been seen elsewhere - predominantly in the UK - tax planning has still come in for
greater scrutiny in North America in the last year. Matthew Gilleard explores the latest developments.
Asia Pacific
Australia
China
Hong Kong
India
Indonesia
Japan
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Malaysia
New Zealand
Philippines
Singapore
South Korea
Taiwan
Vietnam
Europe, Middle East and Africa
Austria
Baltic States
Belgium
Cyprus
Denmark
France
Finland
Germany
Greece
Gulf Cooperation Council
Ireland
Israel
Italy
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Russia
South Africa
Spain
Sweden
Switzerland
Turkey
Ukraine
UK
Latin America
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Uruguay
Venezuela
North America
Canada
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US
Asia Pacific
Where Asia-Pacific authorities draw the line on tax planning
Across the Asia-Pacific region, tax authorities' concepts of what constitutes acceptable tax planning differ
substantially. It is therefore important that taxpayers try to understand the approach of the authorities where
they are operating. Joe Dalton speaks with John Nash, manager of international revenue strategy at New
Zealand's Inland Revenue Department (IRD), Carmel Peters, head of international tax policy at the IRD, and
Mark Konza, deputy commissioner of the Australian Taxation Office's (ATO) large business and international
unit, to find out where they draw the line on tax planning.
International Tax Review: What tax legislation changes have been introduced in the last 12 months and what
new legislation is in the pipeline that will affect international tax planning?
John Nash: Multinationals that behave transparently can expect earlier resolution of tax issuesJohn Nash and
Carmel Peters: In the last 12 months, New Zealand passed new legislation that allows an investor with a
shareholding of 10% or more in any foreign company to apply the active income exemption.
Previously this exemption was limited to investors with a shareholding of 10% or more in a controlled foreign
company (CFC). At the same time we also extended the thin capitalisation rules to apply to such investors and
removed the grey list exemption for investment in eight countries, though an exemption for investment in
Australia is retained. This is consistent with new CFC rules introduced in 2009.
In the next couple of years, New Zealand plans to improve the effectiveness of the thin capitalisation rules. The
main proposals are to make the thin capitalisation rules apply to investments held by non-residents who act
together and to exclude shareholder debt from the worldwide group test. These proposals were consulted on in
a January 2013 issues paper which is available on the IRD's website.
We also plan to introduce an active income exemption for offshore branch operations, again in line with the new
CFC rules.
As mentioned in a December 2012 report to ministers on multinational taxation, IRD officials will continue to
give priority to projects which protect source base taxation.
ITR: Can you highlight any litigation your tax authority has been involved in recently which indicates the type of
tax planning that it deems unacceptable?
JN and CP: There has been considerable recent guidance provided by the New Zealand courts as to what
constitutes unacceptable tax planning, notably the Westpac and BNZ structured finance cases and the Alesco
judgment.
Mark Konza: The Australian government introduced proposed amendments to the general anti-avoidance rules
(GAAR) to Parliament in February following a number of court decisions where the courts accepted the
taxpayers "do nothing" counterfactual argument in determining whether a tax benefit has been derived for
purposes of applying the GAAR.
[The cases the ATO lost in attempting to apply the GAAR were those against RCI, Futuris and Macquarie
Bank.]
ITR: The IRD has enjoyed considerable success in GAAR cases decided by the Court of Appeal in recent
years. How important was the IRD's victory in Alesco's Court of Appeal case in determining when New
Zealand's GAAR can be applied to taxpayers' planning arrangements?
JN and CP: It is difficult to comment on the Alesco case, as it is subject to appeal to our Supreme Court, other
than to state the obvious: That the Court of Appeal has examined in detail the application of New Zealand's
general anti-avoidance provision to a cross-border financing arrangement involving a hybrid instrument, and as
such it is most instructive to taxpayers, practitioners and tax administrators.
ITR: The IRD and ATO offer taxpayers the opportunity to obtain binding rulings or private rulings to obtain
certainty as to the tax consequences of an arrangement. In your experience, how can taxpayers make best use
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of this and what taxpayer activities does it work most effectively for?
MK: If taxpayers are unsure of the correct tax treatment of a transaction, to reduce uncertainty they can apply
for a private ruling asking to be assessed in relation to an existing or proposed transaction, including the
application of a general anti-avoidance provision.
We will work with draft material for prospective transactions. However, the draft documentation must be
materially similar to the end product. We may also ask for more information and can make assumptions in some
circumstances based on our understanding of the information they have provided.
Private rulings can be useful in obtaining our views on uncertain legal positions. Under the law, taxpayers can
object to a private ruling decision. If a taxpayer objects, we may ask them for further submissions to support
their argument.
JN and CP: All taxpayers are able to apply for a binding ruling to give them certainty on the tax implications of
an arrangement. An arrangement can be anything from a complex funding transaction to a straightforward
subdivision of land.
We can issue rulings in respect of proposed transactions that are seriously contemplated, or transactions that
have been entered into or completed as long as the due date for filing a tax return in respect of the relevant
period has not passed.
For most ruling applications, we deliver a draft ruling or indication of our view within three months of an
application being made. Prospective binding ruling applicants should contact us to arrange a pre-lodgement
meeting before they lodge their application.
The purpose of a pre-lodgement meeting is to help the taxpayer to decide whether to apply for a ruling and how
to submit the best application possible. At a pre-lodgement meeting, we will discuss the scope of the proposed
ruling, the type of information and level of detail that should be provided, as well as our timeframes and fees.
Providing written advice on how the tax laws apply is a feature of our self-assessment system and is central to
our role. A ruling is our opinion on the tax interpretation of the law and is binding on us but not on the taxpayer.
For class, product and private rulings, providing a full and true disclosure of all the material facts allows us to
form a view. If all material facts are not disclosed the ruling cannot be relied upon.
ITR: What advice would you give to multinationals carrying out tax planning that involves your jurisdiction to
help them reduce the risk of getting into a dispute with the tax authority?
JN and CP: We encourage full and frank dialogue on difficult or complex issues. We prefer to work through
arrangements with multinationals up front, avoiding disputes where possible.
The clear attraction of this approach for business is certainty - multinationals that behave transparently can
expect an earlier resolution of tax issues with less extensive audits and lower compliance costs.
MK: Our self assessment approach is to encourage and support open and cooperative relationships with
taxpayers in real time, not retrospectively.
Our interactions with taxpayers are guided by the Taxpayers' Charter and we encourage early engagement and
the discussion of major transactions before they occur. These form part of our approach where the
management of tax risk is seen as being the key to good corporate governance.
The ATO offers a range of compliance products and services to help large business taxpayers meet their
compliance obligations including: Pre-lodgement compliance reviews to provide practical certainty for taxpayers
by considering tax risk issues in real time; and Annual compliance arrangements or advance pricing
arrangements tailored to taxpayers with good tax risk governance and who engage cooperatively with the ATO.
These agreements can guide future compliance and reduce compliance costs.
ITR: What will be the tax authority's main areas of audit focus moving forward?
MK: Areas of focus in the ATO's compliance programme 2012-13 for large business include: Amendments to
taxation of financial arrangements; Profit shifting - transfer pricing and thin capitalisation; Non-disclosure of
foreign sourced income and assets; and Inappropriate outcomes involving consolidation.
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Generally speaking though, most of the questions that come up in international tax are about: Who is taxed;
what should be taxed; where it should be taxed; and how much it should be taxed.
Carmel Peters: New Zealand is seeking a broader concept of permanent establishment in its treaties
We also have a structural risk in the potential for lack of transparency in offshore activities. It comes up in all
areas of our international work, but is particularly significant in the context of combating non-disclosure of
foreign sourced income and assets.
JN and CP: We maintain a balanced programme involving a wide range of tax compliance activities. In the year
ahead, we intend to continue with a special focus on transfer pricing matters and complex financing
transactions, which often involve hybrid entities, instruments and transfers.
We also intend to take a closer look at withholding tax avoidance and possible treaty shopping arrangements in
particular.
ITR: How is your tax authority working with other authorities across Asia-Pacific to clamp down on abusive tax
planning?
JN and CP: We have a very close relationship with our major tax treaty partner, Australia. We routinely
exchange information with the ATO on both taxpayers and industries, and also operate a trans-Tasman
financing desk involving experts from both tax administrations exchanging new or emerging issues in regard to
funding arrangements.
Across Asia, we have definitely noticed an upward trend in exchanges of information between tax authorities.
Such exchanges are assisting us greatly in the earlier identification of aggressive arrangements which may
adversely impact the New Zealand tax base.
MK: Two principal strategies the ATO uses for dealing with transparency risk and which underpin all our other
work on specific international risks are: Exchange of information with treaty partners and increasing the number
of treaties and agreements; and International engagement through forums and capacity assistance to share
intelligence, improve our ability to influence international policy and provide practical cooperation with other
jurisdictions.
Australia is party to 44 double tax agreements, 42 of which are in force. Australia has also signed 33 tax
information exchange agreements (TIEAs), 30 of which are in force, and 14 additional treaty partners via the
Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
In recent times, these TIEAs have grown in importance as a result of the emphasis placed by a number of
international organisations, such as the OECD and its Global Forum, and the G20, on the prevention of tax
evasion through exchange of information.
We are also active members of the Joint International Tax Shelter Information Centre (JITSIC) which includes
the Asia Pacific region countries of Japan, US, South Korea and China. JITSIC aims to assist in the
identification, understanding and mitigation of risk arising from those who promote or take part in abusive tax
schemes through the sharing of intelligence and best practices on identifying and addressing known and
emerging abusive tax schemes.
ITR: Is your jurisdiction negotiating any new international tax treaties? If so, will these tax treaties offer any
opportunities for multinationals to improve the tax efficiency of their structures in future?
JN and CP: New Zealand is negotiating double tax agreements (DTAs) with Luxembourg, Vietnam and the UK
while protocols are being negotiated with Austria, Belgium, India and the Netherlands.
New Zealand's treaty policy generally follows the OECD model. However, certain features of our DTAs are
aimed at protecting the New Zealand tax base. In particular, we seek a broader concept of permanent
establishment (PE) - including a services PE provision - positive withholding tax rates on interest and royalties,
and anti-treaty shopping rules.
MK: DTAs with South Korea, Canada, the Netherlands and UK are under revision and the protocol to the Indian
DTA was introduced into Parliament in November.
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The Multilateral Convention on Mutual Administrative Assistance in Tax Matters became fully effective for
Australia on January 1 2013. To date, it has 43 signatories with membership expected to continue growing.
Under the Convention, we have gained 14 new treaty partners from across Europe, South America and Africa.
The Convention is a freestanding multilateral agreement that promotes international cooperation for the
effective enforcement of national tax laws. It provides us with a solid legal framework to facilitate inter-country
exchanges of tax information and other forms of administrative assistance.
Key drivers of this tax treaty network are to support the global economy and to prevent double taxation. Tax
treaties support proper tax planning and sometimes provide concessions between treaty partners like a
reduction in non-resident withholding tax from 30% to 15% in some cases.
We are now better placed than ever before to combat international tax evasion and ensure that businesses
operate within the law, while still respecting the rights of our taxpayers.
ITR: Are any new tax-related investment incentives being introduced which taxpayers may want to factor into
their future planning?
JN and CP: New Zealand has not introduced any specific new tax-related investment incentives. However, from
2012, new tax rules were enacted that allowed non-residents to make portfolio investments through a New
Zealand-based managed fund into investments outside New Zealand, without paying New Zealand tax.
Australia
Tier 1
Deloitte
Ernst &Young
PwC
Tier 2
Allens
Ashurst
Baker &McKenzie
Clayton Utz
Corrs Chambers Westgarth - Taxand
Greenwoods &Freehills
King &Wood Mallesons
KPMG
Minter Ellison
China
Tier 1
Baker &McKenzie
Deloitte
DLA Piper
Ernst &Young
KPMG
PwC
Tier 2
Clifford Chance
Hendersen Taxand
Hwuason Lawyers
Jun He Law Offices
Zhong Lun Law Firm
Hong Kong
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Tier 1
Baker &McKenzie
Deloitte
Ernst &Young
KPMG
PwC
Tier 2
Clifford Chance
DLA Piper
India
Tier 1
BMR Advisors - Taxand
Deloitte
Ernst &Young
KPMG
PwC
Tier 2
Amarchand &Mangaldas
BDO Consulting
ELP Advocates &Solicitors
Khaitan &Co
Indonesia
Tier 1
Ernst &Young
Hadiputranto Hadinoto &Partners
PwC
Tier 2
Deloitte
KPMG
PB Taxand
Japan
Tier 1
Baker &McKenzie
Deloitte Tohmatsu Tax Co
Ernst &Young Shinnihon Tax
KPMG
Tier 2
Grant Thornton
Kojima Law - Taxand
Morrison &Foerster
Nagashima Ohno &Tsunematsu
Nishimura &Asahi
Malaysia
Tier 1
Deloitte
Ernst &Young
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KPMG
PwC
Shearn Delamore &Co
Tier 2
Taxand Malaysia
Wong &Partners
New Zealand
Tier 1
Bell Gully
Deloitte
Ernst &Young
KPMG
PwC
Russell McVeagh
Tier 2
Chapman Tripp
Minter Ellison Rudd Watts
Simpson Grierson
Philippines
Tier 1
Manabat Sanagustin
SyCip Gorres Velayo &Co
Tier 2
Deloitte
Quisumbing Torres
Salvador &Associates - Taxand
Zambrano &Gruba Law Offices
Singapore
Tier 1
Drew &Napier
Ernst &Young
KPMG
PwC
Tier 2
Allen &Gledhill
Baker &McKenzie.Wong &Leow
Deloitte
South Korea
Tier 1
Deloitte Anjin
Kim &Chang
Samil PwC
Tier 2
Ernst &Young
Lee &Ko
Yulchon
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Taiwan
Tier 1
Deloitte
KPMG
PwC
Tier 2
Baker &McKenzie
Ernst &Young
Lee and Li
Vietnam
Tier 1
Deloitte
KPMG
PwC
Tier 2
Baker &McKenzie
Ernst &Young
Grant Thornton
VDB Loi
Europe, Middle East and Africa
The end of the beginning for Europe's tax havens
Europe's tax havens including Cyprus and the Channel Islands have faced a number of serious challenges in
recent months, tarnishing their attractiveness for multinational companies and high net worth individuals looking
to plan their tax affairs. Salman Shaheen finds out why it may not be the end for their economic model, or even
the beginning of the end, but it is the end of the beginning.
In 1942, when Europe was facing a very different crisis from the one it faces today, Winston Churchill declared
the tide of World War II was finally changing.
"Now this is not the end," Churchill declared. "It is not even the beginning of the end. But it is, perhaps, the end
of the beginning."
In a less often quoted part of that Mansion House speech, Churchill went on to say he would not preside over
the breakup of the British Empire. But when the British Empire did break up, it left in its wake a network of tax
havens which, along with other financial centres with low tax rates and strong secrecy laws, have played a
significant role in European tax planning over the last few decades.
That role is now changing.
The economic turmoil that has devastated Cyprus and led to the EU's major economies pushing for greater
transparency and automatic information exchange (AIE) is weakening the attractiveness of offshore financial
centres and changing client behaviour when it comes to tax planning.
It may not be the end of Europe's tax havens. It may not even be the beginning of the end. But it is, perhaps,
the end of the beginning.
Automatic information exchange
The fiercest opponents of tax avoidance consider the 2009 G20 summit and the explosion of OECD tax
information exchange agreements (TIEAs), which were supposed to end tax havens, to be a false dawn.
"Tax authorities are saying that information exchange upon request is not working and the problem hasn't gone
away," says Richard Murphy, director of Tax Research. "Politicians have now realised automatic information
exchange could work."
Inspired by the US's Foreign Account Tax Compliance Act (FATCA), EU countries are increasingly moving
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towards AIE, which campaigners believe holds the key to ending abusive practices in secrecy jurisdictions.
In March, Jersey announced that it would join Guernsey and the Isle of Man in signing a FATCA-like agreement
with the UK, which International Tax Review exclusively predicted back in November.
The deal will see specific financial and non-financial information on UK residents and their accounts held in the
Crown Dependencies being reported to the UK on an annual basis. It will also see disclosure facilities with fixed
penalties for those wishing to come forward and regularise their tax affairs before the new regime of automatic
information exchange comes into being.
Meanwhile, the governments of Europe's five largest economies - France, Germany, Italy, Spain, and the UK
(collectively, the G5) - last month agreed to automatically exchange a wide range of tax information
multilaterally.
"This is an important further step in the fight against tax evasion and represents the next stage in promoting a
new standard in the automatic exchange of tax information," says David Gauke, UK Exchequer Secretary to the
Treasury. "This builds on the agreements we have reached with the Isle of Man, Guernsey and Jersey and the
discussions currently underway with the Overseas Territories."
The move was welcomed by Algirdas Semeta, European Commissioner for Taxation and Customs Union, Audit
and Anti-Fraud.
"This initiative is a very clear sign that the automatic exchange of information, which has been the long-time EU
standard, is the only way forward," says Semeta. "The recent evolution of the US approach further confirms this.
I can only support any effort to speed up expanding the scope of automatic exchange and of pushing our
standard globally. Transparency is the key when it comes to fighting tax evasion and the global environment
today leaves little room for those who resist it."
This development is not enough to satisfy all in the tax justice movement. Richard Brooks, former tax inspector
and author of The Great Tax Robbery: How Britain became a tax haven for fat cats and big business , writes it
off as a futile gesture from politicians who need to appear to be doing something, while Nick Shaxson,
investigative journalist and author of Treasure Islands , is concerned that the pilot will not help developing
countries whose economies are exposed to companies shifting profits into tax havens.
But John Christensen, director of the Tax Justice Network, welcomes the move not only for its recognition that
AIE is the effective standard for tackling tax evasion, but also because the G5 finance ministers indicate that
this is regarded as a prototype for a multilateral and global standard.
"One major proviso, however, is that the new initiative should not derail the upgrading of the EU's Savings Tax
Directive, which urgently needs to be extended to cover legal entities like offshore trusts, foundations and
companies," Christensen says. "If the finance ministers are genuinely prepared to invest time and effort into this
project, it is perfectly possible that the days of secret offshore trusts and bank accounts are finally over."
It is clear that the first rumblings of multilateral AIE do not spell the end for Europe's tax havens and aggressive
tax planning, but the behavioural shift it could cause among taxpayers may well spell the end of the beginning.
"Anti-avoidance measures together with increased transparency and increased cross-border sharing of
information are certainly making it harder for those engaged in the more artificial kinds of tax planning," says
Paul Morton, head of group tax at Reed Elsevier.
As AIE is extended, it will create a climate where tax non-payers cannot take the risk of not declaring. Rather
than leading to a big increase in investigations on the back of a new flow of data, the ultimate consequence will
be voluntary compliance.
"Tax havens aren't over, but they don't realise the implications of the new era of automatic information
exchange by default," says Murphy. "They can continue to offer low tax rates, but what will be the point without
secrecy if clients have to pay the same tax at home anyway?"
Murphy believes that those offshore centres providing value added services other than secrecy, such as
reinsurance in Guernsey, will continue to be able to attract business. But for jurisdictions such as Jersey which
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provide little more than a trust service, the end of their economic model is in sight.
"By the end of the decade we will see a substantial change in the operations of tax havens," Murphy says.
"There will be some serious casualties."
But it is not all bad news for multinational companies who have used offshore jurisdictions to reduce their tax
bill. Removing the opportunities for tax avoidance through tax havens would put pressure on company directors
to invest for the longer term rather than boosting share value through short-term tax avoidance. In the long run,
this may prove to be much less risky, as the collapse of Cyprus shows just how precarious offshore jurisdictions
can be.
The fall of Cyprus
Cyprus' banking crisis has damaged its reputation as an attractive offshore financial centre
Source: Franco Pecchio
Cyprus, which has long been used by Russian multinational companies and wealthy individuals to reduce their
taxes, saw its reputation as an attractive planning location rocked by its bank crisis.
Advisers in Cyprus maintain their country remains an attractive investment location.
"The Cypriot crisis is essentially a banking crisis and this has nothing to do with its attractiveness as a tax
structuring jurisdiction," says Michalis Zambartas of Eurofast Taxand. "In addition, it should be noted that aside
from the two troubled banks, there are other banks in Cyprus, both local and international, which are very
healthy and have actually seen a substantial increase in their business in the last weeks."
Zambartas stresses that Cyprus has been an international business centre for more than 30 years since it
offered - as opposed to many of its competing jurisdictions - a very attractive tax regime, cost-effective services,
a legal system based on English law and "good weather".
"I do not see how these latter advantages have been affected by the crisis of those two banks," Zambartas
says.
But these advantages have been concretely affected by the crisis. Perhaps the clearest sign that Cyprus is
becoming a less attractive location for tax planning is that it has been forced to raise its corporate tax rate to
12.5%. While still possessing a comparatively low rate, Cyprus' economic woes mean it is having to
compromise on the tax system which made it a thriving offshore financial centre.
Zoe Kokoni, also of Eurofast Taxand, points out that the advantages for holding companies - the majority of
companies registered in Cyprus - will not be affected as the rule of no withholding taxes will not be changed.
On paper, everything that makes Cyprus an attractive tax planning location for multinational companies remains
in place. But in the wake of its banking crisis, the capital controls and losses for savers, taxpayers are likely to
be much more wary of the jurisdiction.
"We do not have a presence in Cyprus but given recent events I would have thought that the damage to its
reputation is considerable and long lasting," says Ian Brimicombe, head of group tax at AstraZeneca.
For the campaigners, Cyprus' game as a tax haven is over.
"The Cypriot offshore finance industry is in meltdown; it's hard to believe they can restore confidence in their
business model for many, many years," says Christensen. "The domestic economy requires major adjustments,
not least retraining the huge number of people formerly employed in offshore financial services, and this will
require a complete overhaul of the tax system to raise the necessary revenues to finance this transition. I also
find it inconceivable that the EU and the Financial Action Task Force will continue to tolerate the astonishingly
lax anti-money laundering compliance that has prevailed in Nicosia since the 1980s."
"Cyprus is still a de facto tax haven, but not a de jure one," says Murphy who argues that Cyprus' current woes
owe much to its activity as an offshore financial centre. He warns that Luxembourg, which also has a ratio of
banking transactions to GDP that is significantly out of proportion, may face similar problems, posing a risk for
multinationals that have large deposits there.
Cyprus' example - the crashing and burning of an economy built around tax incentives - is an extreme one. The
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rest of Europe's low-tax jurisdictions may not suffer the same fate, but with warning signs on the horizon and the
rise of AIE, they may be forced to diversify their economies to weather the coming storm.
Trends in tax planning
Alongside these developments, companies report that tax planning in Europe is changing.
"There has been a continued move away from complex and artificial structures to straightforward planning,
based on developments in the business, involving transfer pricing or business models," says Morton. "Some inhouse departments have reduced their planning activities and focussed more on compliance and transfer
pricing. Professional service firms are spending more time understanding the business of their clients."
Morton also reports that authorities have become much more confident in challenging tax planning
arrangements.
"Anti-avoidance law has reached a new level of effectiveness and corporates are increasingly worried about
reputational issues," Morton says.
The legal focus on tax planning has brought some clarity and compliance advantages for taxpayers.
"Evolving EU case law and its adoption in domestic legislation has made planning in Europe more certain, for
example the reformed UK controlled foreign company (CFC) laws," says Brimicombe. "Planning is somewhat
easier as the rules are becoming clear, however anything that constitutes artificial avoidance rightly will more
likely be reversed."
Morton notes that anti-avoidance legislation has been tightened and in some countries the tribunals and the
courts are taking a harder line against avoidance. However he says it would be a concern if anti-avoidance
efforts began to impede straightforward business transactions. He regards the availability of advanced pricing
agreements and rulings as very important.
The media and society have also played a big role in recent trends in tax planning.
"The recent media focus on the level of tax contributions made to EU economies has prompted business to
consider its own communications on issues such as transparency and disclosure," says Brimicombe.
"Reputational risk is a significant factor in any arrangement where tax plays a significant role in delivering
economic benefits."
Last man standing
The level of focus on tax havens in recent years has been unprecedented. But for campaigners, there is one
financial centre which has escaped attention: The City of London.
"The UK is a tax haven in many ways," says Brooks. "Two give the game away. One, a non-dom rule combined
with immigration law favouring the ultra-wealthy, making us what advisers now call a "tax residence solution".
Two, the recent CFC law changes set out the UK's stall as the place for multinationals to put up a brass plate
and avoid tax here, there and everywhere. Britannia is tarting herself out."
Shaxson says the UK is not particularly secretive in its own right, but does offer a plethora of offshore-like tax
and secrecy incentives.
"More importantly, the UK is a key player in the offshore world because of its role as a protector of the Crown
Dependencies and Overseas Territories, which involve some of the biggest tax havens in the world," Shaxson
says. "Britain could strike down their offshore facilities if it wanted to, but it has chosen not to."
Shaxson believes there will be some dent in European tax haven activities and the UK will have to bring its
dependencies into line somewhat, but he describes tax havens as a "cancer that has metastasised through the
global economy".
Given the UK's central role in the offshore financial industry, it will have to play a central role if abusive tax
planning through tax havens is to end.
The expansion of automatic information exchange in Europe and the fall of Cyprus have begun to erode the
hitherto unquestioned truths on which tax havens conducted their business: Secrecy and security.
But for Europe and the wider world to truly tackle aggressive avoidance and the economic model of tax havens,
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it will take another British prime minister to stand up and say: "This is not the end. It is not even the beginning of
the end. But it is, perhaps, the end of the beginning."
Austria
Tier 1
Deloitte
Ernst &Young
KPMG
LeitnerLeitner
PwC
Wolf Theiss
Tier 2
BPV Hugel Rechtsanwalte
Freshfields Bruckhaus Deringer
Baltic States
Tier 1
Deloitte
Ernst &Young
PwC
Tier 2
Borenius
KPMG
Sorainen
Tark Grunte Sutkiene
Belgium
Tier 1
Deloitte
Liedekerke
Linklaters
Tier 2
Baker &McKenzie
Ernst &Young
Freshfields Bruckhaus Deringer
KPMG
Loyens &Loeff
PwC
Cyprus
Tier 1
Deloitte
Ernst &Young
KPMG
PwC
Tier 2
Andreas Neocleous &Co
Baker Tilly Klitou
Chrysses Demetriades
Consulco
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Eurofast Taxand
Denmark
Tier 1
Deloitte
Ernst &Young
KPMG
Plesner
PwC
Tier 2
Bech-Bruun - Taxand
Bruun &Hjejle
Kromann Reumert
France
Tier 1
Bredin Prat
CMS Bureau Francis Lefebvre
de Pardieu Brocas Maffei
Tier 2
Arsene Taxand
Baker &McKenzie
Clifford Chance
Freshfields Bruckhaus Deringer
Mayer Brown
Taj
Finland
Tier 1
KPMG
PwC
Roschier Attorneys
Tier 2
Deloitte
Ernst &Young
Hannes Snellman
Germany
Tier 1
Deloitte
Ernst &Young
Flick Gocke Schaumburg
Freshfields Bruckhaus Deringer
PwC
WTS
Tier 2
Allen &Overy
Hengeler Mueller
Linklaters
P+P Pollath + Partners
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Greece
Tier 1
Ernst &Young
PwC
Zepos &Yannopoulos - Taxand
Tier 2
Deloitte
KPMG
Photopoulos &Associates
Gulf Cooperation Council
Tier 1
Cragus Group
Deloitte
Ernst &Young
KPMG
PwC
Tier 2
Cramer-Salamian (in association with Abdulla Al-Ali &Associates)
Stibbe
Ireland
Tier 1
Arthur Cox
Deloitte
KPMG
Matheson
PwC
Tier 2
A&L Goodbody
Ernst &Young
William Fry Tax Advisors - Taxand
Israel
Tier 1
Deloitte
Ernst &Young
Herzog Fox &Neeman
KPMG
PwC
Tier 2
BDO Israel
Fahn Kanne &Co - Grant Thornton
Gornitzky &Co
Shekel &Co
Italy
Tier 1
Maisto e Associati
Vitali Romagnoli Piccardi e Associati
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Tier 2
Bonelli Erede Pappalardo
Chiomenti Studio Legale
Di Tanno e Associati
Studio Tributario e Societario STS Deloitte
Luxembourg
Tier 1
Allen &Overy
Clifford Chance
Ernst &Young
KPMG
Loyens &Loeff
PwC
Tier 2
Arendt &Medernach
ATOZ - Taxand
Bonn Steichen &Partners
Deloitte
Malta
Tier 1
Deloitte
KPMG
PwC
Tier 2
Avanzia Taxand
Ernst &Young
Fenech &Fenech Advocates
Netherlands
Tier 1
Atlas Tax Lawyers
Baker &McKenzie
Deloitte
KPMG Meijburg
Loyens &Loeff
PwC
VMW Taxand
Tier 2
Ernst &Young
Norway
Tier 1
Deloitte
Ernst &Young
Thommessen
Tier 2
Bugge Arentz-Hansen &Rasmussen
PwC
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Wiersholm Mellbye &Bech
Poland
Tier 1
Deloitte
Ernst &Young
KPMG
PwC
Tier 2
Baker &McKenzie
Crido Taxand
Domanski Zakrzewski Palinka
MDDP
Salans
Portugal
Tier 1
Deloitte
KPMG
Morais Leitao Galvao Teles Soares da Silva &Associados
Uria Menendez
Tier 2
Abreu Advogados
Cuatrecasas Goncalves Pereira
Ernst &Young
Garrigues - Taxand
PwC
Vieira de Almeida &Associados
Russia
Tier 1
Baker &McKenzie
Ernst &Young
KPMG
PwC
Tier 2
Deloitte
Pepeliaev Group - Taxand
Salans
South Africa
Tier 1
Deloitte
ENS - Taxand
Ernst &Young
KPMG
PwC
Webber Wentzel
Tier 2
Bowman Gilfillan
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Werksmans Attorneys
Spain
Tier 1
Cuatrecasas Goncalves Pereira
Garrigues - Taxand
Uria Menendez
Tier 2
Baker &McKenzie
Deloitte
Freshfields Bruckhaus Deringer
KPMG
Landwell
Sweden
Tier 1
Deloitte
Mannheimer Swartling
PwC
Tier 2
Ernst &Young
KPMG
Skeppsbron Skatt Taxand
Switzerland
Tier 1
Ernst &Young
Homburger
PwC
Tax Partner-Taxand
Tier 2
Deloitte
Lenz &Staehelin
Oberson Avocats
Walder Wyss
Turkey
Tier 1
Deloitte
Ernst &Young
Mazars Denge
PwC
Tier 2
BDO Denet
Erdikler-Taxand
KPMG
Ukraine
Tier 1
Ernst &Young
PwC
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Tier 2
Baker &McKenzie
Deloitte
Egorov Puginsky Afanasiev &Partners - Taxand
KM Partners
Konnov &Sozanovsky
KPMG
Sayenko Kharenko
Ulysses
UK
Tier 1
Allen &Overy
Alvarez &Marsal Taxand
Clifford Chance
Deloitte
Ernst &Young
Freshfields Bruckhaus Deringer
Linklaters
PwC
Slaughter and May
Tier 2
Herbert Smith Freehills
KPMG
Macfarlanes
Norton Rose
Latin America
How transfer pricing in Latin America can affect your company's tax planning
The transfer pricing environment in Latin America shows a number of contrasts from country to country. Sophie
Ashley looks at the differing levels of implementation, along with some of the biggest developments in the
region and explains how these aspects can affect your company's tax planning.
The government of Ecuador, under Rafael Correa, has taken a tough stance on tax havens
Source: Agencia Brasil licensed under CC BY 3.0 BRLatin America is at differing stages in its transfer pricing
development. From the relatively well established economy of Mexico, which has a transfer pricing regime
reasonably in line with the OECD, to the up and coming economic superpower that is Brazil, which doesn't
adhere to OECD transfer pricing principles, taxpayers also have to negotiate countries such as Chile, which
only introduced transfer pricing legislation towards the end of last year.
Negotiating Brazil
In September 2012, Brazil converted into law some significant changes to its transfer pricing regime. The
changes (Law 9430/96 (Law 9430), introduced by the Executive Measure 563 (EM 563)) have been in force
since the beginning of this year, but taxpayers can choose to apply the changes to the 2012 fiscal year.
The wording of Law 12715 differs from the one of EM 563. The main changes are as follows: undefined RPLP:
Profit Margin - EM 563 detailed the activities performed on the imported goods, assets services or rights
(manufacturing, trading etcetera) to determine the applicable profit margin while the list of activities of Law
12715 merely mentions the products. For example, EM 563 listed that the manufacturing of tobacco was subject
to the 40% profit margin while Law 12715 has merely mentioned tobacco. Therefore, according to the rules of
EM 563, a company that only resells tobacco would be subject to the 20% profit margin, but with the final
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wording of Law 12715 it will have to use the 40% profit margin; undefined Interest: EM 563 established that the
benchmark for these transactions would be achieved by using the Libor rate for six-month deposits in US dollars
plus a spread that should be determined year-by-year by the Ministry of Finance. Law 12715, on its turn,
provided that the spread is 3% per year and that it can be reduced or restored up to 3% by the Ministry of
Finance. ; and undefined Quoted price on import (QPI) and Quoted price on export (QPE): Law 12715 clarified
that, in case the exported or imported commodity has no listed prices in internationally recognised stock
exchanges, the taxpayer can use the prices obtained from data bases, provided by internationally renowned
research entities, to determine the benchmark. In what refers to exports, it will also be possible to use prices
established by regulatory agencies or regulatory entities, duly published in the Official Gazette.
The changes are designed to give taxpayers more certainty in their planning, in particular about which methods
they should apply to their profit margin calculations.
"The expectation is for this regulation to clarify some relevant points such as, for example, the procedures to
apply the QPI and QPE methods, the guidelines to determine the profit margin of the RPLP method and also
the introduction of a transition rule for loans that were already in place at the time of the beginning of the
application of the new rule," says Cristiane Magalhaes and Pedro Leonardo Stein Messetti of Machado
Associados.
Fewer disputes?
Guidance has also been published on Law 12715/12, which is designed to adjust margin requirements to work
better with the economic environment and to close loopholes. For taxpayers with manufacturing or assembly
operations in Brazil, which fall into the 20% corporate tax category, the law will be beneficial because the
guidance brings more certainty but for those taxpayers that do not, the law will bring disadvantages.
"The wording in many parts is not clear and will provide the basis for different interpretations and consequently
additional areas of litigation," says Werner Stuffer of Ernst &Young. "The high gross margin for certain sectors
(40%/30%) will continue the trend to apply alternative methods to achieve a transfer price that is acceptable for
Brazilian purposes but closer to the transfer price internationally required."
Taxpayers now have better guidance about whether they are engaged in industries that are subject to different
gross margin requirements. It is hoped the guidance will help to reduce the number of litigation cases piling up
in the tax courts, of which there are more than 350 concerned with the application of the PRL 60 method.
The profitability threshold, for exports and safe harbours, has been raised from 5% to 10%. A cap on
intercompany export transactions now means they should not be more than 20% of total net export
transactions. "We understand however that this was an oversight by the tax authorities and that they intend to
fix that with a new normative instruction, which should be applicable only for 2013 onwards," says Stuffer.
The just-published Normative Instruction means that any imports or exports listed in the accompanying Annex 1
or 2 will have to be tested using PCI (quotation on imports) and PECEX (quotation on exports) respectively. The
instruction lists commodity exchanges that should be recognised to apply the new methods and also the
publications of authorised institutions in the case of commodities not traded on a stock exchange market.
Ecuador's battle against tax havens
Ecuador has been introducing more laws into its tax system to stop companies making use of low-tax
jurisdictions to siphon profits away from the country. Strategies include making it impossible for companies
whose shareholders are located in tax havens to participate in public procurement, charging additional taxes on
dividends and presuming related-party relationships between transacting parties.
"The greatest feature of the Ecuadorian Tax Havens regulation is that it does not just refer to countries,
territories and jurisdictions, but to regimes," says Alexis Carrera of Ernst &Young. "That is, if a company is
domiciled in a country whose income tax rate exceeds 13.8% (13.2% in 2013), but is host to a special regime
and tax reduction that allows you to pay less than the fee, then that company shall be presumed as located in a
tax haven by Ecuador."
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Carrera says the consequences of a jurisdiction being ruled as a tax haven are not trivial, since, although one of
the consequences of relations with tax havens may be the requirement to document transfer pricing, the biggest
drawbacks are the limitations that are set to repatriation of capital, because dividends paid to tax havens require
withholding the difference between the full fare for individual income tax (35%) and for corporate income tax
(23%), additional to not enjoying exemption for Currency Exportation Tax (CET) (an additional 5%).
"This punishment has pushed formal companies, with stockholders located in tax havens, to seek changes in
their corporate structure, moving their entities to other jurisdictions where there are sufficiently high rates of
income tax (over 60%), but there is no additional taxation on dividends received, to avoid a double taxation to
their profits," he added.
Aggression from Argentina
A number of developments in Argentina have forced taxpayers to address their planning strategies. For one;
three significant tax treaties, with Switzerland, Chile and Spain, were repealed in 2012.
"While those treaties did address, efficiently, double-tax concerns and helped to ensure some certainty as to the
tax costs over time in long-term tax structuring, their unilateral repeal by Argentina brought about uncertainty as
to overall efficiency of the treaty framework in general," says Cristian Rosso Alba of Rosso Alba, Francia
&Associados.
Rosso Alba also says there was a precedent set on this type of repeal in 2008 with the Argentine-Austria tax
convention: "Such decision was then viewed as an isolated one, which was focused on an old-designed treaty.
This impression is certainly different, nowadays."
Rosso Alba also pointed towards the IRS's attitude to foreign multinationals operating in Argentina and says the
tax authority has been very active in auditing and construing notices of deficiencies; mainly on exporters of
commodities and pharmaceutical companies. He advises taxpayers to collect evidence on the substance of
their foreign trading partners and warned that, in many cases, this evidence has to be filed before the Argentine
courts.
Stepping out on the TP scene
While some countries are struggling to qualify their positions, meaning taxpayers are struggling to keep control
over their planning strategies, other countries are only just stepping out onto the transfer pricing scene.
Chile introduced transfer pricing legislation in October 2012. Law No 20.630 includes the new Article 41 E of the
Income Tax Law, which relates to transfer pricing. It clarifies the transfer pricing methods (following the
guidelines of the OECD, though including a non-specified, residual and, effectively, a last-resort method to be
chosen by the taxpayer), introduces the advance pricing agreements (APA) with the fiscal authority for up to
three years (subject to revision in very exceptional cases) and allows the taxpayer to file for the recognition of
out-of-range prices resulting from adjustments in their prices, practiced by other countries that have entered into
a tax treaty with Chile.
The new law also shifts the taxpayers' obligations to a more proactive position. They have to file an annual
sworn statement with their operations, not only with related, but also with non-related entities. "This raises some
concern about the confidentiality of the information," says Munoz. "The burden of proof changes, charging the
taxpayers with the obligation to prove that they used the best method and comparables to guide their transfer
pricing policies.
"On the other hand, the new law provides the companies with the transfer pricing studies, which, though not
compulsory, give them the best and perhaps the only way to sustain a sound transfer pricing policy," he adds.
Argentina
Tier 1
Deloitte
Marval O'Farrell &Mairal
PwC
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Rosso Alba Francia &Asociados
Teijeiro &Ballone Abogados
Tier 2
Bruchou, Fernandez Madero &Lombardi - Taxand
Ernst &Young (Pistrelli, Henry Martin y Asociados)
Nicholson y Cano
Perez Alati Grondona Benites Arntsen &Martinez de Hoz
Brazil
Tier 1
Ernst &Young Terco
Machado Associados, Advogados e Consultores
Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados
Pinheiro Neto Advogados
PwC
Tier 2
Deloitte
KPMG
Lefosse Advogados
Machado Meyer Sendacz Opice
Ulhoa Canto Rezende e Guerra
Chile
Tier 1
Barros &Errazuriz - Taxand
Carey y Cia
Ernst &Young
Tier 2
Baraona Abogados
KPMG
Philippi Yrarrazaval Pulido &Brunner
Colombia
Tier 1
Deloitte
Ernst &Young
KPMG
Orozco Pardo &Asociados
PwC
Tier 2
Baker &McKenzie
Brigard &Urrutia
Godoy &Hoyos Abogados
Gomez-Pinzon Zuleta - Taxand
Lewin &Wills
Mauricio A Plazas Vega Abogados y Cia
Posse Herrera &Ruiz
Prieto Carrizosa
Quinones Cruz Abogados
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Mexico
Tier 1
Chevez Ruiz Zamarripa y Cia
PwC
Tier 2
Basham Ringe y Correa
Deloitte
Mancera (Ernst &Young)
Ortiz Sainz y Erreguerena
Tron Abogados
Peru
Tier 1
Estudio Echecopar / Baker &McKenzie
Hernandez &Cia
PwC
Rodrigo Elias &Medrano
Tier 2
Ernst &Young
Rubio Leguia Normand
Uruguay
Tier 1
Ferrere
Guyer &Regules
PwC
Tier 2
Deloitte
Estudio Bergstein
Grant Thornton
KPMG
Venezuela
Tier 1
Baker &McKenzie
Norton Rose
Tier 2
Deloitte
D'Empaire Reyna Abogados
PwC
Rodriguez &Mendoza
Torres Plaz &Araujo
North America
US companies keeping an eye on tax planning implications of reform
While there has not quite been the same media interest or public backlash against companies' tax contributions
in the US and Canada as has been seen elsewhere - predominantly in the UK - tax planning has still come in for
greater scrutiny in North America in the last year. Matthew Gilleard explores the latest developments.
A familiar pattern is emerging in the debate on comprehensive reform of the US tax code. While there is
consensus reform is necessary ("In the US it is clear the current system is not optimal," says Ginny Chung,
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attorney adviser in the Treasury's office of International Tax Counsel), there seems to be a perennial application
of the Spanish " manana " principle as progress stalls time and again. Just as lawmakers reach down to the ball
that business and lobbyists have urged them to pick up, a stray foot enters to kick it once more into the long
grass. Asked about reform prospects in 2012, the majority of taxpayers said it was an issue for 2013; inquire
again in 2013 and the most common response is "2014 or beyond".
Last year, Citizens for Tax Justice produced a report which indicated that 26 Fortune 500 companies used tax
planning to pay no US federal income tax in the preceding four years. International Tax Review suggested then
that the biggest impact of such findings would manifest itself in the push for tax reform, which, of course, would
throw up plenty of new tax planning opportunities and obstacles. However, the tax code remains largely as it
was in 1986, and in some cases, having flirted with reform, certain tax planning provisions (particularly relating
to transaction tax planning) have actually regressed to their former state.
"In recent years, the Internal Revenue Service (IRS) instigated a 10 week expedited process for obtaining a
private letter ruling on a proposed transaction," says David Zimmerman of Miller &Chevalier in Washington. "But
in the last 12 months, with staffing shortages at the IRS and with the effects of sequestration coming into play,
the mechanism really wasn't being allowed to work and really became a dead letter. So it has now been
formally withdrawn, meaning we are essentially back where we started."
Layla Aksakal, also of Miller &Chevalier, says planning work relating to transactions is still going ahead, but that
fundamental tax reform is now in the back of taxpayers' minds when entering transactions.
"Taxpayers are considering how planning they are looking at would fare under a reformed tax code, particularly
how it would fare if territoriality is introduced because taxpayers are taking that proposal seriously given that it
would bring the US more in line with international norms," says Aksakal.
And consideration of how planning techniques would be treated under a reformed code is not the only reason
the meandering developments on Capitol Hill are being keenly watched. Preserving the ability to influence a
new-look tax code is also on taxpayers' agendas.
"Some clients are trying to model and plan how they would fare under various proposals that have been put on
the table. Some want to be involved in the legislative process and to influence the reform debate, so there has
been an adjustment of approach both in terms of assessing tax planning work under possible future legislation
and in terms of acting in such a way that would not impact the taxpayer's ability to influence the reform debate,"
explains Zimmerman.
UTP disclosures
Jim Ditkoff, senior vice president, finance and tax at the Danaher Corporation in Connecticut, says the most
important changes in US tax planning in recent years relate to the disclosure of uncertain tax positions (UTPs).
US corporations must provide reserves for potential tax assessments (foreign or domestic), unless it is "more
likely than not" (MLTN) that the taxpayer's position will ultimately be sustained, he explains.
"In determining MLTN, it is assumed that all relevant facts are known to the tax authorities. So speculation on
whether the taxpayer will be audited in a particular jurisdiction, or whether the tax auditors will discover and
challenge the UTPs, are irrelevant," says Ditkoff. "Moreover, where a US corporation decides to take a position
that does not meet the MLTN threshold on a US tax return, that position must be fully disclosed on that return."
A key factor for assessing whether a UTP is likely to prevail is whether it has economic substance. Following
the wording of the legislation, that means whether the transaction changes the taxpayer's economic position in
a meaningful way, apart from federal income tax effects, and whether the taxpayer has a substantial purpose
(apart from federal income tax effects) for entering into the transaction. Ditkoff points out that failing to
adequately disclose a UTP that does not meet the codified economic substance test can lead to the taxpayer
being hit with a 40% penalty.
"There is as yet no evidence that the IRS is abusing the requirement for UTP disclosures or assessing
economic substance penalties in a reckless manner," says Ditkoff, adding that as a result both of these changes
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seem to be beneficial for both the IRS and the taxpayer.
"They are beneficial to the IRS because it does not need to expend resources looking for UTPs. Instead, it can
focus on what has already been disclosed by the taxpayer," he says. "And the new rules are of benefit to the
taxpayer in that it can ignore the crazy schemes hatched by tax planning boutiques and concentrate on tax
planning that is consistent with its business objectives."
Others have had slightly different experiences of tax planning in the context of IRS interpretations of the codified
economic substance doctrine, with Aksakal saying it is throwing up some issues by "creating an uncertain
environment for taxpayers and practitioners to engage in tax planning".
"In the BNY Mellon case, for example, there was surprise at the way the doctrine was applied. Taxpayers are
faced with considerable uncertainty about the range of the doctrine," she says. "The courts and authorities have
sometimes gone beyond the economic substance test of seeing if the structure changes the taxpayer's
economic position in a meaningful way, and have sought to assess whether there is a tax benefit at all. This has
added to taxpayer uncertainty and made tax planning work harder."
Obama budget proposals
While he views UTP developments as the most important change affecting US tax planning, that's not to say
Ditkoff is unconcerned about potential changes to the tax code; quite the opposite.
"That's [UTP developments] the good news for US tax planners," says Ditkoff. "The bad news is that corporate
tax reform is still on the Congressional agenda."
Ditkoff has previously expressed views on the Republican proposals to increase the federal deficit and reduce
US unemployment by lowering the corporate tax rate through base broadening and enacting a territorial tax
system financed by a retroactive tax on pre-enactment foreign earnings and profits (a move he describes as
"unconstitutional"). But he says the Obama Administration "has some pretty bad tax reform proposals of its
own".
"The first would disallow US interest deductions to the extent they are allocated to foreign income that is not
taxed in the US. That sounds pretty reasonable when you are only looking at third party interest. After all,
individual taxpayers in the US can't deduct interest on loans used to purchase tax-free municipal bonds," says
Ditkoff.
However, he says a problem arises because this would also apply to inter-company interest.
"For example, when a US company borrows from a foreign subsidiary, the foreign subsidiary's interest income
is taxable in the US under Subpart F. So the US company's interest deduction and its foreign subsidiary's
Subpart F income offset each other. However, if the foreign subsidiary's Subpart F income remains fully taxable,
while a portion of the US parent's interest deduction is disallowed, there is a mismatch that can be solved only
by repaying the debt to the foreign subsidiary."
Another Obama proposal causing some concern is the mooted change to foreign tax credits. The Obama
budget outlines a plan to create a single pool for determining foreign tax credits on distributed foreign earnings.
"At the present time, US corporations generally repatriate earnings from high tax foreign subsidiaries and use
low tax foreign earnings for foreign investments," says Ditkoff. "But if all dividends from foreign subsidiaries are
deemed to come from a single blended pool, there can be no foreign dividends without a residual US tax."
A third proposal Ditkoff takes issue with is the move to impose a tax on the repatriation of foreign capital.
"Sometimes when a US corporation wants to acquire a foreign business, but has insufficient foreign cash for
that purpose, it will inject cash into a foreign holding company, which then makes the acquisition," he says.
"Then when its foreign operations do accumulate some excess cash, they will loan it to the foreign holding
company, which will redeem some of its shares. As long as the foreign holding company has no earnings and
profits, its distribution to its US parent, which simply returns some of the US parent's initial investment in that
company, will not be subject to US tax. But the Obama Administration wants to tax those distributions."
Taken together, the three proposals identified would have a significant impact on US tax planning. Ditkoff
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believes the combination of these, if enacted, would effectively shut down all three tax-efficient methods by
which US companies repatriate cash from their foreign subsidiaries - loans, dividends and returns of capital. He
says this would remove ambiguity, but not in any positive way.
"This would convey a single unambiguous message to US multinationals: Use your foreign cash and profits to
expand your business and create new jobs anywhere you want as long as it's not in the US," says Ditkoff.
BEPS
A dominant theme globally is the concept of base erosion and profit shifting (BEPS). In the US, Zimmerman
says the OECD report has "had a lot of attention" but that many taxpayers are unsure what to make of it.
"US multinationals do feel targeted by the language used in the report, though, and there is a feeling of being
regarded with a jaundiced eye," says Zimmerman.
"From our viewpoint, though, nothing has really changed despite the new "base erosion" buzzword," adds
Aksakal. "We have always been very careful in advising clients anyway, and encouraged them not to take
shortcuts or skirt boundaries. This is clearly an area of extra focus now, though, and the US authorities are
increasing their staffing in the international area."
Jim Fuller, partner at Fenwick &West in California, has also seen the effects of increased IRS resources.
"The IRS has become more aggressive in transfer pricing, and there would seem to be an rise in the number of
companies in tax court over transfer pricing issues," says Fuller. "This is unfortunate. Transfer pricing is
complicated enough without these additional pressures from the IRS. But I suppose that's the purpose of the
IRS' new transfer pricing office. Some IRS audits have involved 10 or more IRS examiners, attorneys and
economists at meetings."
US officials want the OECD to go further in terms of clarifying the international tax planning environment.
"The OECD could do more in looking at overvaluation of risk or undervaluation of assets. As these are two
instances that give rise to BEPS," says Chung.
Carol Tello, partner at Sutherland Asbill &Brennan, echoes Chung's sentiments regarding the updating of
international tax planning rules.
"Current international norms date back to the 1920s when the League of Nations formed the permanent
establishment (PE) concept," says Tello, adding that the digital economy challenges the principles embodied in
the PE concept.
In Canada, the BEPS concept has already manifested itself in a variety of recent developments, says Jeffrey
Trossman, leader of the Blake, Cassels &Graydon tax practice.
"The theme of much of the recent legislative activity in Canada has been the protection of the "integrity" of the
tax base," he says. "In the 2013 federal budget, the government proposed several such "integrity" measures.
These include a new synthetic disposition rule (which frustrates common asset monetisation transactions) as
well as a character conversion rule (aimed at shutting down widely-used structures that effectively convert
ordinary income into capital gain). Also, previously existing opportunities to avoid the thin cap rules, where
businesses are conducted by branches or trusts, were eliminated."
These measures reinforce a trend seen over the last seven years, beginning with the 2006 announcement of
SIFT rules that shut down income trusts, and continued with, among other measures, the 2012 foreign affiliate
dumping rules which Trossman says "frustrated plans widely employed by foreign controlled Canadian
companies".
"The overall effect of this trend is to limit the menu of available strategies for corporate tax minimisation," says
Trossman. "Perhaps more significantly for taxpayers and advisers involved in tax planning in the context of
transactional work is that these rules, while typically aimed at a fairly well-understood mischief, invariably are
drafted very broadly, creating the prospect of potentially applying in seemingly benign situations."
As a result, he says, an increasing amount of time and energy must be spent in structuring ordinary commercial
transactions to ensure they do not inadvertently engage this array of new anti-avoidance rules, some of which
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have punitive consequences.
"Put another way, many tax executives and advisers are expending more and more resources on sidestepping
potholes, as opposed to exploiting loopholes," says Trossman.
Of particular interest is the fact this network of new specific anti-avoidance rules (SAARs) has emerged around
the 25th anniversary of Canada enacting a general anti-avoidance rule (GAAR).
"Perhaps ironically, the original GAAR enactment was coupled with the repeal of a number of SAARs - the
theory being that GAAR would be a sufficient deterrent to abusive transactions, and therefore that complicated
SAARs would no longer be needed," says Trossman. "The actual GAAR experience here in Canada has been
that the abusive tax avoidance test has been construed in a sufficiently narrow way that there are more SAARs
than ever in the Income Tax Act."
Many tax executives and advisers are expending more and more resources on sidestepping potholes, as
opposed to exploiting loopholes
Treaty developments
Tax treaty network developments have created more tax planning work in the past 12 months, too. Kristin
Konschnik of Withers Worldwide says that though US treaties are broadly similar, there are numerous small
(and not so small) differences between them. For example, US treaties contain a limitation-on-benefits (LOB)
provision that determines whether a treaty resident is entitled to claim treaty benefits, and these provisions
include a number of tests designed to ensure the treaty claimant has sufficient nexus to the treaty jurisdiction to
justify availing itself of the benefits.
While these tests are broadly the same, says Konschnik, there are various nuances which lead to differing
results.
"For example, a classic LOB test is the base erosion test, which generally requires both that the company
claiming benefits is owned as to a certain percentage by certain treaty residents and that non-treaty residents
don't receive more than a certain percentage of the company's gross income in deductible, non-arm'slength'ordinary course of business' payments," she says. "However, under some treaties the ownership test can
be met only by residents of the same jurisdiction in which the company is resident. Other treaties are more
permissive and allow the ownership test to be met by a combination of residents in both the US and the other
jurisdiction; and some treaties allow US and treaty jurisdiction residents and US citizens to meet the ownership
test. Similarly, some treaties require "more than 50% ownership" and some only require "50% or more
ownership"."
Konschnik says the differences may appear small, but they can have a significant impact on tax planning. For
instance she references the US-Luxembourg treaty.
"One reason why US companies use Luxembourg as a structuring jurisdiction - in addition to the generally good
Luxembourg tax regime - is that it has a favourable treaty with the US," she says.
David Forst, of Fenwick &West, agrees that treaties have been an area of some recent changes and said that
binding mandatory arbitration in unsettled competent authority proceedings, which is in an increasing number of
US treaties now, is a good development.
He says the US modifications to LOB provisions need "careful reading" in order to take advantage of the
nuanced tax planning opportunities Konschnik refers to, and to avoid pitfalls.
But while treaty inconsistencies provide a little room for manoeuvre when it comes to structuring tax affairs,
there is no doubt the big-ticket issue that is holding everybody's attention is impending US tax reform. How
these developments play out - and when - will determine the ways in which taxpayers and advisers must adapt
in their tax planning activities in the next 12 months. Over to you, Congress.
Canada
Tier 1
Blake Cassels &Graydon
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Davies Ward Phillips &Vineberg
Ernst &Young
Osler Hoskin &Harcourt
PwC
Stikeman Elliott
Tier 2
Deloitte
Goodmans
KPMG
McCarthy Tetrault
US
Tier 1
Akin Gump
Baker Botts
Baker &McKenzie
Cleary Gottlieb Steen &Hamilton
Davis Polk &Wardwell
Deloitte
DLA Piper
Ernst &Young
Fenwick &West
Fulbright &Jaworski
Kirkland &Ellis
Mayer Brown
McDermott Will &Emery
PwC
Skadden Arps Slate Meagher &Flom
Sullivan &Cromwell
Vinson &Elkins
Wachtell Lipton Rosen &Katz
Tier 2
Bingham McCutchen
Caplin &Drysdale
Cravath Swaine &Moore
Debevoise &Plimpton
Gibson Dunn &Crutcher
KPMG
Latham &Watkins
Miller &Chevalier Chartered
Morgan Lewis &Bockius
Paul Hastings
Paul Weiss Rifkind &Garrison
Shearman &Sterling
Sidley Austin
Steptoe &Johnson
Sutherland Asbill &Brennan
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Thompson &Knight
Weil Gotshal &Manges
Subject: International taxation; Tax reform; Manycountries; Tax planning;
Location: Europe, United States--US, Asia, Latin America
Classification: 9175: Western Europe; 9190: United States; 9179: Asia & the Pacific; 9173: Latin America;
4200: Taxation; 4310: Regulation
Publication title: International Tax Review
Pages: n/a
Publication year: 2013
Publication date: May 2013
Year: 2013
Publisher: Euromoney Trading Limited
Place of publication: London
Country of publication: United Kingdom
Publication subject: Business And Economics, Business And Economics--Public Finance, Taxation
ISSN: 09587594
Source type: Scholarly Journals
Language of publication: English
Document type: Feature
ProQuest document ID: 1354430743
Document URL: http://search.proquest.com.proxy1.ncu.edu/docview/1354430743?accountid=28180
Copyright: ( (c) Euromoney Institutional Investor PLC May 2013)
Last updated: 2013-06-04
Database: Accounting & Tax,ABI/INFORM Global

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