Cross-border Tax Research Articles

Principles of subsidiarity and proporcionality in tax law enforcement

Subject. The principles of subsidiarity proportionality, which serve as the basic principles fordetermining the competence of integration associations, are considered in the article.Aim. The aim of this paper is to analyse the place and the importance of Member States’ obligationsderiving from the EU legal order in order to address the relationships between EU lawand national tax law, as well as to analyse the practice of using of principles of subsidiarity andproportionality by the highest courts of the Russian Federation as a federal state.Methodology. The author uses methods of theoretical analysis, particularly the theory ofintegrative legal consciousness, as well as legal methods, including formal legal method andcomparative law.Results, scope. The exercise of power by the European Union in the areas of shared competencemust respect the principle of subsidiarity. The founding Treaties make clear thatsubsidiarity is a legal enforceable legal principle. However. the case law of the EuropeanCourt of Justice reveals that the enforcement of subsidiarity as a judicial principle has beenineffective.The article examines cross-border loss relief for group companies in the context of EuropeanUnion law and considers how this has affected Member States such as the UK. Thecase law of the Court of Justice is then analysed in an attempt to assess whether some ofthe principles set out in these legislative initiatives found their way to Member State lawsthrough the Court's jurisprudence. Following this, the judicial and legislative response tothe Marks & Spencer judgment in the UK are critically assessed.The practical suggestions are looking at developing EU compatible tax principles to be appliedto cross-border taxation within the EU.Having considered the principles of subsidiarity and proportionality in the context of interactionbetween integration and national tax law, the author suggests directions for improvingthe practice of integration tax law. The supranational judicial authority should dwell onthe position that only those differences that are directly based on the origin of the incomeor nationality of the taxpayer can be justified on the basis of restrictions on fundamentalfreedoms.Conclusions. The author comes to the conclusion that a co-ordinated approach to crossborder tax is essential. The effectiveness of integration tax law will largely depend on how the ratio of the norms of integration and national law in the tax jurisdiction of the Union and member states will be formed. However, historically direct tax has been viewed by Member States as central to national sovereignty.

Automatic exchange of tax information: initiation, implementation and guidelines in Bulgarian context

The paper aims to introduce and clarify automatic exchange of tax information as a global and European Union initiative in order to curb tax evasion via cross-border tax avoidance, along with aggressive tax competition. It investigates the role of Organization for Economic Cooperation and Development (OECD) which developed Common Reporting Standard (CRS) and endorsed it in 2014. CRS is a framework for automatic exchange of tax information with the purpose to promote cooperation among various jurisdictions. For EU Member States, CRS is transposed by the amended EU Directive on Administrative Cooperation (DAC2). Bulgaria as a member state has transposed the Directive in the national law. This study examined automatic exchange of tax information (AETI) from Bulgarian perspective – historic development, legal framework, responsible and competent authorities and application of DAC2 and expectations for newly approved DAC3. In the study, Bulgarian financial institutions (banks) are examined, implementation status and how the challenge of AETI, including client information and data protection, are addressed. Primary data for banks are collected from publicly available sources (website of the respective bank), as company websites of top 5 Bulgarian banks were examined for information related to automatic exchange of financial information/tax information. Results show that major Bulgarian banks, within First Group in terms of assets, are initiating the process, internal due diligence and preparation for the new reporting requirements. General conclusion is that currently there are some critical issues to be addressed, new DAC3 might introduce higher challenges, as practical guidance is the solution.

Crackdown on tax evasion – improving ways of coordination between the tax authorities and automatic exchange of information developments in Romania

Abstract In an effort to reduce the tax transparency and banking secrecy, the Organisation for Economic Co-operation and Development (“OECD”) has been taking the lead on the battle against cross-border tax evasion, seconded by the Internal Revenue Services (“IRS”) of the United States of America (“USA”), the G20 and the European Commission. Understanding the power that is brought by information and knowledge, the international community proposed adapting the exchange of information tools that were available to them and extending them to a worldwide level. As a result, the Common Reporting Standard (“CRS”) and the Foreign Account Tax Compliance Act (“FATCA”) reporting standards were born. This paper aims at analyzing the improvements in automatic exchange of information brought by the CRS and FATCA standards, together with its limitations. An important section of this paper shall be dedicated to the role that Romania plays in the international efforts of fighting tax evasion, together with the tools and procedures developed in order to sustain the reporting standards. In order to analyze the effects of the CRS and FATCA, it is essential to understand the pros and the cons of the international cooperation on tax matters and its available tools before the CRS and FATCA were created. As there is limited previous literature on the subject, the methodology of the research will consist mainly of analyzing the guidelines issued by the international public body representatives and of the current legislative framework. The main finding of the paper can be considered the fact that the new developments in the automatic exchange of information field can represent a huge step forward towards limiting the tax evasion activity, however, one should be reserved due to aspects such as compliance costs, protection of private information, data gathering and processing techniques and tax residency uncertainty. Further analysis is required when the automatic exchange of information results will be available in order to update the reservations of the paper.

EU Implementation of BEPS Action 12 in Light of Human Rights Requirements

The author examines the tools available to tackle aggressive tax planning and presents the framework for a mandatory disclosure regime referred to in Action 12. She argues for a potential mechanism in the form of an EU directive to adequately address cross-border tax schemes. Further, the limitations on EU action in light of human rights law are analysed.

The Evolving World of Global Tax Planning: Part II

The authors continue their analysis of the evolving world of global tax planning, with a particular focus here on means of resolving cross-border tax disputes.

The Decline of Manufacturing in the U.S. Economy: Impacts of China's Trade Shockk, Trump's Protectionist Tariffs, and the Drivers of Manufacturing Job Losses (Presentation Slides)

The long-term declining role of manufacturing in the U.S. economy – reflecting a shift of the economy after World War II to a post-industrial orientation with an increased emphasis on services – was accelerated by the effects on manufacturing jobs and trade deficits of President Reagan’s budget deficits in the 1980s and China’s recent trade penetration. Similarities of Reagan’s policies to President Trump’s proposed protectionist tariffs and the cross-border corporate tax reform advocated by House Republicans in February 2017 suggest a possible partial reversal of the long-term job decline, but the ensuing major dislocations in jobs are unlikely to lead to a net increase in manufacturing jobs. The magnitude and fast pace of China’s import penetration, coupled with anemic demand for domestic goods and high productivity gains in American factories, are associated with the 33 percent decline of 5.7 million domestic manufacturing jobs in the 2000-10 period – the largest loss in a decade in U.S. history. The effects on manufacturing employment associated with trade, domestic demand, and productivity strongly suggest that the largest impact – accounting for over 85 percent of total manufacturing jobs lost in the 2000s – is attributable to technological advances in U.S. factories sustaining productivity gains, with trade a relatively minor contributory factor, when viewed from the long-term perspective. The superior productivity gains, as well as the vaunted growth in real value-added output, associated with manufacturing are driven by the performance of its computer and electronic products industry, representing only 13 percent of total manufacturing value added. China’s trade competition challenged the prevalent assumption, based on bilateral trade pacts after World War II, suggesting that economies recover from ‘trade shocks’ by displaced workers shifting into higher-productivity export industries. Free trade agreements and China’s trade penetration – with the benefits not evenly distributed in the U.S. – are associated with the geographically-concentrated and unexpected political results of the November 2016 elections.

Leak-Driven Law

Over the past decade, a number of well-publicized data leaks have revealed the secret offshore holdings of high-net-worth individuals and multinational taxpayers, leading to a sea change in cross-border tax enforcement. Spurred by leaked data, tax authorities have prosecuted offshore tax cheats, attempted to recoup lost revenues, enacted new laws, and signed international agreements that promote “sunshine” and exchange of financial information between countries. The conventional wisdom is that data leaks enable tax authorities to detect and punish offshore tax evasion more effectively, and that leaks are therefore socially beneficial from an economic welfare perspective. This Article argues, however, that the conventional wisdom is too simplistic. In certain circumstances, leak-driven lawmaking may in fact produce negative social welfare outcomes. Agenda-setting behaviors of leakers and media organizations, inefficiencies in data transmission, suboptimally designed legislation, and unanticipated behavioral responses by enforcement-elastic taxpayers are all factors that may reduce social welfare in the aftermath of a tax leak. This Article examines the potential welfare outcomes of leak-driven lawmaking and identifies predictable drivers that may affect those outcomes. It provides suggestions and cautions for making tax law, after a leak, in order to best tap into the benefits of leaks while managing their pitfalls.

How Kenya Has Implemented and Adjusted to the Changes in International Transfer Pricing Regulations: 1920-2016

transfer pricing; cross-border taxation; Kenya; Africa; tax avoidance; base erosion and profit shifting.

The Case against BEPS Lessons for Coordination

In 2013 the OECD, at the behest of the G20, embarked upon an ambitious project of coordinating and harmonizing countries’ international tax rules under the guise of curtailing multinational companies’ cross-border tax planning, generally referred to as base erosion and profit shifting, or BEPS. The project was finalized with great fanfare in October 2015. But the proclamations of success masked real underlying differences between participant countries. I argue that the project suffered from a number of flaws that that largely precluded effective coordination, as a result of which the project’s recommendations largely gloss over key differences in participants’ goals and commitments while doing nothing to solve the systemic problems it was seeking to address. For example, while a key stated goal of the project was to align the taxation of profits with value creation, there was no attempt made to define the location of value creation, nor to address the fact that this principle is fundamentally at odds with the arm’s length principle that serves as the backbone of transfer pricing rules. The project left in its wake a system even more broken than before, but one papered over with rhetoric suggesting the illusion of consensus and general agreement on new rules. Broadly worded anti-abuse rules allow different countries to go off in their own, preferred directions in interpretation, implementation and enforcement. They thus open the door to unprincipled and aggressive tax agents and an increase in multilateral tax disputes with no clearer path to resolution. Poor outcomes were largely predictable from the project’s premises, which merely sought to reinforce the existing rules, but never questioned whether those rules needed updating to adjust for global economic changes and to lead to a fairer allocation of taxing rights. Furthermore, the project failed to acknowledge the bias in the existing system that meant that the outcomes were likely to benefit more powerful countries at the expense of smaller and weaker ones. While the project may have succeeded in its overt goal of limiting multinationals’ international tax avoidance, it never addressed the more systemic failures of the system that underpinned the broad consensus it achieved in obtaining initial agreement on its action plan. The BEPS project thus has important lessons for the future of international coordination efforts, as efforts to fix a broken international tax system, restore public confidence in multinational corporations, and achieve real agreement on the underlying principles of the rules must continue, if only to minimize the flood of disputes expecting to result from the recent changes in law and policy. More broadly, the role that international tax rules can play in addressing inequality and economic stagnation remains an important topic.

The Case Against BEPS: Lessons for Tax Coordination

In 2013, the Organisation for Economic Co-operation and Development (OECD), at the behest of the G20, embarked upon an ambitious project of coordinating and harmonizing countries’ international tax rules under the guise of curtailing multinational companies’ cross-border tax planning, generally referred to as base erosion and profit shifting, or BEPS. The project was finalized with great fanfare in November 2015. But the proclamations of success masked real underlying differences between participant countries. I argue that the project suffered from a number of flaws that largely precluded effective coordination, as a result of which the project’s recommendations largely gloss over key differences in participants’ goals and commitments while doing nothing to solve the systemic problems it was seeking to address. For example, while a key stated goal of the project was to align the taxation of profits with value creation, there was no attempt made to define the location of value creation nor to address the fact that this principle is fundamentally at odds with the arm’s length principle that serves as the backbone of transfer pricing rules.The project left in its wake a system even more broken than before, but one papered over with rhetoric suggesting the illusion of consensus and general agreement on new rules. Broadly worded antiabuse rules allow different countries to go in their own, preferred directions in interpretation, implementation, and enforcement. They thus open the door to unprincipled and aggressive tax agents and an increase in multilateral tax disputes, with no clearer path to resolution. Poor outcomes were largely predictable from the project’s premises, which merely sought to reinforce the existing rules but never questioned whether those rules needed updating to adjust for global economic changes to lead to a fairer allocation of taxing rights. Furthermore, the project failed to acknowledge the bias in the existing system, which meant that the outcomes were likely to benefit more powerful countries at the expense of smaller and weaker ones. While the project may have succeeded in its overt goal of limiting multinationals’ international tax avoidance, it never addressed the more systemic failures of the system that underpinned the broad consensus it achieved in obtaining initial agreement on its action plan.The BEPS project thus holds important lessons for the future of international coordination efforts, as efforts to fix a broken international tax system, restore public confidence in multinational corporations, and achieve real agreement on the underlying principles of the rules must continue, if only to minimize the flood of disputes expected to result from the recent changes in law and policy.

The Europeanization of Good Tax Governance

This is a unique era where the international tax community, most vocally represented by developed countries mainly through the OECD/G20, is engaged in a global fight against tax evasion and tax avoidance. It is thought that lack of tax cooperation increases the risk of cross-border tax evasion and avoidance. The recalcitrance shown by some countries to engage in deeper cooperation is something that is widely criticized. However, apart from the traditional notions of cooperation/assistance and exchange of information commonly viewed as instrumental in the fight against tax evasion/avoidance, another concept has emerged — that of good tax governance or tax good governance or fiscal good governance. Countries are increasingly being asked to adopt standards of tax good governance either on a stand-alone basis or in the context of the fight against tax avoidance and evasion, without a common understanding of what this concept actually entails. Notwithstanding the uncertainties surrounding good tax governance, it is acquiring increasing importance and institutional backing, both internationally and within the European Union (EU). This paper examines how this concept has been received and developed internationally and especially in the context of the EU. From an international perspective, it is shown that there are many facets of good tax governance and it is not always clear what the term actually covers. For international organizations such as the OECD and the UN, the focus is on developing countries and certain state functions such as domestic resource mobilization and capacity building. In a wider context, the focus also seems to be on the relationship between governments and their ability to (automatically) exchange some types of information and ensure transparency. To a lesser extent, the focus is also on the relationship between governments and taxpayers through regimes of enhanced cooperation between tax authorities and some taxpayers. The author considers the soft law initiatives that have been taken in these areas and examines how some of these initiatives are gradually morphing into hard law. In the second half of this article, the author examines the development of the concept of good tax governance in the EU context. Here, it is shown that although the EU was more precise as regards the definition of this concept (at least in the early stages of its evolution), by linking the concept of good tax governance with fair tax competition this has enabled the Commission to inject a great amount of subjectivity in this area. Furthermore, by including the exchange of information and later on BEPS standards in the definition of this concept, this facilitated the Commission’s more expansionist agenda both internally and externally. The author assesses the implications of what she calls the Europeanization of good tax governance — or good tax governance a la Europeenne — and the problems that this creates in so far as the global development of the concept is concerned.

Better governance through more transparency on advance cross-border tax rulings

In recent years, the challenge posed by tax fraud and tax evasion has increased considerably and has become a major concern within the European Union. As a consequence, in the European initiatives a special emphasis has been laid on the actions aimed at reinforcing the anti-abuse provisions in bilateral tax treaties, national legislation and EU corporate legislation. Any artificial arrangement carried out for tax avoidance purposes would be ignored and companies would be taxed instead on the basis of actual economic substance. The aim of the article is presenting the European initiative aimed at implementing the automatic mode of the exchange of information on cross-border tax rulings and advance pricing arrangements. The paper investigates if the implemented measure can help Member States to detect certain abusive tax practices taken by companies, and to take the effective actions in response. It also tries to answer the question whether the initiative can result in more transparency and – as a consequence – in much better governance, both at the states’ and the corporations’ level.

INTERMEDIATE RESULTS AND LIMITS OF HARMONIZATION OF DIRECT TAXES IN THE EUROPEAN UNION

УДК 347.9 The article is devoted to analysis of tax harmonization in the area of direct taxation in the European Union. Questions of positive and negative integration, common market and tax harmonization are analyzed. The author mentions the following benchmarks of the European tax integration: these are tax harmonization in the area of direct taxation, prohibition of discrimination and of unfair competition, leading role of fundamental freedoms in field of European integration. The direct effect of EU law is brought into light. The international treaty is a special source of law of Member States and it used in cases which can't be regulated by national legislation or by acts of integration law. Directives and regulations as sources of EU secondary law are described in the article. Their special features are also brought into light. International EU agreements and acts of cooperation in the area of taxation are also brought into light. The special role of soft law is also mentioned in the article. The special role of the European Court of Justice in forming of EU tax law is emphasized. The conclusion of the article is in the statement of importance of taxation in the forming of internal market in integration community. The expected results are important both from theoretical and practical points of view and include: working out the legal framework of direct taxation and finding out actual problems of integration tax law mentioning modern trends of cross-border taxation; recommendations of improving of harmonization mechanisms in the EAEU and improving of the Russian Tax Code.

Tax Seminar II on Recent Case Law of the European Court of Human Rights on Taxation and Special Issues on the Taxation of Expatriates

A tax seminar for students following the LL.M course in Cross-border Taxation of Human Capital was held at the Faculty of Law of Maastricht University on 12 March 2014. The objective of this seminar was to provide the students with additional information and insights on several issues with regard to the taxation of individuals. Dr Marjon Weerepas, associate professor of law at Maastricht University, welcomed the speakers as well as the participating students and gave a brief introduction to the subject of the seminar. The seminar featured two presentations given by Ms Larisa Gerzova, senior research associate in the International Bureau of Fiscal Documentation (IBFD), and Ms Laura Ambagtsheer-Pakarinen, also in the IBFD.

The Relationship between Corporate Social Responsibility and International Tax Avoidance

This paper aims to illustrate Corporate Social Responsibility (CSR) dilemmas that multinationals face when taking international tax planning decisions. The paper, written as a chapter in a CSR-handbook for business lawyers, first provides an overview of the context in which cross-border tax issues and dilemmas arise, and identifies the relevant stakeholders and actors. The authors do not take a stance in the discussion on whether or not CSR should play a role when a multinational determines its international tax planning policy, but taking as a starting point a hypothetical multinational that wants to take CSR considerations into account, they illustrate the tax planning dilemma’s that may arise. They provide a list of factors that may be taken into account by a multinational in determining whether an international tax planning scheme is acceptable from a CSR point of view. To illustrate the relevance of their observations, the authors finish the discussion by considering three of the debate’s high-profile cases.

BEPS Action 16: The Taxpayers’ Right to an Effective Legal Remedy Under European Law in Cross-Border Situations

This article starts from the reasonable assumption that the implementation of the base erosion and profit shifting (BEPS) project increases legal uncertainty in tax matters. The shift from the isolated and bilateral exercise of taxing jurisdiction to international tax coordination in the framework of the BEPS project is not accompanied by a corresponding global convergence in the exercise of legal remedies, which remain confined to their national boundaries. In line with their previous research, the authors address hereby the right of taxpayers to an effective legal remedy under European tax law, taking into account the dialogue among Courts in respect of legal values contained in national Constitutions of European Union (EU) Member States, the EU Charter of Fundamental Rights and the European Convention on Human Rights. The focus is on the right to an effective legal remedy in cross-border tax procedures, with special emphasis on mutual agreement procedures and mutual assistance. The authors suggest a two-tier mechanism with the involvement of taxpayers and tax authorities, which allows for an effective exercise of the right of defence and does not require major changes in the wording of treaty clauses modelled after Articles 25 and 26 OECD MC. Hopefully, something that other international institutions, including the United Nations, may consider for the future. The authors suggest filling this gap with their proposal for a BEPS Action 16.

Confronting the problem of cross-border tax evasion in an era of greater global transparency of tax relevant information

Purpose This paper aims to examine the Nigeria’s approach for tackling tax evasion, the limitations of double tax conventions for that purpose, the benefits of multilateral instruments/standards for automatic exchange of tax information and Nigeria’s ability to participate in such arrangements. Design/methodology/approach This paper is a library-based research, deploying content analysis with respect to books, law reports, law journals and newspapers. Findings Nigeria has taken significant steps to deal with domestic tax evasion by tightening anti-money laundering legislation, principally by making tax evasion a predicate offence and by imposing relating reporting obligations on financial institutions and a wide range of designated non financial institutions (DNFI's), but cross-border tax evasion remains a big problem owing to a limited network of double tax conventions (DTCs) and inherent limitations of the machinery in limiting exchange of information to distinct requests. Nigeria’s ability to benefit from new international standards providing for automatic exchange is compromised by the absence of robust rules with respect to taxpayer confidentiality and data protection. Research limitations/implications Because the research focused on Nigeria, the findings of the study might not be applicable to other jurisdictions. Originality/value Given the devastating effects of tax evasion on development in Nigeria and the priority accorded to the eradication of the problem in the sustainable development goals, this paper meets a need to determine the extent of sufficiency of Nigeria’s legal and regulatory framework in enabling the country to tackle tax evasion.

Cross-border tax evasion under a unilateral FATCA regime

Cross-border tax evasion has emerged in recent years as a central issue in tax enforcement. Traditionally, the legal regime governing cross-border tax enforcement was based on information exchange upon request. In 2010, the US Congress enacted the Foreign Account Tax Compliance Act (FATCA), which seeks to induce foreign financial institutions (FFIs) to participate in a global regime of automatic information reporting of the income of US residents to the US government. This paper presents a simple theoretical model of cross-border investment that analyzes the consequences of this (unilateral) FATCA regime. The model emphasizes cross-border investors' (heterogeneous) intrinsic motivation to comply with tax law, as well as the impact of information reporting requirements on the cost of providing financial services. In FATCA-compliant equilibria (in which FFIs report information to the US government) FFIs face a higher cost of providing financial services, increasing the fees charged to their accountholders. Consequently, tax-compliant behavior – such as investing via their domestic financial sector – becomes more costly for foreign residents. Under certain conditions, a unilateral FATCA regime causes increased cross-border tax evasion among residents of foreign countries. This result is robust to various extensions.

Taxing Investments in the Asia-Pacific Region: The Importance of Cross-Border Taxation and Fiscal Incentives

This article investigates the taxation of investments in the Asia-Pacific region. The authors’ analysis is based on the methodology of Devereux and Griffith (1999 and 2003) for determining effective average tax rates. This approach allows us to account for important domestic and international tax regulations. The results presented in this article show that for the tax law of 2014, the overall dispersion of effective tax burdens in the Asia-Pacific region ranges from 10.6% in Hong Kong to 40.4% in India for domestic investments (an overall average of 23.4%). In 8 out of 19 jurisdictions covered, investments are, however, effectively taxed at a rate between 20% and 25%. For foreign direct investment, international tax law regulations have a significant impact on the overall tax burden. In any of the Asia-Pacific jurisdictions, foreign direct investments by a Singaporean or a German parent company are on average taxed at 29.2% and at 32.8% in the case of profit repatriation to the United States. Meanwhile, tax incentives for the stimulation of private investment reduce the effective average tax rate by 8.6 percentage points on average. Fiscal incentives targeted at investments in the high-technology sector or the development of specific geographic areas result in the lowest effective tax burdens.

Dispute Resolution in Cross-Border Tax Matters

The author, in this note, looks at the history and present trends of cross-border tax dispute resolution as discussed at the 20 November 2015 ICT Leiden Conference. The author provides his personal insights and comments, exploring the current state and future initiatives aimed at making dispute resolution more effective.