Corporate Tax 2016

The Corporate Tax guide provides expert legal commentary on the key issues for businesses operating in the Corporate Tax sector. The guide covers the important developments in the most significant jurisdictions.

Last Updated October 21, 2016

Steve Edge advises on the tax aspects of private and public mergers, acquisitions, disposals and joint ventures and on business and transaction structuring (including transfer pricing in all its aspects) more generally. He also advises many banks, insurance companies, hedge funds and others in the financial services sector in a wide range of areas. A large part of Steve's practice involves advising non-UK multinationals (particularly those based elsewhere in Europe and in the USA) on cross-border transactions and tax issues of various types. In that area of his practice, he works closely with other leading international tax advisers around the world.

Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. The highly experienced tax group deals with the tax aspects of all corporate, commercial and financial transactions. Alongside a wide range of tax-related services, the team advises on: the structuring of the biggest and most complicated mergers and acquisitions; the development of innovative and tax-efficient structures for the full range of financing transactions; the documentation for the implementation of transactions so that the desired tax objectives are met; the tax aspects of private equity transactions and investment funds from initial investment to exit; and tax investigations and disputes from opening enquiries to litigation or settlement.

Corporate Tax

This year, lawyers from each country that is represented are providing knowledge and expertise on a range of domestic tax issues.

No one involved in the international tax area at present can be unaware of the considerable pressures that countries are facing, namely:

(a)       to fill holes in their budget by protecting or extending the current tax base and, in particular, responding to public pressure by taxing multinationals who are seen to have exploited the tax system and built up large pools of offshore tax-free or low-taxed cash. Whereas attempts in the past by certain countries to impose tax on an extraterritorial basis might well have been frowned upon as inappropriate or detrimental to inward investment, such measures are now increasingly seen as an appropriate response to “misbehaviour”; and

(b)       to attract international investors by being competitive across the legal spectrum (including in the area of tax). The European Court of Justice has expressed regret in the past that tax competition exists between Member States but that is inevitable when countries in the EU have separate fiscal economies and are not on an equal footing as regards the other attributes they can offer to investors. Countries that are geographically or economically disadvantaged will see tax as a way to even the score, which is not a problem, either under EU rules or as a matter of philosophy, provided that tax competition is seen to be fair and straightforward. The state aid cases currently being reviewed have arisen because of distortions in the tax system or its administration, which create a form of subsidy that is likely to infringe European legal principles in respect of what a country can do to help its citizens compete.

This is an obvious dilemma for countries that feel the need to tax and yet, at the same time, do not want to do so, as they are increasingly subject to public pressure (which is not always well informed or carefully reasoned) to impose taxes in amounts that exceed the profits generated by the footprint of the multinational in question in the jurisdiction concerned. Not surprisingly, tax authorities often find it difficult to justify or explain the difficult balance they are trying to maintain (particularly when taxpayer confidentiality is a fundamental principle).

The BEPS process

The BEPS process could so easily have constituted a distraction from the difficult issues that needed to be discussed at length in the face of public discontent, but it has turned out to be very different from that (to the credit of the OECD BEPS team and of those in business, the professions and academia who have supported them).

The 15 BEPS Actions can be allocated to three separate areas:

  • the practical reorganising of international principles (transfer pricing, permanent establishment rules and international dispute settlement are clearly a priority in this context);
  • the co-ordination of domestic base protection measures (interest restrictions, hybrid rules and CFC reforms are a priority); and
  • the correction of perceived “international misbehaviour” (the secondary charge under the hybrid rules, double tax treaty changes and proposed tainting of low-tax areas for CFC purposes are of most importance in this area).

It is the job of the OECD to set the standards for the points above in order to pre-empt any complaint.

Base erosion protection is something that countries could (and should) have been doing themselves; however, to have international standards available for guidance may encourage consistency.

When the BEPS proposals extend to corrective international behaviour, however, more controversy may arise.

Co-ordination of domestic base protection

From the point of view of the UK, there is no doubt that a combination of those US tax rules which seem to encourage US multinationals to structure and plan their tax system in order to build up pools of low-taxed offshore profits available for reinvestment in their businesses and the over-aggressive attempts by some jurisdictions to go to any lengths to attract investment and create “stateless income” from mobile capital assets is what has given rise to controversy. As cases are reported of large profits from the use of intellectual property being diverted to jurisdictions where there may be little substance and even less tax to pay, the adverse public reaction is predictable.

The general theme of the BEPS process is that profits should be attributed to jurisdictions where activity is being carried out and the resulting profits are, therefore, actually being generated.

As has often been said, transfer pricing is an art rather than a precise science but, even so, attribution is relatively easy until the vexed question of how to deal with mobile assets (such as capital and intellectual property) arises.

Largely as a result of OECD input and reactions from tax authorities around the world, there is increasing recognition that capital assets (whether in a bank or in a pharmaceutical or IT company with valuable IP) need to be managed in order to generate high returns, thus it is wrong to attribute anything other than a passive return to a jurisdiction that has the asset but not the people to support its management or generation.

In a situation where those two elements are divided, the jurisdiction that owns the asset ought only to get, at most, a passive return, whilst the jurisdiction where the active management team is located should get the return that they make as a result of their activities.

In many ways, the state aid challenges reflect these principles, and militate against distortion of the taxable income or tax result in a particular jurisdiction.

Corrective international behaviour mode

This is good as far as it goes, but matters become more complicated when the implications of category 3 of the BEPS Actions (as described above) are examined.

Whilst many have said that the UK diverted profits rules amount to extraterritorial taxation by the UK (which is not correct because the assessable income for diverted profits tax purposes is, in almost all cases, calculated by reference to transfer-pricing rules according to UK activity and attributes), there are two particular areas where full implementation of BEPS recommendations could have put jurisdictions claiming taxing rights into direct conflict:

(a)       if the digital economy tax discussion had been less ambivalent: as the recent press discussion on Google in the UK has disclosed, there is often confusion as to whether or not someone selling goods into the UK should be taxed on UK turnover, taxed on profits made as a result of UK sales or taxed only on the portion of their profits that has been generated by UK activity (the last of these, of course, is the correct answer, with the first or second being the answer that the press have tended to reach for). It is clear why people think it is illogical that someone selling books through a bookshop on the UK high street should pay tax whereas someone doing the digital equivalent but operating entirely from an overseas location should not. Nevertheless, there is a tax logic in saying that those who operate within a jurisdiction should make a contribution to the state in which they are running their business for the services from which they benefit (and there are obviously practical implications in the subsequent collection of the tax due from any UK agent or office), whereas someone who is operating entirely from an overseas base could argue that they are not enjoying the benefit of those services and so should not make a contribution. The philosophical basis for a digital tax (unless profits are to be taxed by reference to the location in which the products are consumed) is not, therefore, entirely straightforward. Those who support digital taxation should perhaps do so on the basis that it is a fee for accessing the market or for using the digital highway in the jurisdiction concerned. At present, however, no decision has been made on this basis, not least because developed jurisdictions that propose such a change might well find that, as large exporters of goods and services, they lose more than they stand to gain; and

(b)       if secondary charges under the anti-hybrid rules, where the recipient jurisdiction has failed to tax income that those rules state it ought to have taxed, could appear to encourage a particular jurisdiction to impose a tax because another has not. There will be differing views as to whether or not this is fair – or whether the investment jurisdiction ought to be free to decide whether or not to tax income which its taxpayers receive. The logic for requiring taxation in those circumstances has always been less than straightforward, leading to a situation where, perhaps, world trade organisations should intervene, on the basis that it is an unfair taxation incentive to export. This is certainly one of the areas that jurisdictions will find most difficult to implement in practice.

Whether or not this latter point will cause the USA to accelerate the long-awaited review of its international tax systems remains to be seen; there will surely come a time when the political deadlock must be broken.

At present, there are discussions taking place in the USA to determine what it might do if it were to implement a territorial system and what its CFC rules might then look like. There is a suggestion that it would then have a minimum tax rate requirement, so that income earned in a jurisdiction in which the tax paid was less than 15% on US-equivalent profits would always be vulnerable to a CFC apportionment.

Against the background of a BEPS initiative which is designed to make sure that profits are taxed where they really belong, that appears to be a somewhat severe attack on those jurisdictions that have genuinely low tax rates because they know that they cannot offer the same sort of investment package (and infrastructure) as other jurisdictions with better economic and geographic advantages.

Unfortunately (except as regards EU subsidiaries), the EU seems to have decided to adopt the same philosophy contained in the draft Directive that was recently put forward by the Dutch presidency.

Draft Directive

The timing and content of this Directive are both odd. It is evident that, in areas where BEPS gives discretion to jurisdictions (for example, the interest restriction rules which are more appropriate to a territorial system), it would be a good idea for the European countries to decide that they are all going to adopt a 30% of EBITDA measure, as Germany has done.

If there is to be a process for mandatory dispute resolution under tax treaties, Europe should have a role in that.

But, at this stage in the BEPS debate, when jurisdictions are trying to achieve the difficult balance between responding to two years’ worth of work by the OECD and balancing this against their own desires to be competitive, it is surprising that what is effectively a rival set of proposals (with some significant differences) should have appeared, at very short notice and without the same degree of background work, in Europe.

Whether or not that Directive is approved by all the countries and is then implemented remains to be seen, but the proper response must surely be to restrict radical European initiatives at least until the BEPS process overall has settled down.

Whatever happens, as the unrest in the international tax world continues, the detailed country-by-country summaries that follow will certainly be useful to practitioners.

Slaughter and May

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