World Tax Journal
| Profit Shifting and “Aggressive” Tax Planning by Multinational Firms: Issues and Options for Reform
Author:Fuest, C.; Spengel, C.; Finke, K.; Heckemeyer, J.H.; Nusser, H. Published online:26 September 2013 2013 (Volume 5), No. 3 World Tax Journal This article discusses the issue of profit shifting and “aggressive” tax planning by multinational firms. The article makes two contributions. First, it provides some background information to the debate by giving a brief overview of existing empirical studies on profit shifting and by describing arrangements for IP-based profit shifting which are used by the companies currently accused of avoiding taxes. We then show that preventing this type of tax avoidance is, in principle, straightforward. Second, we argue that, in the short-term, policymakers should focus on extending withholding taxes in an internationally coordinated way. Other measures which are currently being discussed, in particular unilateral measures, like limitations on interest and license deduction, fundamental reforms of the international tax system and country-by-country reporting, are either economically harmful or need to be elaborated much further before their introduction can be considered. |
| Intra-Group Debt at the Crossroads: Stand-Alone versus Worldwide Approach
Author:Burnett, C. Published online:27 January 2014 2014 (Volume 6), No. 1 World Tax Journal Cross-border intra-group debt represents a significant proportion of total global monetary flows. Responding to tax base erosion from related party interest deductions, countries have introduced domestic rules against “interest stripping” but the heterogeneity of these rules leads to double taxation and double non-taxation. The OECD’s 2013 Base Erosion and Profit Shifting (BEPS) Action Plan endorsed by the G20 identifies debt deductions as “Action Item 4”, for reform by the end of 2015. This article surveys the existing approaches, from “stand-alone” to “worldwide ratio” rules. The author concludes that the worldwide approach is preferable, and recommends that more countries adopt such a rule, limiting the local leverage ratio to the third-party leverage ratio of the worldwide group. Such a rule is principled, given the fungibility and other unique features of finance, can draw upon existing rules in three countries and achieves the BEPS project aim of eliminating a large capacity for profit shifting. |
| BEPS: An Interim Evaluation
Author:Brauner, Y. Published online:4 February 2014 2014 (Volume 6), No. 1 World Tax Journal The article evaluates the OECD BEPS Action Plan and recent progress in light of the key insights of the BEPS: (i) progress can be achieved solely through cooperation, and the existing competition based, unilateral action dominated paradigm is destined to fail; (ii) a comprehensive, holistic approach rather than ad hoc fix-ups is needed for a chance of success; and (iii) some innovations differing from the tradition that is the base for the current regime may be required in order to tackle the evolving new challenges that the regime faces. The article points to the promising aspects of the plan and to the areas where progress seem wanting. It further provides observations on certain steps that the OECD can and should take to increase the chances of success of the BEPS project. |
| Attribution of Functions and Profits to a Dependent Agent PE: Different Arm’s Length Principles under Articles 7(2) and 9?
Author:Dziurdź, K. Published online:1 July 2014 2014 (Volume 6), No. 2 World Tax Journal This article argues that under the OECD Model, conceptually, there should be no difference between the arm’s length principles of articles 7(2) and 9, and analyses how control functions as significant people functions can still lead to a net profit attribution to a dependent agent PE above zero. |
| Transfer Pricing, Integration and Synergy Intangibles: A Consensus Approach to the Arm’s Length Standard
Author:Kane, M.A. Published online:9 October 2014 2014 (Volume 6), No. 3 (Next Issue) World Tax Journal A common critique of transfer pricing analysis under the arm’s length standard is that it is conceptually incapable of dealing with synergistic gains and losses among entities under common control. Specifically, its approach of respecting the separateness of corporate entities under common control and on allocating profit across such entities by reference to a baseline of uncontrolled, but comparable, situations cannot, under this critique, account for profits from integration, as they derive from the very fact of common control. This article addresses the question whether the arm’s length standard should be modified to incorporate a distinct “synergy intangible” to take account of such synergistic gains and losses. The article concludes that the introduction of a synergy intangible is undesirable, as it would not serve the core aim of transfer pricing analysis (in the treaty context) to reduce the risk of double taxation, while achieving a reasonable allocation of tax base across countries. In the service of this argument, the article introduces a three-part categorization of intangible value arising from the integration of assets: common control value, bilateral integration value and unilateral integration value. The article then urges a novel “fractional” interpretation of article 9 of the OECD Model, under which the article is read to reach only those profits that could be earned at arm’s length and thus does not speak to the allocation of profits that can only be earned under common control. The paper uses this framework to suggest particular approaches for dealing with synergistic gains and losses for each of the three types of value identified: the value from common control should be left to taxpayer discretion; the value from bilateral integration should be dealt with through attention to arm’s length ranges; and the value from unilateral integration should be dealt with through rules on aggregated transactions. The article concludes with prescriptive implications for the ongoing work of the OECD regarding intangibles and transfer pricing. |
| Exposing Unaddressed Issues in the OECD’s BEPS Project: What About the Roles and Implications of Contract Interpretation Law and Private International Law in the Transfer Pricing Arm’s Length Comparability Analysis?
Author:Pichhadze, A. (Amir) Published online:25 February 2015 2015 (Volume 7), No. 1 World Tax Journal Through the BEPS Project, the OECD is currently attempting to address the international tax system’s ongoing problems of base erosion and profit shifting. It aims to do so by introducing additional coordinated measures, while also rethinking and improving existing measures. The purpose of this article is to expose an issue that has not been addressed by the BEPS Project, though it is relevant to the Project’s objectives. This issue is the roles that contract interpretation law and private international law necessarily have in the task of delineating the actual controlled transaction when conducting the transfer pricing arm’s length comparability analysis. The article also explains some of the implications of these roles, and proposes measures for reform to address the potential risks involved. |
| Sharing the Benefits of the EU’s Common Consolidated Corporate Tax Base within Corporate Groups
Author:Petutschnig, M. Published online:11 June 2015 2015 (Volume 7), No. 2 World Tax Journal One of the main features of the CCCTB Draft Directive, the formulary apportionment of the consolidated group income, leads to a significant change in corporate income taxation paradigms. Currently, corporations are taxed on a separate entity basis using the arm’s length principle to evaluate intra-group transactions. Similarly company law uses a separate entity approach with regard to transactions between related parties. The CCCTB Draft Directive will regularly lead to allocation results that are explicitly not at arm’s length as the arm’s length principle will not be necessary anymore for tax purposes. However, without a corresponding change in company law paradigms – which is not foreseeable – the current lockstep between corporate income tax law and company law will cease to exist. Yet, not only the proposed CCCTB regime but also existing group taxation systems produce taxable outcomes that are not in accordance with the domestic company laws’ single entity approaches. This article therefore analyses group taxation systems currently employed by EU Member States and shows that the vast majority of group taxation systems employ instruments to (re-)unite the results from the joint taxation with company law’s separate entity approach. These accompanying mechanisms ensure a fair distribution of the advantages and disadvantages of the respective intra-group loss-offset system to all group members. However due to various reasons, one being the fact that every group member of the CCCTB will be responsible for a share of the group’s overall tax liability, another being the fact that different tax rates will apply within one CCCTB group, these currently employed mechanisms and techniques are not suitable for the CCCTB concept. Therefore this article develops a distinct mechanism to share the benefits of the CCCTB concept within the whole group. The current international debate on the suitability of the arm’s length to continue as a standard for the allocation of taxing powers in intra-group transactions and the new impetus for the common tax base in some EU Member States may suggest that there is a new potential momentum to make progress in the introduction of formulary apportionment within the European Union. |
| The Arm’s Length Comparable in Transfer Pricing: A Search for an “Actual” or a “Hypothetical” Transaction?
Author:Pichhadze, A. (Amir) Published online:24 July 2015 2015 (Volume 7), No. 3 World Tax Journal When searching for an arm’s length comparable in the transfer pricing analysis, does the analysis require (or allow) searching for a transaction that actually took place in the market, or can/should the internal data of the controlled transaction simply be imputed to form a hypothetical uncontrolled transaction in which the parties are assumed to be operating at arm’s length but otherwise dealing under the same circumstances? This article sheds light on this question, based on lessons distilled from recent Canadian jurisprudence; particularly, the case Canada v. GlaxoSmithKline Inc. The author calls on Canada’s courts to reconsider their approach to this issue, and alerts courts in other jurisdictions to avoid transplanting the Canadian approach because otherwise they would risk repeating the same mistake(s). |
| Improving the Chinese General Anti-Avoidance Rule: A Comparative and Functional Approach
Author:Pas, J. van der Published online:17 February 2016 2016 (Volume 8), No. 1 World Tax Journal Seven years after its introduction in 2008 with the enactment of the new Chinese Corporate Income Tax Law, the Chinese general anti-avoidance rule (GAAR) has become a complex and incoherent piece of legislation. Despite its current shortcomings, the international impact of the Chinese GAAR is expected to grow significantly given China’s increasingly proactive participation in the G20’s fight against international tax avoidance and its embrace of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative. Against this background, this research takes a comparative-functional approach to analyse and evaluate the functioning and efficacy of the Chinese GAAR. The comparative-functional approach is used to critically compare the Chinese GAAR with the GAARs of the Netherlands and the United Kingdom. These jurisdictions were chosen for reasons that are both practical and theoretical, as the comparators both have a large amount of reliable and openly accessible literature and jurisprudence, and strike a balance between civil law jurisdictions and common law jurisdictions. The analysis reveals that for a number of legal, institutional and cultural reasons, the Chinese GAAR is not working as effectively, and is not as balanced, as it could be. On these grounds, the article puts forward some suggestions for reforms on a legal and administrative level that could lead to a more balanced application of the Chinese GAAR. The article does not advocate judicial reforms. |
| Financial Transaction Tax: An Eleven-Point Analysis of Transaction Taxes Across Member States
Author:Said Formosa, C. Published online:23 February 2016 2016 (Volume 8), No. 1 World Tax Journal This article analyses the European Commission’s Proposal for Financial Transaction Tax with transaction taxes currently implemented in Member States of the European Union. The features identified for this purpose include transactions liable to tax, recognition of legal title, the tax base, jurisdictional rules, provisions for groups, exemptions, deduction rules and timing considerations. This analysis highlights that the Proposal, in principle, varies little from existing transaction taxes; tax rates are generally low and an extraterritorial effect is found in a number of Member States. The Proposal is however broader in scope and contains limited exemptions. The commonalities found in transaction taxes could help to forge a common framework for future reform of the Proposal whilst differences shed light on problems that may be encountered with respect to implementation. Greater support and guidance will be required. |
| Joint Tax Audits: Which Countries May Benefit Most?
Author:Burgers, I.J.J.; Criclivaia, D. Published online:29 August 2016 2016 (Volume 8), No. 3 World Tax Journal In their joint fight against tax avoidance and tax evasion, international governance organizations have developed different tools. One of these tools is the joint tax audit, in which two or more countries join together to form a single audit team to examine an issue(s)/transaction(s) of one or more related taxable persons with cross-border business activities. International governance organizations, such as the Organisation for Economic Co-operation and Development (OECD), the European Union and the African Tax Administration Forum (ATAF), promote the use of joint tax audits, amongst others, as a tool in fighting tax fraud, tax evasion and aggressive tax planning. The literature on this phenomenon mainly focuses on the advantages and obstacles of using the instrument, and the need to amend legislation. Moreover, in the literature, guidance for companies invited to participate in a joint tax audit can be found, as well as references to the few joint tax audits conducted and the results of a pilot project conducted by the Netherlands and Germany. The authors’ aim is to answer the question, “Which countries may benefit most from joint tax audits if the arguments raised in the tax literature are valid?”. The authors have identified eight arguments for joint tax audits (arguments (a) – (h), see sections 4.1. and 5.) in the tax literature and have used sixteen different yardsticks (factors 1 – 16, see section 6.) to analyse which countries might benefit most. To make the research project manageable, the research focuses primarily on the situation faced by the European Union’s 28 Member States (hereinafter the “EU-28”) and the 13 associated states. By combining arguments raised in the legal literature about joint audits with what public finance data tell us about, for example, tax compliance costs, the number of active taxpayers per administration employee, the number of mutual agreement procedures, tax compliance and tax moral levels, the authors analyse which of the EU-28 and its associated states might benefit most from joint audits and for what reasons. The analysis strongly supports the international governance initiatives for a multilateral legislative framework on joint audits. As multinational legislation in this field should be drafted with great care, the authors call for more pilot projects with, as their aim, the sharing of know-how and building capacity. The authors also provide some recommendations for the development of the multinational legislative framework and urge tax authorities/the OECD/the European Union to publish statistics on the joint audits performed. |
| “Visible, Though Not Visible in Itself”. Transparency at the Crossroads of International Financial Regulation and International Taxation
Author:Turina, A. Published online:20 September 2016 2016 (Volume 8), No. 3 World Tax Journal This article addresses the origins and potential evolutionary perspectives of one of the most frequently recurring words in the international tax policy debate: transparency. In doing so, this study introduces a two-level analysis. At a background level, it acknowledges that transparency is – by now – a term of art in the social sciences which lends itself to some specific legal characterizations. Adopting this very conceptual framework, the article advances the hypothesis of many symmetries between the international tax and financial regulatory spheres, which, in some instances, would seem to be suggestive of a derivative nature of the currently promoted transparency agenda in international taxation from various initiatives in the field of international financial regulation: this observation applies in particular to some underlying conceptual categories, institutional frameworks and concrete implementation mechanisms. The article argues that there are, thus, ample margins, on the one hand, to promote a reconciliation between these two regulatory spheres and, on the other hand, that international financial regulation – due to its historical precedence – may serve as a good predictor of some fundamental developments in the area of international tax transparency, once again especially with regard to the development of an institutional framework and the adoption of implementation mechanisms. At the same time, the shortcomings or asymmetries of the transparency agendas promoted in the two main fields of enquiry covered by the article are addressed in the light of the contribution of interdisciplinary “transparency studies” surveyed in the background section of this contribution. |
| International Profit Allocation, Intangibles and Sales-Based Transactional Profit Split
Author:Schreiber, U.; Fell, L.M. Published online:25 January 2017 2017 (Volume 9), No. 1 World Tax Journal Information technology has greatly changed the economy and intangible assets have become dominant value drivers of multinationals’ business. Firm-specific intangibles challenge the time-honoured arm’s length principle. The OECD’s Action Plan on Base Erosion and Profit Shifting addresses this issue, aiming at an allocation of profits associated with the transfer and use of intangibles that is in accordance with value creation. The OECD proposals are in line with inter-nation equity, but may have undesired effects on the investment location decisions of multinationals. The authors take the OECD’s proposals as a starting point and explore a sales-based transactional split of profits associated with intangibles to ensure both international investment tax neutrality and inter-nation equity. Sales-based taxation of intangible-related profits calls for an appropriate nexus in the sales jurisdiction. The authors examine possible avenues to expand the current permanent establishment rules to cover intangible-related business activities. |
| International Taxation in the Digital Economy: Challenge Accepted?
Author:Olbert, M.; Spengel, C. Published online:1 February 2017 2017 (Volume 9), No. 1 World Tax Journal The digitalization of the economy is considered as a key driver of innovation, economic growth and societal change, and is a major challenge for the international tax system. The OECD has addressed this challenge in its extensive Action 1 Final Report as part of its BEPS project. This article critically depicts the OECD’s view and reform proposals on taxing businesses in the digital economy. Further, recent literature contributions on the matter are synthesized. While taxing profits according to value creation is detected as the new paradigm in international taxation, this review reveals that the understanding of the digital economy and corresponding reform proposals for taxation are premature. The authors show that the OECD has systematically missed the opportunities to define the paradigm of value creation and to analyse digital business models accordingly. Considering the current challenges, the key pressure area for taxing digital businesses in the near future is transfer pricing. Drawing from practical case studies and research in industrial economics, accounting and management science, this article derives a concept for value creation in digital businesses. Based on this concept, the authors propose a framework to refine transfer pricing guidance in order to come closer to the goal of aligning profit taxation with value creation. |
| Profit Attribution to Dependent Agent Permanent Establishments in a Post-BEPS Eral
Author:Petruzzi, R.; Holzinger, R. Published online:4 April 2017 2017 (Volume 9), No. 2 World Tax Journal The overall topic of profit attribution to dependent agent permanent establishments is a highly complex issue. Various aspects are controversially discussed in literature. From a general perspective, article 7 and article 9 of the OECD Model are both fundamentally based on the arm’s length principle, which was initially established in the early 1930s in order to properly account for profit attributions within MNEs. Since its beginnings, the arm’s length principle(s) under article 7 and article 9 of the OECD Model have evolved over time. In this respect, especially the OECD’s work under the Authorised OECD Approach, BEPS Action 7 as well as under BEPS Actions 8-10 have eventually minimized, or even closed the gap between, the principles of profit attribution under article 7 and article 9 of the OECD Model. This article will analyse the topic of profit attribution to dependent agent permanent establishments, thus dealing with the question as to whether or not different results could/should arise when applying article 7 and article 9 of the OECD Model in a post-BEPS era. |
| Legitimacy and the Making of International Tax Law: The Challenges of Multilateralism
Author:Mosquera Valderrama, I.J. Published online:6 October 2015 2015 (Volume 7), No. 3 World Tax Journal |
| The Taxation of Technical Services under the United Nations Model Double Taxation Convention: A Rushed – Yet Appropriate – Proposal for (Developing) Countries?
Author:Báez Moreno, A. Published online:17 September 2015 2015 (Volume 7), No. 3 World Tax Journal |
| European Union – Transfer Pricing Adjustments and VAT
Author:Matesanz, F. Published online:4 September 2015 2015 (Volume 26), No. 5 International VAT Monitor In this article, the author describes the interrelationship between transfer pricing and VAT. He mentions that it is a fact that cannot be overlooked. Taxable persons need certainty on how to tackle transfer pricing adjustments for VAT purposes. The author explains that harmonization at EU level is urgently needed. |