the changing international tax landscape: causes and effects aldo farrugia: dg, legal &...
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THE CHANGING INTERNATIONAL TAX
LANDSCAPE:CAUSES AND EFFECTS
Aldo Farrugia: DG, Legal & International
Office of the Commissioner for Revenue
The Causes
Three Issues -
Tax Sovereignty
Human Rights and Developing Countries
Increased General Awareness on Tax Matters
First Issue
Tax Sovereignty
Tax legislation is always changing
Jurisdictions continue to rely on taxation to raise revenue and redistribute social income
Governments effect changes to their tax laws in order to reflect the socio-economic circumstances of their jurisdiction
Jurisdictions continue to assert as much sovereignty in tax policy as possible
Tax Sovereignty is not Absolute
Jurisdictions limit their tax sovereignty owing to a number of factors – Market forces Pragmatic concerns External influences Regulatory emulation Tax treaty negotiations
The Role of Tax Treaties
The interaction of domestic tax systems can lead to double taxation
Jurisdictions attempt to eliminate double taxation through international tax instruments
Such instruments - minimise trade distortions and
impediments to sustainable economic growth
have been critical in promoting cross border investments and competitive tax systems
Changes in Business Patterns A shift from country-specific operating
models to global models The growing importance of the service
component of the economy The increasing centrality of intellectual
property to value creation Businesses locate both productive
activities and legal rights in geographic locations that are distant from the physical location of their customers
Tax Authorities in Difficulty National governments are not in a
position to adequately monitor intra-firm transactions
MNEs operate on a global basis whereas Tax Authorities operate on a national basis
Tax services providers have become more sophisticated
Tax treaties began to facilitate not only the elimination of double taxation but also to facilitate double non-taxation
Tax Sovereignty is Undermined
Tensions emerged in the international framework
The objective of allocating taxing rights between countries where companies operate is seen to be undermined
Increased tax controversy and litigation between businesses and tax administrations as well as between tax administrations
The sovereign right of countries to set tax policy is seen to be undermined
Second Issue
Human RightsAnd
Developing Countries
Question of Human Rights
The modern international consensus about the definition and content of human rights began with the Universal Declaration of Human Rights that was adopted by the United Nations in 1948
The UN Human Rights Council adopted the UN Guiding Principles on Extreme Poverty and Human Rights in 2012
UN Guiding Principles on Extreme Poverty and Human Rights According to these Guiding Principles
eradicating extreme poverty is not only a moral duty but also a legal obligation under existing international human rights law
There is a connection between taxation and human rights
Tax abuses deprive governments of the resources required to respect, promote and fulfil human rights
Impact of Tax Abuses on Developing Countries Actions of states that either –
encourage or facilitate tax abuses, or deliberately frustrate the efforts of other
states to counter tax abuses
could constitute a violation of their international human rights obligations, particularly with respect to economic, social and cultural rights
Greatest Concerns for Developing Countries Transfer pricing and other cross-
border intra-group transactions The negotiation of tax holidays and
incentives The taxation of natural resources The use of offshore investment
accounts Secrecy jurisdictions because of their
role in facilitating tax abuses
Questions for States to Consider
Obligation to ensure coherence between fiscal, tax and human rights laws and policies, both at the domestic and international levels
Obligation to assess and address the domestic and international impacts of fiscal and tax policies on human rights
Obligation of international cooperation and technical assistance to support the realisation of human rights (including international cooperation in the field of taxation)
Questions for Business Enterprises to Consider
The tax planning strategies of MNEs, as well as their advisers and financiers, could have potential negative impacts on human rights
According to the International Bar Association - Merely complying with tax law is not enough
when this results in the violation of human rights. Responsibility for human rights includes situations where lawyers are associated with third parties’ actions that violate human rights − including by their clients
Third Issue
Greater General AwarenessOn
Tax Matters
Greater Scrutiny
The tax practices of multinational enterprises and wealthy individuals are being increasingly questioned and scrutinised
Politicians, advocacy groups and prominent individuals are questioning the fairness and morality of sophisticated tax planning strategies that result in individuals and corporations not paying a fair share of tax
The perception of the magnitude of the issue of tax abuse has caught the attention of the media
The Role of the Media
Investigative journalists are joining forces to share and coordinate work Exposing MNEs tax planning strategies Exposing Tax Authorities’ practices
Making the general public more conscious of a sense of tax fairness
The Reaction
Unilateral Actions
Coordinated Actions Tax Transparency (Global Forum)
OECD BEPS Project EU and BEPS
Unilateral vs Coordinated Measures
Many countries have considered taking action to protect their tax bases (CFC, TP and Thin Cap)
Unilateral action by countries on an uncoordinated basis could lead to – excessive compliance costs for MNEs the potential for double or multiple taxation protectionist measures that would be
detrimental to international trade The Solution: Coordination Action through
G20/OECD
First Step: Tax Transparency
Exchange of Information on Request EOIR Standard Peer Reviews (more than 150 Reviews) Updates being discussed
Automatic Exchange of Information US FATCA CRS AEOI Standard on basis of CRS Peer Reviews (expected to start in 2016)
Next: The BEPS Action Plan
The Action Plan – 15 key elements to be addressed is designed to take a principled,
holistic approach to addressing BEPS
focuses not only on closing gaps that have led to tax avoidance, but also on improving dispute resolution
Aims to deliver on the Actions within a two-year time frame
BEPS Project Results
Recommendations on 7 elements (September 2014)
Agreement reached on three key elements (February 2015) - A mandate to launch negotiations on a
multilateral instrument to streamline implementation of tax treaty-related BEPS measures
An implementation package for country-by-country reporting in 2016 and a related government-to-government exchange mechanism to start in 2017
The criteria to assess whether preferential treatment regimes for intellectual property (patent boxes) are harmful or not
EU and the BEPS Project
Work is being carried out within the EU to concretise BEPS conclusions into European law (including soft law) - Transparency of Tax Rulings Code of Conduct Group
IP regimes Hybrid Permanent Establishments
Parent Subsidiary Directive Interest and Royalties Directive CCCTB (international anti-BEPS aspects)
Some Reflections to Conclude
What will be the effecton
Small Jurisdictions?
Two Important Facts
Fact No.1: Large jurisdictions have a disproportionate influence in the construction of global tax rules
Fact No. 2: The economic situation of small jurisdictions is different less customers, smaller available pool of
labour, smaller network of providers of capital, greater transportation costs etc.
BEPS and Small Jurisdictions
Question of Sovereignty: How will the Sovereignty of Small Jurisdictions be affected by the BEPS project?
Question of Tax Revenues: Will the BEPS project have a detrimental effect on the tax revenues of Small Jurisdictions?
Question of Awareness: To date very little attention has been given to the potential effect of the BEPS project on Small Jurisdictions
Question of Fairness: Will the BEPS project discriminate unfairly against Small Jurisdictions?
Thank You for
Your Attention