THE LEGITIMACY OF TAX PLANNING

TODAY NICHOLAS JACOB

WRAGGE LAWRENCE GRAHAM LLP

SOLICITORS

LONDON, SINGAPORE, DUBAI, MOSCOW, MONACO, PARIS, BRUSSELS, MUNICH

THE LEGITIMACY OF TAX PLANNING IN TODAY’S WORLD

- Governments continue to blur the distinction between tax

avoidance & tax evasion

- Tax avoidance confused with money laundering

- Tax avoidance is immoral?

- Perceived right of every citizen to minimise amount of tax paid

- Is that being eroded?

- Do efforts to stamp out tax planning and increasing tax rates

lead to.............

- Damage to onshore economies?

- Are we only really talking about semantics?

- What about FATCA & CRS?

THE LEGITIMACY OF TAX PLANNING IN TODAY’S WORLD What are we really talking about?

The moral high ground

The UK draft code of practice for banks

Transfer Pricing

Double tax treaties

General anti-avoidance rule (GAAR)

The OECD's approach

BEPS, FATCA & CRS

IIlegal tax fraud/evasion/avoidance

Do these efforts damage "onshore" economies?

THE LEGITIMACY OF TAX PLANNING IN TODAY’S WORLD -

INTRODUCTION It is in governments' interest to make as much planning

as possible illegal. But is that right?

Isn't it in govts' interest to create an entrepreneurial spirit?

Yet we all want to stamp out improper tax evasion so we all pay less tax!

How creative can you be?

How literally can you interpret tax legislation?

How much do you have to take the spirit of the legislation into account

How much do morals matter?

THE MORAL HIGH GROUND How much should morality enter into the equation?

Should we be able to take advantage of loopholes or a lack of clarity in legislation on a literal interpreation?

Or should we look to the spirit of the legislation?

Or what the legislators intended?

Why do we have to look at the spirit if drafting is inadequate?

Is it fair to have a GAAR to cover inadequacy of drafting?

This issue will come up more under CRS

There will be many questions asked as info gets disclosed

MORALITY Previously acceptable tax planning now may be viewed

as aggressive

Are there now a different set of values?

Planners increasingly forced to look beyond legal risks to consider political & reputational risks

Media planners now important

Regarded as unfair and shirking of social responsibility

Maybe taxpayers need to seek to engage more with tax authorities & develop messaging strategies to defend increase in shareholder value

TRANSFER PRICING Christian Aid has assessed that “trade mispricing” by multi-

nationals amounts to US$160bn pa

Difference between deliberate mispricing or faked transns and attempt to tax arbitrage on a commercial basis

Some still say that tax havens cause part of the tax gap in mature countries

Revenue authorities always have the option of challenging a company’s transfer pricing process

Often because countries disagree on size of slice of the cake

Concern is that developing countries may lose out more as it is more diff for them to challenge mature countries

DOUBLE TAX TREATIES

How can you be sure that anti-avoidance provisions prevent DTTs from applying?

Clients often ask if they can set up a co in a jur with a better DTT to save tax

Benefits of DTT should not be available where main purpose is to secure more favourable tax position

Also if obtaining more favourable treatment is contrary to object & purpose of provisions

Not in line with Vienna Convention on Law of Treaties

Should GAAR override?

TREATY SHOPPING

Eng

co India

bus Personnel to serve custs in India.

More than 90 days = PE under DTT

Mauritius

Co

M –I DTT has

no services

PE

concept.

Only PE if

fixed pl of

bus in India

Second

personnel

to M co

BASE EROSION & PROFIT SHIFTING OECD BEPS project – attempt to construct a unified

approach against aggressive tax behaviour to prevent corporate profits from escaping tax

Important that this is international as otherwise would increase tax arbitrage between countries

Most plans eg Dutch/Irish/Dutch Sandwich used by Starbucks, Apple & Google do not violate anti-avoidance provns – tax arbitrage

Public awareness & scrutiny of tax based transactions

Possible retroactive action over last ten years

Ethics & Morality are taking over legality - legislators

BEPS

Will develop new standards to prevent double non-taxation

Tougher rules on CFCs to prevent tax avoidance by holding profits in offshore subs

Deterrence against treaty shopping & multiple deductions

If profits earned in a country then that country can tax them

Profits will be more difficult to split between IP than trading; current DTT & TP rules facilitate such separation

BEPS action plan sets out 15 specific actions

RUSSIAN TAX CHANGES

De-offshorisation & amendments to the CFC legn

Proposed Introduction of a Capital Amnesty Draft Law

Clarification of the Federal Tax Service Regarding Transfer Pricing adjustments

Income from the indirect sale of immovable property - tax must still be withheld at source

Russia signed up to CRS in 2018

The world is changing....................

GENERAL ANTI-AVOIDANCE RULE (GAAR) (1)

Increasing consideration and use of GAAR

Plug filler for lazy or inadequately drafted legislation?

Or is it simply putting into one provision existing anti-avoidance legislation?

GAAR generally requires a revamping of existing anti-avoidance legislation

Extremely difficult to draft

Australia, NZ, Canada has a GAAR

Danger is change of balance of power and threat of use

GENERAL ANTI-AVOIDANCE RULE (GAAR) (2)

Well known principles in Furniss v Dawson & Ramsay have been effective where no commercial purpose

Does a GAAR give more certainty?

As such it is a deterrent

MacNiven (2001) – Ramsay doctrine was not a judicial anti-avoidance doctrine based on a bus purpose test, but allows freedom to apply a literal test as opposed to a purposive test

UK has a general Anti-Abuse system

TAX FRAUD & DISHONESTY

Tax Fraud is generally a dishonest admission and criminal

Fraudulent evasion of income tax (UK) – dishonest

What is dishonesty?

- Absence of an honest belief as to tax liability

- Standards of reasonable and honest people

- Did he realise he had not met those standards?

Tax evasion is generally fraud

Switzerland – distinction between tax fraud and tax evasion; tax fraud is more serious

EXECUTION & CONCEALMENT

Planning may be legitimate, but execution may be illegal or poor or insufficient to implement the planning

Also failure to disclose fully to revenue authorities

R v Charlton (1996) – accountants and barrister involved in planning were all jailed for deliberately concealing ineffective transfer pricing and offshore companies being controlled in the UK

Tax advisers had been dishonest, and had set up Jersey companies - device or sham for purpose of evasion

Abusive tax avoidance compounded by incomplete presentation of facts to HMRC supported by professionals

TAX PLANNING & TAX MITIGATION

“Every man is entitled to order his affairs so that the tax attaching under the appropriate acts is less than it otherwise would be” per Lord Tompkin

Tax mitigation allows a taxpayer to take a fiscally attractive option afforded to him.

Perfectly legitimate business in planning eg

- doing things in different tax years

- Spreading ownership between different family members

- Using reliefs

- Using different vehicles

FATCA & CRS Globally co-ordinated approach to tax disclosure

Jurs obtain financial info from their financial institutions & annually automatically exchange that with other jurs

Obviously this will enable jurs to enforce tax liabilities

But it will lead to many more questions as to whether tax planning (which does not rely on non-disclosure) is effective

Advisers will have to be more prepared to justify planning

Banks & Trust cos will need to review existing & vet new structures

Greater concern over confidentiality

DINNER PARTY CONVERSATIONS “So you help people avoid tax??”

“Isn’t that immoral in today’s world??”

“How can you justify helping the wealthy avoid tax when the less well off can’t do it??”

“No – I help people to plan their tax affairs”

“I help make sure they use the reliefs that they are allowed to use”

“I help them plan in accordance with the law”

Is the problem the law, the interpretation of the law or the fact that morality is more important than the law?

CONCLUSIONS Brebner v IRC – if two ways of carrying out a transaction –

one paying the max in tax and the other paying none or less tax – does not mean that purpose is tax avoidance

None condone illegal tax avoidance, but have govts gone too far in stopping creative but legitimate tax planning?

Is there a real question that it is the quality of legislative drafting that is the problem?

Maybe we should have an intly agreed standard – OECD?

Lack of coherent intnl tax system – maybe have one agreed legal doctrine enforced by centralised authority? BEPS a step

Now serious undercurrents with sometimes no legal tax merit

YES – I'VE GOT THE

BALANCE RIGHT!

YES – I'VE GOT THE

BALANCE RIGHT!