TAX PLANNING DOESN’T MEAN THAT A CORPORATION HAS OPERATED OUTSIDE THE LAW TO EVADE TAX.

An interesting article was published today in a major Australian newspaper, The Age. In the article “How 76 big firms saved $5.6b in tax” it says that according to certain groups, many profitable companies haven’t paid the appropriate level of tax due to the adoption of strategies that are essentially either ‘inflating losses’ or ‘shifting profits’.

While times are such that changes to tax systems in many jurisdictions are being reviewed, it is not necessarily to call ‘foul’ against those companies when the existing laws provide for corporations to deal with their taxes in the most efficient manner possible, so long as the laws are not violated.

The Australian Senate inquiry on corporate tax avoidance distinguishes between tax minimisation, evasion, tax avoidance and tax planning. The tax minimisation via appropriate planning is legal, allowing corporations to reduce their tax obligations. This tax planning is legitimate when it is done within the law.

On the corporate side, it is the obligation of management to ensure all aspects of the business are managed in the best interest of the stakeholders and this includes taxation. The current debate often centres around the IT and pharmaceutical sectors. For corporations that have invested vast amounts of money to develop new products (such as in the pharmaceutical industry), a commercial return for the use of those products, even by a subsidiary, is a foundation of many business transactions. To suggest that such practices are inappropriate is not commercial. If the payment under the law can be structured to be more efficient, then why would the corporation elect a less efficient solution to the detriment of the shareholders?

In Australia, transfer pricing and thin capitalization are some of the major focal points of tax authorities and these are consistent with the OECD & G20 agenda. There is an inference that tax practices adopted by the larger corporates are in breach of legislation. This is not necessarily correct. Despite the complex nature of legislation in Australia (and other countries), the Australian system is sound and is able to adapt to a changing environment as the need arises. It is most unlikely to be able to avoid complexity when there is a need to deal with multiple jurisdictions; each with their own laws in addition to wanting to protect their revenue base.

The final report on corporate tax avoidance from the Senate Standing Committee on Economics is due the end of this week on 22nd April 2016.

The Age's article is at http://www.theage.com.au/business/federal-budget/how-76-profitable-companies-left-australian-taxpayers-56-billion-out-of-pocket-20160419-goa6o2.html

OECD - Global standard on information exchange - just released

OECD and BEPS – Global standard on information exchange.

For those in the cross border tax advisory arena, the world is a rapidly changing one. The changing face of business and cross border dealings including but not limited to e commerce is pregnant with issues of how business and the tax regimes can cooperate while not adding disproportionate costs (being only one of the concerns) in preserving the tax base.

Last week the OECD unveiled a uniform global standard for the automatic exchange of information between tax authorities worldwide.

Discussion about this new standard by some respected commentators and industry participants suggest that it does not achieve what it set out to do. One concern as expressed by PWC was that it caters for needs of the revenue authorities without regard to business. Concerns include costs and confidentiality. These aspects alone gives rise to serious reservations about the success of the standard.

Of particular concern was the 2 tier file system that business will need to maintain. Specifically the requirement to keep a file that meets country requirements as well as a separate “Master” file that will need additional documentation. One fear is that there will be a mismatch resulting in double taxation.

Some interesting points are also made in a paper put out by Bond University and whether the ‘modernisation’ provides a solution to BEPS or whether the solution to BEPS lies in international cooperation. The paper can be found at : http://epublications.bond.edu.au/rlj/vol23/iss1/3

Dirkis, Michael Dr. (2013) “On the eve of the global response to BEPS: Australia’s new transfer pricing rules,” Revenue Law Journal: Vol. 23: Iss. 1, Article 3.

According to the OECD, the standard is a “game changer” in terms of cooperation and transparency in the fight against tax evasion. The underlying thinking behind the strategy is an extension of the thinking behind the US legislation FATCA and general anti money laundering positions of many jurisdictions. The question is whether in fact it has given sufficient thought to the totality of the situation?

Annual data is to be automatically provided rather than on a request basis. The level of data to be provided by financial institutions and the taxpayers to whom it applies will be better known once the report is presented at the next G20 meeting in Australia on February 22nd / 23rd .
Apart from the strong reservations of PWC, other jurisdictions have made comment that they are reviewing the standard but they may not adopt it at this stage.

Hong Kong by way of example is of the view that their current legislation which was introduced in 2009 is adequate to protect against inappropriate taxation practices and in principle is in line with the OECD program. Hong Kong will seek feedback from stakeholders at this stage.

The OECD is expected to deliver a more detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.