Tax authorities throughout the world are cracking down on taxpayers – individuals and corporations – that utilize some aggressive tax planning strategies. While most of these schemes are perfectly legal and merely take advantage of loopholes in the international tax system, there is a growing concern that they not only threaten tax revenue for governments but also undermine local and regional business and economic development.
Aggressive tax planning strategies under fire
There are a number of tax avoidance methods used by multinational corporations that exploit international tax law “loopholes” and result in “double non-taxation”—loopholes that are slowly and steadily being closed. Among these strategies are the following:
Transfer Pricing Manipulation – This involves trade between related parties at prices meant to manipulate markets or to deceive tax authorities (e.g., Company A sells to subsidiary B in a tax haven at an artificially low price, so that A can report a low profit. Then subsidiary B sells to subsidiary C in another country at an inflated price, so that subsidiary C can report a low profit). These schemes are prevalent in Africa and the developing world. The EU has adopted a directive regarding country-by-country reporting to combat this practice.
Hybrid Loan Arrangements - The EU recently closed a loophole used by many multinational corporations, whereby financial instruments that are considered tax-deductible loans in some member states and tax-exempt equity in others have been exploited to avoid taxation on profits.
Base Erosion and Profit Shifting (BEPS) – The OECD has an Action Plan that addresses tax planning strategies that allocate taxable profits to locations where no actual business is conducted, but where taxes are low, or that otherwise make profits disappear for tax purposes by exploiting gaps in tax laws.
While it is crucial for companies to keep their tax burdens low, it is equally important to make sure that the tax strategies utilized do not raise red flags, particularly in the international arena.
Avoiding Red Flags in Tax Avoidance
Businesses with operations abroad must not only keep abreast of local laws and regulatory issues, but must also maintain a tax strategy that is responsive to worldwide taxation developments in order to maximize opportunities and minimize risks.