AN IMPOSSIBLE DREAM?
As an additional newsletter this month, but without an appending article, I would like to share with you a vision of the future, where Tax Administrations have trust in tax computations submitted by Taxpayers; and where Taxpayers no longer have the administrative burden of a myriad of reporting and regulatory requirements, sometimes amidst the unwanted apprehension of unnecessary investigations into their affairs. Even perhaps where tax legislation becomes less complex, so that the need to employ advisors simply to decipher compliance with relevant legislation can be avoided. Living in today’s environment, we may all be forgiven for thinking that this is an impossible dream, but fast forward 25 years and we may think differently.
The OECD BEPS initiative is not the herald of a new era, but more the pronouncement of the end of a previous era. The much awaited OECD Deliverables announced last week amidst a fanfare of self-congratulatory speeches from officials, advances the progress of this new era in a typically slow fashion. Treaty shopping has been denounced as the modern day scourge of international business structuring if the entities involved have little or no substance, but this has been realised by professional advisors for the past twenty years. The OECD have reiterated, unnecessarily, that we are now in a digital age which cannot be reversed, and that tax legislation must recognise this; but then in the same sentence they state that Tax Administrations must follow traditional concepts of taxation, and that the way of dealing with the digital economy is through existing legislation together with the introduction of other measures promoted under the BEPS initiative.
The OECD has also stated that hybrid mismatches must be neutralised, as they represent harmful tax practices. But for those of us who have always denounced tax schemes in general, this idea of treating income in different ways in two jurisdictions has always seemed like ‘now you see it, now you don’t!’. And the need to develop transfer pricing scrutiny by Tax Administrations has been part of the anti-avoidance legislation of most developed countries for the past thirty years. Unfortunately it is the Tax Administrations themselves that may not have implemented the legislation that exists in a practical and effective way. Hence, the furore over Starbucks and other companies who may have taken advantage of a lax approach to transfer pricing. We have been constantly advising clients for many years to develop comprehensive transfer pricing manuals to demonstrate the functional analysis of each company within a group, the intercompany relationships that exist and the methodology behind intercompany payments that could be affected by transfer pricing adjustments.
The OECD has formalised the need for transfer pricing manuals to be available with a master file describing the activities of the business as a whole, and local files analysing the way in which companies relate with each other. The country by country reporting which is the logical extension of the preparation of transfer pricing manuals will help Tax Administrations to identify where profits are being allocated and enable them to confirm that the transfer pricing manuals correctly reflect the business operations of the taxpayer’s group.
So, yes, the OECD BEPS initiative should be welcomed, but one has to be concerned about the bureaucracy underlying the initiative. Creating greater complexity in tax legislation is the antithesis of what the business world requires. The OECD must explain to the world at large a fundamental objective, and that is to create the element of trust between Taxpayer and Tax Administration alluded to at the beginning of this review. Taxpayers, from individuals to entrepreneurs and multi-national corporations, will always attempt to minimise the tax that they pay to Tax Administrations. Sometimes they attempt to justify this on the basis that they can deploy tax savings in a more productive way than governments can, and they do not like to see their hard-earned income frittered away through bureaucratic waste. Many of us have sympathy with these views. Unfortunately, there does not seem to be a political will at present to overhaul the complexity and indeed unfairness of tax laws, merely the denouncement of those offending the laws.
As many of you are aware, I have created the International Business Structuring Association (IBSA) to demonstrate the integrity and professionalism of those advisors to international businesses who understand the need for trust to be nurtured between Taxpayers and Tax Administrations. I have been gratified that Tax Administrations themselves, whether HMRC or their international counterparts, have been willing to attend IBSA conferences and discussion groups to understand better the ideas promoted by IBSA members. And it is healthy for these members to understand the difficulties faced by Tax Administrations in implementing their governments’ legislation. This is a start, and I am hopeful that multi-jurisdictional firms of lawyers, accountants, corporate financiers, bankers, IP specialists and corporate service providers will embrace this vision. Governments themselves should cease the ‘carrot and stick’ approach they have adopted for decades, and indeed still seem to be under their new initiative, and instead start a generational change in tax policy and legislation with the ultimate aim of representing fairness and simplicity, which equals trust. An impossible dream?
On this topic, the IBSA held a discussion group last week on fiduciary relationships in international business structures, which explained the extent of exchange of information available under FATCA and other legislation. Such information is relevant to determine whether entities, such as trusts and companies, should be considered separately from their beneficial owners, and the discussion group centred on reviewing this complex principle underlying international business structures.
I will be in Malta next week opening the Maltese branch of the IBSA, and in Washington and New York the following week opening the US branch of the IBSA. For further information relating to these events and indeed the IBSA annual conference on 19 November 2014 at the Mandarin Oriental Hyde Park Hotel, London, entitled ‘Trends in Cross Border Corporate Acquisitions’, please (click here).
With my best regards
Roy Saunders, Chairman, IFS and IBSA. IBSA is the network for international business advisors and their clients, bringing together specialist advisors to enable businesses to optimise the structure of their international operation by enhancing resilience in tax planning, mitigating regulatory and market risk and enabling sustainable multi-jurisdiction growth.