International Tax Planning Research Articles

Multilateral Convention: Potential Issues of Legal Uncertainty

On October 1, 2019, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting entered into force with respect to the Russian Federation. The main purpose of the MLI is to establish minimum standards for combating international tax avoidance. The MLI will extend the key approaches of the BEPS plan at once to a large number of bilateral double tax treaties. The application of the MLI is expected from January 1, 2021 in relation to a number of tax treaties concluded by the Russian Federation. At the same time, certain provisions of the MLI leave some questions about their application and may cause new problems for the taxpayers and tax authorities. In the short term, the application of a number of MLI provisions may be expected to increase uncertainty in international tax planning and lead to an increase in the number of disputes over tax treaties. The main purpose of this article is to analyze the key provisions of the MLI and identify possible problems of their enforcement for the subsequent analysis of potential ways to overcome the legal uncertainty of the application of the MLI. To this end, the tasks were set to study the goal of adopting the MLI, and analyze the content and procedure for the application of the MLI, as well as the content of the key standard of the MLI—the principal purpose test. Identifying the problems of law enforcement before the start of active use of the MLI is important, since it would allow one to pay attention to possible problems at an earlier stage and quickly move to their resolution, which would contribute to the formation of a higher level of legal certainty in the field of international tax planning and further development of foreign economic cooperation.

International Tax Planning: A Perspective on the Principal Purpose Test

This article provides a detailed review and analysis of the commentary on article 29(9) of the Organisation for Economic Co-operation and Development's (OECD's) model tax convention, the so-called principal purpose test (PPT). The PPT is intended to deny a treaty benefit where obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in the relevant circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty. The analysis distills the various principles that are reflected in the OECD commentary, compares those principles with principles developed in Canadian jurisprudence involving similar tests applied under the Income Tax Act, and highlights some uncertainties; but ultimately, it is intended to contribute to the process of better understanding how the PPT may affect the interpretation and application of Canada's numerous income tax treaties.

Aggressive Tax Avoiders: U.S. Multinationals Shifting Domestic Earnings to Zero

ABSTRACTWe investigate whether U.S. multinational corporations shift income overseas to the point of recording domestic pretax earnings around zero. We label firms with near-zero domestic earnings “Small” firms, and present evidence that Small captures targeted income shifting that minimizes worldwide and domestic current taxes. Because shifting essentially all income out of the U.S. represents a very aggressive form of international tax planning, Small firms represent an important margin for understanding the income shifting of U.S. MNCs. We find that firms facing tax incentives to shift income and firms with greater income shifting ability are more likely to report near-zero domestic earnings. In addition, investors value the earnings of Small firms higher than that of other U.S. multinational firms, conditional on overall profitability, suggesting that, on average, investors hold a positive view of income shifting to the point of recording domestic earnings around zero.Data Availability: Data are available from the public sources cited in the text.JEL Classifications: F23; H25; H26; M40.

Do Credit Rating Agencies Care About Our International Tax Planning Strategy When Assigning Credit Ratings?

International tax planning strategies, by their very nature, increase firms’ free cash flows, which could improve companies’ creditworthiness. However, these strategies also bring information and agency problems, which may reduce their creditworthiness. To understand which of these effects dominates, this study examines the effect of international tax planning on credit ratings. We find that credit analysts incorporate information related to international tax planning when analyzing a firm’s credit risk and that high international tax planning is associated with less favorable credit ratings. We also find that this effect is mitigated by a higher conflict of interest for the bond rating agencies. Furthermore, we find that the effect of international tax planning operates through the channels of future cash flow effects, agency costs, and information risk. Our results are robust to a difference-in-differences research design using The American Jobs Creation Act of 2004 as an exogenous shock to the benefits from international tax planning, and we document that the effect of international tax planning is different from and incremental to overall tax avoidance.

GE의 지배구조와 국제조세전략

본 논문에서는 지난 127년 동안 미국 자본주의의 역사를 대표하는 다국적기업으로 널리 알려져 있는 제네럴 일렉트릭(GE)의 국제조세전략 사례를 살펴본다. GE는 최근 20여 년 동안 적극적인 국제조세전략을 통해서 매우 낮은 유효세율을 공시하여 왔는데 이렇게 GE가 적극적인 조세전략을 실행한 배경에는 강력한 지배구조가 있다. GE 지배구조의 특징은 분산된 소유구조, 강력하고 독립적인 이사회와 기업가치에 연계된 경영자보상이다. GE의 주요주주들은 연기금 등의 기관투자가들인데 이들은 안정적 분기별 이익과 배당을 최우선 목표로 설정하고 스톡옵션과 같은 경영자보상을 통해 GE 경영진들로 하여금 적극적인 조세전략을 추진하도록 유인했다. 1990년대 말 적극적 해외 금융소득에 과세이연을 허용하는 것으로 미국세법이 개정되면서, GE는 해외 저세율국가에서 발생하는 이익의 송금을 이연시켜 현금조세를 최소화하여 순현금흐름을 증가시켰으며, 미송금된 해외이익을 재무보고상 영구적재투자이익으로 분류하여 전세계과세시스템이었던 미국에서의 법인세비용을 낮게 인식하여 재무보고상 세후 순이익을 극대화하였다. 이런 조세전략을 통해서 GE는 매년 수입억 달러에 달하는 막대한 조세이익을 보고하여왔으며 이는 GE가 보고하는 총이익에서 상당한 비중을 차지했다. 예를 들어 2009년 GE가 PRE 지정으로 보고한 조세이익은 3십억 달러인데 이는 동일한 연도에 GE가 거둔 순이익의 27%에 달한다. 그러나 금융위기 이후 GE는 신용등급의 하락, 강력해진 금융규제로 인하여 심각한 재무적 제약상황에 처하게 되었으며 결국 2015년 Capital 사업 중단 결정과 이로 인한 대규모 송금으로 인하여 국제조세전략을 중단하기에 이르렀다. 이런 GE 사례는 다국적기업의 조세회피와 관련된 기존의 연구결과들을 뒷받침하는 시사점을 줄 수 있다. 구체적으로 지배구조와 조세회피와의 관련성, 재무적 제약이 조세전략에 미치는 영향 및 조세회피에 대한 명성비용에 대한 시사점을 준다.

International tax planning techniques: a review of the literature

PurposeThis paper aims to understand the international practices of tax planning. International companies choose their capital structure according to differences in international taxation, in order to minimize the tax burden of the whole company group. This paper reviews the literature that deals with international tax avoidance techniques by highlighting tax planning measurements in the empirical literature. The methodology used is the narrative approach of literature review, which consists on assembling and synthesizing previously published research. The paper concludes that there are several approaches of international tax planning including transfers of revenues by geographical area, redevelopment of the company, haven and loopholes in tax legislation. Moreover, finding more precise measures of tax planning techniques would be of great value to studies in this respect.Design/methodology/approachThe authors follow the guideline provided by Templier and Pare (2015) in order to select the type of the literature review to use in this paper. Accordingly, this paper employs the narrative approach of literature review, which consists on assembling and synthesizing previously published research on international tax planning. This narrative review will serve as a starting point for future investigations and research developments. The authors rely on a logic of configuration in order to analyze data. This logic consists on addressing then organizing various aspects of international practices of tax planning.FindingsThe paper concludes that there are many aspects of international tax planning that need to be covered by future researchers, especially finding more precise measures of tax planning techniques would be of great value to studies in this respect.Research limitations/implicationsThe literature survey reveals the following issues. First, few studies have been conducted to date. Second, several approaches remain unexplored, and studies rely only on surveys' results collected from the annual report of companies (microeconomics variables), while macroeconomic variables can better explain the phenomenon of international tax planning. In this context, studies containing proposals to estimate more accurate international companies' tax planning techniques would also be welcome. Previous literature supposes premises on this issue th:at limit the accurateness of the analysis. Particularly, empirical literature is short of the proper measurement to evaluate corporate tax avoidance. This would explain the various interpretations of research findings. Hence, finding more precise measures of tax planning techniques would be of great value to studies in this respect.Practical implicationsThis literature survey highlights recent studies dealing with tax planning theories within the framework of corporate governance. This theoretical framework particularly specifies which key variables are the most suitable for measuring tax planning methods and highlights the need to examine how those key variables might differ and under what circumstances. In addition, it underlines limits on tax planning measurements by addressing the comparison of the empirical measurements.Originality/valueThe paper contributes to the literature on internal tax planning in several ways. First, this study is unique in that it constitutes the only literature review that provides a comprehensive overview of research on international tax planning. Especially, it extends previous studies by considering the specific new trend of empirical literature dealing with the techniques of international tax planning. This literature review identifies two categories of tax planning approaches including techniques related to company internal management practices and international tax planning techniques. In addition, the literature survey helps to determine various strategies used by multinationals for tax planning, through an in-depth review of the existing studies. Finally, it provides researchers with a starting point to further explore issues related to tax avoidance techniques.

International Corporate Tax Regime Post-BEPS: A Regulatory Perspective

Among the other rationales underlying the existence of corporate income tax (CIT) as a standalone tax on the profits derived by legal entities, some scholars have underlined its regulatory function, i.e. its potential to steer the behaviour of private sector actors. In this regard, it has to be noted that significant constraints on the use of CIT as a regulatory tool have emerged in the aftermath of the base erosion and profit shifting (BEPS) project. One example may be found in the new ‘modified nexus approach’ with regard to tax incentives for R&D activities. This article takes a regulatory perspective regarding the recent attempts to overhaul the ‘international corporate tax regime’, resulting in the adoption of new hard- and soft-law rules. The regulatory perspective is understood here as the capacity of the rules of international tax law to affect the behaviour of both corporate taxpayers in arranging their cross-border activities and the States in designing their CIT systems. The BEPS initiative, being an unprecedented exercise in tax coordination aimed at widespread avoidance practices, serves as a prime example of how international tax law fulfils its regulatory function, by guiding the behaviour of both governments and taxpayers. Accordingly, the paper argues that the international corporate tax regime post-BEPS exhibits two sides of the same regulatory coin: on the one hand, taxpayers are disincentivized to resort to particular types of international tax planning; on the other, the incentives for individual States to engage in corporate tax competition are significantly reduced. It is further argued that the most far-reaching proposal in this area relates to ‘global minimum tax’, drawn under Pillar Two of the ‘BEPS 2.0’ initiative. international tax law, tax competition, regulatory taxation, tax incentives, tax avoidance, BEPS, global minimum tax.

Analysis of Interest Deduction Rules Under Ethiopian Corporate Tax System

The use of third party and related party interest is one of the profit-shifting techniques available in international tax planning. The fluidity and fungibility of money make it a relatively simple exercise to adjust the mix of debt and equity in a controlled company. When the level of debt capital is much greater than the equity capital of the company thin capitalization occurs. Nowadays, thin capitalization is one of the major challenges to the corporate tax system of Ethiopia. Thin capitalization reduces government income from tax by increasing deductible interest paid or payable on the debt. To address this problem, Ethiopia has implemented tax rules restricting the deductibility of interest payments. This article aims to qualitatively examine the interest deduction rules under the Ethiopian income tax regimes through a qualitative analysis of existing literatures and laws. To this end, the analysis start unfolding the conceptual framework of interest deduction and its rules followed by an examination of interest deduction rules of Ethiopia. As the finding has revealed, the newly enacted federal income law has taken a big step in tightening the interest deduction rules through the adoption of debt-to-equity ratio and arm’s length approach to determine the maximum debt on which interest deductible. In doing so, the income tax rules of Ethiopia incorporated the indirect interest deduction rule which indirectly limits the amount interest on which is deduction is allowable. In addition to this, the withholding tax imposed on interest paid to non-resident and limit on maximum deductible interest rates are adopted as an interest deduction approach to supplement arm’s length and debt-to-equity ratio to protect tax base erosion. Despite these positive developments, the Ethiopian tax law has failed to recognize direct interest deduction rules which directly limit the maximum interest on which deduction is allowed. Nowadays, interest stripping rule is widely appreciated as the modern and most effective approach that directly restricts interest deduction. So, the failure to introduce a direct interest deduction rule is one of the major defect interest deduction rules in Ethiopia. Besides, the income tax law has failed to limit the special debt-equity ratio that applies to financial institutions. Furthermore, the tax law has failed to set a maximum deductible rate that applies to financial institutions licensed to lend in Ethiopia. To fill these gaps and ensure efficient protection of the tax base against erosion by deduction of interest payment, the researcher called for a direct interest deduction rule. Besides, the researcher called for the introduction of the debt-equity ratio that applies to a financial institution and the maximum deductible interest rate concerning the interest payment to legitimate financial institutions.

Profit-shifting through Panama Papers destinations: A case study for the Czech Republic

This paper exploits firm-level data from the ORBIS database to identify international tax planning by the Czech multinational enterprises (MNEs) through Panama Papers destinations. Profit shifting is measured by comparing a tax payable per unit of profits of the Czech MNEs having links to the Panama Papers destinations with the results of the same indicator of the Czech non-multinational entities i.e., without any cross-border links and thus without any profit shifting opportunities. Results are based on the sample of 116,312 entities and provide evidence about the importance of the Panama Papers destinations in profit-shifting from the Czech Republic. Overall, the estimated base erosion ranges from EUR 159 up to EUR 2.92 mil., which corresponds up to approximately CZK 14 mil. of corporate tax revenues losses. Results also show that anonymous ownership and financial secrecy play an important role in the world economy and contribute to the tax planning and profit shifting.

REGISTER OF ULTIMATE BENEFICIARIES AS A LEGAL MECHANISM FOR TRACKING THE REAL OWNER OF THE COMPANY. EXPERIENCE IN RUSSIA AND ABROAD

In 2015, the European Union adopted the Fourth European Union Directive 2015/849 of the 20th of May, 2015 «on the prevention of the use of the fi nancial system for the purpose of money laundering and terrorist fi nancing», which introduced the most important innovation – the introduction of a public register of benefi cial owners of European companies and other structures. This article examines the reaction of individual countries to the main proposals and comments of the Directive, which is refl ected in the amendments to the current legal system. Special attention is paid to offshore zones, which are trying to fi nd a compromise between the comments of the European Union, promoting business transparency, and the principle of anonymity, which is the main privilege of offshore territories and which attracts a considerable fl ow of entrepreneurs and their investments. In addition, the article deals with the problem of contradiction of the Russian legislation regulating the procedure for maintaining the register of benefi cial owners and providing information contained therein. The article formulates the main conclusion regarding the register of benefi ciaries as a new modern trend of international tax planning, which should be taken into account in the future when creating the structure of foreign companies, as well as when choosing the jurisdiction in which business activities are planned.

Profit-shifting through Panama Papers destinations: a case study for the Czech Republic

This paper exploits firm-level data from the ORBIS database to identify international tax planning by the Czech multinational enterprises (MNEs) through Panama Papers destinations. Profit shifting is measured by comparing a tax payable per unit of profits of the Czech MNEs having links to the Panama Papers destinations with the results of the same indicator of the Czech non-multinational entities i.e., without any cross-border links and thus without any profit shifting opportunities. Results are based on the sample of 116,312 entities and provide evidence about the importance of the Panama Papers destinations in profit-shifting from the Czech Republic. Overall, the estimated base erosion ranges from EUR 159 up to EUR 2.92 mil., which corresponds up to approximately CZK 14 mil. of corporate tax revenues losses. Results also show that anonymous ownership and financial secrecy play an important role in the world economy and contribute to the tax planning and profit shifting.

What the BEPS?

Unprecedented attention to aggressive international tax planning has shaken the earth under the most powerful players in the world of international tax policy design. The media exposure of what Bloomberg’s calls “The Great Corporate Tax Dodge,” combined with the ever-growing discontent of civil society with the magnitude of contribution of the largest multinational enterprises to the society within which they operate, has recently forced the politicians to take action. Leaders of the strongest world economies demanded a revision of the rules of the international tax regime that would generate more revenues for their challenged coffers and would restore public trust in the system. In what is now commonly known as the Base Erosion and Profit Sharing (“BEPS”) project, the OECD has established three principles: (1) promotion of collaborative rather than competition based solutions; (2) take a holistic view of the challenges and their corresponding solutions rather than an ad hoc approach; and (3) permit the consideration of innovative solutions even when they conflict with the traditional premises of the current international tax regime. This Article reviews the progress of the BEPS project and its compatibility with the fundamental principles for reform set by the OECD with a view to influence the discourse and the outcome of the project. This Article focuses on the importance of the paradigm shift from the current emphasis on competitiveness and the perfection of competition to a collaborative international tax regime, demonstrating the desirability of such a shift and suggesting how the OECD should go about making that shift.

International tax planning within the structure of corporate entities owned by the shareholder‐individuals through Panama Papers destinations

AbstractMotivationThe Panama Papers scandal highlighted the scale of financial secrecy, anonymous ownership and shell companies and their role in profit shifting and tax avoidance. We show the importance of international tax planning within the structure of corporate entities owned by shareholder‐individuals through Panama Papers destinations.PurposeTo identify profit‐shifting channels and to estimate related government revenue losses to European Union Member States.MethodsUsing company data from the Amadeus/Orbis database (Bureau Van Dijk, n.d.a, n.d.b), we applied micro‐data analysis to the financial statements of multinational companies (MNEs) owned by shareholder‐individuals. Two groups—one with and the other without links to Panama Papers tax havens—alongside an analysis of profit‐shifting indicators.FindingsProfit is generally shifted by moving operating revenues or costs, though the use of debt channels is also important. Also, groups linked to tax havens pay significantly less tax per unit of profit before tax, and require less operating revenue to achieve higher profits. Finally, related government revenue losses were assessed at EUR 8.67 billion.Policy implicationOur results are relevant to the European Commission’s Comprehensive Common Consolidated Corporate Tax Base (CCCCTB) as it aims to counter profit shifting out of the European Union (EU) into tax havens. Further, our research highlights the importance of setting up registries of ultimate beneficiary owners in EU Member States.

Międzynarodowe planowanie podatkowe z wykorzystaniem spółki prawa luksemburskiego

System podatkowy w Polsce cechuje się dużą liczbą obciążeń podatkowych oraz skomplikowaną konstrukcją poszczególnych podatków. Wpływa to bezpośrednio na decyzje podmiotów gospodarczych, które przyjmują różne postawy w odpowiedzi na wysokie opodatkowanie ich dochodów. Celem artykułu jest przedstawienie jednego ze sposobów legalnego międzynarodowego planowania podatkowego umożliwiającego minimalizację opodatkowania dochodów przedsiębiorców dzięki wykorzystaniu odpowiednich regulacji prawnych oraz form organizacyjno-prawnych prowadzonej działalności gospodarczej. W artykule zwrócono również uwagę na proces dostosowywania struktur do zmieniających się przepisów podatkowych.

Is ATAD a Black Hole? The Impact on International Tax Planning

This article examines the impact of the EU Anti-Tax Avoidance Directive (2016/1164) (ATAD) on international tax planning. Is ATAD a black hole in the tax planning universe, absorbing almost every possibility, especially double non-taxation and hybrid mismatches? Do the regulations on hybrid mismatches have a limited 2D effect? Does international tax planning need to be redefined in the ATAD era and what is the solution?

International Tax Planning: Transfer Pricing and Transactions Between Foreign Entities

International Tax Planning: Transfer Pricing and Transactions Between Foreign Entities

Chinese State Capitalism and the International Tax Regime

As signaled by its participation in the G-20/OECD Base Erosion and Profit Shifting Project, China is gaining significant influence over international tax rules. Yet, how exactly China intends to shape international tax law remains an open question, even amongst leading Chinese tax scholars. As both a major capital importer and exporter as well as a developing economy with tremendous global economic power, China does not fit neatly into the traditional dichotomies of the international tax regime. This article argues that China’s international tax policy is likely to be strongly influenced by its unique system of state capitalism. Both the history of Chinese domestic tax reforms and the Communist Party’s current mechanisms of control over the Chinese economy suggest that China’s tax policy cannot be understood separately from its system of state capitalism. This article contends that as a result, China is likely to adopt distinctive international tax policies including maintaining a worldwide system of corporate taxation, providing tacit state support for international tax planning by major Chinese multinationals, and negotiating for broad exemptions in tax treaties for state-associated entities. If not proactively addressed by OECD countries, these policies may lead to significant fractures within the international tax regime.

Dutch Shell Companies and International Tax Planning

This paper uses the financial statements of special purpose entities (SPEs) for explaining the origin and destination of dividend, interest, and royalty flows passing the Netherlands. We find that Bermuda is the most important destination for royalty flows. These flows come from Ireland, Singapore and the United States. For dividend and interest payments the geographical pattern is more widespread. We find a substantial tax reduction for royalties by using Dutch SPEs compared to a direct flow between the origin and destination country. However, we cannot find such tax savings for dividends and interest with an approximation based on statutory tax rates. When controlling for country characteristics in our regression analysis we do find that tax differentials partially explain the geographical patterns of income flows diverted through the Netherlands. This is the case for the likelihood that a route is used, as well as for the size of the flows. This paper is one of the first using bilateral income flows as dependent variables instead of bilateral FDI stocks or flows.

International Tax Planning: The Stop-Loss Rules and Corporate Reorganizations—Interpretive Challenges

Tax rules often present interpretive challenges. One such challenge involves the stop-loss rules, which can suspend the recognition of a loss realized on a transfer of shares between affiliated persons. Continuity rules prevent a suspended loss from being released as a result of certain corporate reorganizations. One continuity rule applies to mergers and combinations, while others apply to certain types of windups. The Canada Revenue Agency recently issued a broad interpretation of the former rule, arguing that in this context a "merger or combination" can include a winding up—even if the woundup corporation has multiple shareholders. In this article, the principles of statutory interpretation are applied to the relevant provisions, to determine their true meaning. This analysis indicates that the continuity rule for mergers and combinations does not apply to windups.

When is tax planning becoming aggressive in France?

Based on the adage ‘Fraus omnia corrumpit’ and shaped by the French Courts and Legislator for more than 150 years, the abuse of law doctrine applies to all taxes against all taxpayers in respect of domestic and international tax planning. It allows the French Tax Authorities to sanction tax planning qualified as aggressive in disregarding any legal arrangement and raising taxes when the transaction is either considered to be artificial, fictitious or simulated, or purely tax motivated and the taxpayer obtained an improper tax benefit by a literal application of the relevant tax rules while disregarding the spirit of such rules.