Tax Matters Research Articles

Aggressive Tax Planning and Corporate Social Irresponsibility: Managerial Discretion in the Light of Corporate Governance

The purpose of this contribution is to explore the possibility of integrating tax with corporate social responsibility (CSR). Some corporate directors seem to argue that they do not have a choice with regard to tax planning, implying that a responsible tax planning strategy is not an option. This contribution shows such argument to be wrong. First, the issue of management accountability and choice will be dealt with in the context of corporate governance systems in order to find out what kinds of obligations corporate governance entail for managers. It will be shown that corporate directors enjoy sufficient discretion for making socially responsible decisions. To this end, two existing theoretical frameworks will be analysed, according to which corporate decisions should prioritise either shareholders or stakeholders interests. Both theories allow managers a choice to act with a wider interest than purely shareholder value maximisation. Furthermore, it will be argued that managerial discretion to take CSR into account does not oblige managers to aspire to some kind of ideal social responsibility but rather to stay away from corporate social irresponsibility (CSI). Therefore, corporate managers in different corporate governance regimes have sufficient room for aligning their tax planning strategies with societal expectations and avoiding aggressive tax planning. Thus, this paper aims to make two contributions to academic theory. First, it is shown that both shareholder and stakeholder-oriented corporate governance regimes allow for managerial discretion to take CSR on board in tax matters. Secondly, the concept of corporate social irresponsibility is introduced to enhance a more balanced debate about multinationals’ tax planning practices.

Selectivity in Corporate Tax Matters After World Duty Free: A Tale of Two Consistencies Revisited

In World Duty Free Group, the CJEU has reaffirmed that de jure-selectivity requires a derogation from the reference system of taxation giving rise to a different treatment of undertakings that are in a legally and factually comparable situation in light of the objective of the reference system. In corporate tax matters, the reference system is generally the corporate tax system itself. It is thus not necessary to identify a certain group of undertakings as the only ones that can benefit from a tax measure. The CJEU’s emphasis on discrimination in the second step of the selectivity test will not effectively restrict the concept of selectivity. By contrast, the CJEU did not address the internal justification where problems persist which respect to permissible grounds of justification, to the relationship between derogation and justification and finally to proportionality. In World Duty Free Group, the CJEU has also confirmed the existence of a second dimension of selectivity, namely de facto-selectivity. While de jureselectivity amounts to an obligation to design Member States’ tax systems in an internally consistent manner, de facto-selectivity can be understood as an example of the obligation also to adhere to certain external consistency standards.

Exchange of Information on Subjects and Allocation of Income Rules: How Cooperation in BEPS Era is Boosting Economic Allocation of Income and Disregard of Narrowly-Held Entities

Parallel to recent significant changes to international tax rules, the G20, OECD and the European Union have furthered administrative cooperation to fill enforcement gaps that made previous rules, and could make new rules, less effective. Within these new administrative mechanisms, improvement of Exchange of Information (EoI) is probably the leading policy. In this regard, new standards and reviewing processes of EoI upon request, the Common Reporting Standard for automatic EoI, and the extension of EoI to new fields such as rulings or Country-By-Country Reports, have significantly changed the panorama on information available to tax authorities. However, the impact of such rules may not be limited to the administrative procedure, but it could also progressively lead to a significant change in practical application of allocation of income rules, both at treaty and domestic level. This is due to the use of identification rules that point to the ultimate owner of income and assets and because of two reasons. First, the economic ownership and substance analysis policy underlying G20, OECD and EU tax policy projects, namely the BEPS Action Plan; and second, the import of identification rules from protocols on information on financial activity to prevent crimes such as terrorism or drug-trafficking. This last one makes an impact on EoI for tax matters as the rules do not match at all the purposes of the rules they are inserted in. While these rules were developed in the 90s aimed at identifying natural persons behind structures used for financing and supporting criminal activities, EoI for tax matters should provide the information to apply tax rules, that is to assess taxes according to their ability to pay as prescribed by the relevant law. It is true that EoI does not define per se allocation of income. But when tax authorities receive a person linked to an asset or income upon new EoI Standards, it will be tempting to automatically allocate such asset or income to he or she. Thus, defining natural persons behind entities or contracts may not help but distort application of taxes as it may lead tax authorities to attribute the income or asset to a different person from the one that applicable law allocates it. Moreover, as those rules refer to natural person with reference to certain percentage of participation in the shares, it may lead to an almost automatic disregard of narrowly-held entities. Doing so, allocation of income rules on domestic tax law and tax treaties could in practice change radically. Thus, this paper aims at analysing new EoI rules as refers to the identification of the holder of assets or income, and if they match the purpose they serve. To do so, in the first part we will analyse identification rules in EoI; in the second part, we will briefly analyse attribution of income rules in tax treaties and we will compare them and identify the gaps between both set of rules and the possible changes in the application of tax treaties they may lead to.

Taxing the Virtual Economy: Tax Implications of E-Commerce in Uganda

Information technology advancements have been challenging many traditional concepts and approaches and tax authorities have been faced with a problematic, or rather challenging scenario because of the development of electronic commerce. E-commerce presents a radical transformation of the nature of commercial activities, creating significant challenges to regulations and tax formulas that are not specifically directed towards the “virtual” commercial world. The design of tax policies in the face of e-commerce is now a tall order. Like in many developing and even developed countries, Uganda Revenue Authority (URA) has not implemented effective strategies to tax these online transactions. The purpose of this study was to obtain insights into the e-commerce category of potential taxpayers that will enable their inclusion into the tax bracket. Specifically, it was intended to get a clear understanding of the nature of operation of the e-commerce business in Uganda; identify the major products/ services traded through e-commerce; assess the revenue potential of e-commerce businesses and to assess the capacity of URA (policy, legal and administrative frameworks) to effectively tax e-commerce. This research employed both a qualitative and quantitative approach. It involved discussions with officials from various government agencies, Ministry of Finance, IT experts and App developers and some textual analysis of the existing academic articles, periodical reports from UCC and legal documents. The study also benefited from URA registration and compliance data. The study established that the sector is steadily growing in Uganda manifesting in almost all sectors of the economy. The e-commerce scope in Uganda includes but not limited to online marketing, sports betting, professional services, online retailing among others. These are greatly supported by the telecom and financial sectors that provides them the operating and payment platforms. Majority of the players were revealed highly non-compliant with their tax matters. There is very weak regulation of the sector in Uganda and the current tax laws were found inadequate to tax the sector players. On the administrative side, the study recommends that URA should assign staff to register these players, hire experts in this sector, benchmark from other countries and understand the relationship between telecoms and financial institutions. On the legal side, the residence and place of supply rules need to be amended to cater for e-commerce; URA should also introduce a withholding tax on all bank transactions originating from outside the country among others.

Should Taxpayers Have Access to the International Tax Arbitration Procedure?

Globalization has subjected corporations to multi-jurisdictional tax systems. As a result, cross-border entities are exposed to the possibility of being audited and undergoing tax adjustments more than once for their transactions. In addition, various states’ measures — such as Tax Information Exchange Agreements (TIEA) and the Foreign Account Tax Compliance Act (FATCA) — have promoted international cooperation, thereby allowing tax authorities to have access to a vast volume of data. The risk of double taxation has greatly increased due to the multi-jurisdictional authorities’ easy access to data. To address and balance the overlap of jurisdictions in tax matters, states are signing bilateral and multilateral treaties consenting to mandatory and binding tax arbitration, thereby expanding states’ mutual agreement procedure “MAP,” a historic competent authority negotiation process. However, taxpayers are not part of the arbitration process. The focus of this analysis is on demonstrating the benefits of taxpayers’ access to the state-to-state MAP arbitration procedure, which was intended to provide taxpayers relief from double taxation.

Transfer Pricing in Mauritius and the Case for a Proper Legal Framework

This paper aims to analyze the general anti-avoidance legislative provisions of the Mauritius Income Tax Act. In doing so, the importance of certainty in law regarding tax matters will be highlighted, and the need for an appropriate legal framework to combat transfer pricing abuses in Mauritius will be discussed. In the absence of data on transfer pricing in Mauritius, direct and indirect interactions with key stakeholders have been carried out in order to find out the current situation of transfer pricing in the country.

Taxation and Innovation in the 20th Century

This paper studies the effect of corporate and personal taxes on innovation in the United States over the twentieth century. We use three new datasets: a panel of the universe of inventors who patent since 1920; a dataset of the employment, location and patents of firms active in RD and a historical state-level corporate tax database since 1900, which we link to an existing database on state-level personal income taxes. Our analysis focuses on the impact of taxes on individual inventors and firms (the micro level) and on states over time (the macro level). We propose several identification strategies, all of which yield consistent results: i) OLS with fixed effects, including inventor and state-times-year fixed effects, which make use of differences between tax brackets within a state-year cell and which absorb heterogeneity and contemporaneous changes in economic conditions; ii) an instrumental variable approach, which predicts changes in an individual or firm's total tax rate with changes in the federal tax rate only; iii) event studies, synthetic cohort case studies, and a border county strategy, which exploits tax variation across neighboring counties in different states. We find that taxes matter for innovation: higher personal and corporate income taxes negatively affect the quantity and quality of inventive activity and shift its location at the macro and micro levels. At the macro level, cross-state spillovers or business-stealing from one state to another are important, but do not account for all of the effect. Agglomeration effects from local innovation clusters tend to weaken responsiveness to taxation. Corporate inventors respond more strongly to taxes than their non-corporate counterparts.

Selectivity in Fiscal Aids: Recent Developments

The notion of fiscal aid is becoming crucial in determining the relationship between supra-national integration and national tax sovereignty; the selectivity criterion is often key in the assessment of compatibility of fiscal measures with Article 107(1) TFEU. Therefore, the notion of selectivity as defined by the recent case-law of the CJEU and decision-making practice of the Commission is fundamental in order to understand the actual allocation of powers in direct taxation matters. Against this backdrop, the aim of the present article is to establish what the current notion of selectivity is in fiscal aids, assessing whether the approach used by the CJEU and the Commission share common patterns, and evaluating the impact of such interpretation on the division of competences within the EU. In particular, this article offers a critical reading of the recent European Commission v. World Duty Free case and of the so-called Tax Rulings Decisions.

Towards an International Code for administrative cooperation in tax matter and international tax governance

There is not a “Global Code” that encodes the duty of cooperation between tax authorities in the world, concerning the global tax system. This article addresses this issue by proposing a global Code of administrative cooperation in tax matters including both tax relations: between States, and between States, taxpayers and intermediary’s agents. It follows a wide concept of tax governance. The findings of this research have highlighted several practical applications for future practice. article analyses, firstly, the State of the question, starting with the legal sources (international and European sources of hard law and soft law) reviewing the differences with the Code as here proposed. It also examines some important Agents who emit relevant normative in international administrative tax cooperation and the role that these agents are developing nowadays (sometimes international organizations but also States like the United States, which Congress enacted the Foreign Account Tax Compliance Act, FATCA). Overlapping and gaps between different regulations are underlined. Finally, the consequences of this “General Code” lack for the functioning of a good international governance, are described. Hence, the need to create an International Cooperation Code on tax matters and international fiscal governance is concluded. That Code could be proposed by any International Organization as the World Bank nature, for instance, or the International Monetary Fund or whichever International or European Organization. This instrument could be documented through a multilateral instrument (soft law), to be signed by the States to become an international legal source (hard law). Filling this Code as Articulated Text (form) could be very useful for the International Community towards an International Tax Governance.

Responsible Investment: Taxes and Paradoxes

Abstract Taxes have become an issue of corporate social responsibility (CSR), but the role of taxation is to some extent an ambiguous and controversial issue in the CSR framework. Similarly, another unclear question is what role investors who are committed to sustainable and responsible investment (SRI) see taxes as having on their environmental, social, and governance (ESG) agenda. Corporate taxes have an inverse relationship with the return of the investors: taxes paid directly affect what is left on the bottom line, reducing the return of investors. However, investors are now more aware of tax-related risks, which can include different forms of reputation risk. Corporate tax planning may increase the returns, but those increased returns are riskier. This study focuses particularly on the relationship between SRI and taxation. We find that tax matters are considered to be on the ESG agenda, but their role and significance in the ESG analysis is unclear.

Greek Council of State Seminal Decision Regarding the Limitation Period for Tax Matters (Case 1738/2017)

The authors, in this note, discuss a decision of the Greek Council of State regarding the limitation period for tax matters. In particular, the case examined the practice of the Greek Parliament to extend, through statutory amendments, the duration of the limitation period for tax matters, enabling the Greek tax authorities to impose taxes in respect of fiscal years with limitation periods that would otherwise have lapsed.

The EU and ECHR Rights of the Defence Principles in Matters of Taxation, Punitive Tax Surcharges and Prosecution of Tax Offences

Where national tax legislation comes within the scope of EU law, it must be compatible with the principle of the rights of the defence, as developed by the Court of Justice of the European Union in its case law and found in the Charter of Fundamental Rights of the European Union. The rights of the defence proclaimed by the European Convention on Human Rights (ECHR) is also applicable in tax matters when a tax dispute involves a criminal charge. For the European taxpayer it may not be clear if and when the principle of the rights of the defence can be invoked or how the rights of the defence in EU law and the rights of the defence of the ECHR influence domestic tax proceedings. Broadly speaking, customs duties, harmonized indirect taxes and to some extent direct taxes fall under the EU rights of the defence, while the ECHR applies to tax matters in which punitive measures occur or criminal prosecution takes place.

Congregación De Escuelas Pías Provincia Betania: Tax Exemption for Education Services by Religious Congregation Not Sacrosanct from State Aid Perspective

On 27 June 2017, the Court of Justice handed down a judgment in another fiscal State aid case concerning a tax exemption granted by Spain to a religious congregation performing educational services (Case C-74/16 Congregación de Escuelas Pías Provincia Betania). The Court of Justice’s judgment is interesting – and relevant for future fiscal state aid cases – for a number of reasons, which are discussed in the present article. Firstly, the case adds to the growing body of case law regarding the interpretation of the selectivity requirement in tax matters. Secondly and more importantly, the case provides insight into what constitutes an ‘economic activity’ and an ‘undertaking’ for state aid purposes, and specifically deals with the role played by the receipt of remuneration in this respect. Finally, the case may shed light on an issue of growing importance, i.e. the interaction between an instrument of public international law (a treaty) and various aspects of EU state aid law.

Increasing transparency in the European Union: developments of Country-by-Country Reporting

Increasing transparency in the European Union: developments of Country-by-Country Reporting The aim of the paper is to bring closer Country-by-Country Reporting and outline possible future amendments of the introduced anti-tax avoidance measures. The article presents the motives of implementing the international CbC initiative, aimed at increasing transparency of the biggest multinational enterprises, with particular emphasis on the specificity of the European Union. Part 2 of the paper analyses the Euro-pean legal bases for companies’ financial reporting. It also gives an overview of the main findings of Directive 2016/881, which implements Country-by-Country Reporting and allows for the exchange of information between tax authorities. Part 3 deals with the national perspective, presenting the CbC solu-tions implemented to the Polish legal system; the paper also attempts to assess the potential impact of tax information disclosures, both from the perspective of taxpayers and the tax administration. The final part presents conclusions and tries to draft future developments of the Country-by-Country Reporting system. In the paper, the following research methods have been used: critical analysis and deduction, with partic-ular reference to the source materials and legal acts, as well as the reports of the European Commission, consulting companies, and NGOs. Although the article deals with tax matters, CbC Reporting is an im-portant and relevant issue from the point of view of researchers and accounting specialists. Reporting this phenomenon is part of the accounting science as a universal tool for recording economic phenomena. The author examined all relevant sources and took into account all important factors in order to obtain a com-prehensive picture of CbC Reporting and to prepare a paper that may serve as a reference for future research.

The Proportionality Principle under EU Tax Law: General and Practical Problems Caused by Its Extensive Application – Part 2

This article analyses how the ECJ applies the proportionality principle in respect of direct taxation, as well as the consequences flowing therefrom. Part 1, published in European Taxation 9 (2017), addressed the proportionality principle and its application by the ECJ, while Part 2 covers the impact of the proportionality principle on justifications and the sovereignty of Member States in direct tax matters, as well as the consequences of the ECJ’s approach towards proportionality.

Use of Geographically Weighted Regression (GWR) Method to Estimate the Effects of Location Attributes on the Residential Property Values

This study estimates the effect of locational attributes on residential property values in Kuala Lumpur, Malaysia. Geographically weighted regression (GWR) enables the use of the local parameter rather than the global parameter to be estimated, with the results presented in map form. The results of this study reveal that residential property values are mainly determined by the property’s physical (structural) attributes, but proximity to locational attributes also contributes marginally. The use of GWR in this study is considered a better approach than other methods to examine the effect of locational attributes on residential property values. GWR has the capability to produce meaningful results in which different locational attributes have differential spatial effects across a geographical area on residential property values. This method has the ability to determine the factors on which premiums depend, and in turn it can assist the government in taxation matters.

The Proportionality Principle under EU Tax Law: General and Practical Problems Caused by Its Extensive Application – Part 1

This article analyses how the ECJ applies the proportionality principle in respect of direct taxation, as well as the consequences flowing therefrom. Part 1 addresses the proportionality principle and its application by the ECJ, while Part 2, to be published in European Taxation 10 (2017), covers the impact of the proportionality principle on justifications and the sovereignty of Member States in direct tax matters, as well as the consequences of the ECJ’s approach towards proportionality.

Requirements of the Principle of Legality in the Field of Taxation // Zahtjevi principa zakonitosti u oblasti poreza

The principle of legality of taxation is among the greatest rule of law, which not only provides protection against the arbitrariness of the authorities, but also, in a political sense, ensures the legal certainty of citizens, their rights and freedoms. The legal meaning of the principle of legality of taxation manifests in the establishment of taxes and the determination of the important tax components, tax rate interpretations, determination of taxes and the prohibition of the retroactive effects of tax laws. The very complexity of tax matters requires that certain questions regarding the entire process of taxation are further regulated by subordinate legislation, which is, on the basis of legal authorization, left to the executive authority or the government, the ministry of finance, the tax authorities, and in some particular cases to the local governments. However, subordinate legislation, such as decrees, regulations, instructions and decisions can only have a subsidiary character of the legislation in terms of the elaboration of legal provisions and shall be made when there is a specific authorization by tax law. Whether the principle of legality is violated by some regulation or not is decided in each specific case in a constitutional dispute by constitutional court, which evaluates whether the subordinate tax regulations set to taxpayers some new requirements that are not determined by tax law.

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.

El sistema tributario posrevolucionario y el juicio de amparo en materia fiscal, 1917-1935

On February 5, 1917, the Political Constitution of the United Mexican States was promulgated, which would begin on May 1 of that year. In it, besides its multiplied social and central part, was contained a liberal part, direct inheritance of its predecessor of the nineteenth century. The postrevolutionary tax system and the amparo judgment in tax matters represent the most liberal part of the Mexican constitution. Various articles of the Constitution established the general principles that were to be followed by fiscal policy and, in the amparo trial, these principles found their practical application. In this way, various social sectors found in the amparo a form of institutionalized fiscal resistance, going to the federal courts in search of protection and protection of the justice of the Union to avoid paying the contributions they considered disproportionate and inequitable, or Either to combat the procedures to carry out their recovery.