Peter Wilson, head of SG Global Tax says “IFS is a top quality provider of transnational tax services with Roy and his protégé Dmitry clear leaders in their fields. SG Global Tax is delighted to be able to forge a closer working relationship with Roy and Dmitry”.

From my perspective, having developed IFS as a unique international tax practice over the past forty years, it provides the basis for developing a wider range of services for our clients through the various disciplines offered by SG Group. It dovetails well with the continuing development of the International Business Structuring Association (IBSA) with SG providing help in developing the multi-disciplinary as well as multi-jurisdictional nature of the IBSA.

On the subject of IBSA, we are looking forward to our first annual dinner for IBSA members on 18 November at Hush Brasserie, Mayfair, London, followed the next day by our annual conference, details of which can be found on the IBSA website (click here). There is still time to register for both events (the first for IBSA members only), but in any event please look on the IBSA website for details of forthcoming discussion groups – the next one being in Lisbon on 25 November on investments into and out of Africa through the UK and Portugal.

Please note that our new address will be 7/10 Chandos Street, Cavendish Square, London W1G 9DQ with effect from 1 December 2015.

With kind regards

Roy Saunders

The post November 2015 (156) – ALLIANCE WITH SIMMONS GAINSFORD appeared first on IFS Consultants Ltd.

The BEPS (Base Erosion and Profit Shifting) initiative of the OECD has been a fascinating insight into a politically driven project fuelled by public and media disquiet about the effectiveness the tax planning of multinationals, some of whom were paying very low levels of tax on income outside of their home base. The first set of Reports came out in September 2014 and the OECD wanted to present the entire 15 Action points as a completed project in October this year, so some of the Reports released now simply repeat what was said last year.

Outside of the international tax profession, the advent of the completed project has had little awareness. Perhaps because some of the elements had already been discussed and publicised, but principally because few journalists were prepared to read such a vast number of pages relating to each Action point. This month’s newsletter will highlight what we believe are the most important developments of BEPS, and the problems that may become apparent when countries seek to implement these recommendations. We have deliberately kept the newsletter limited in content to highlight the most important aspects of BEPS from the perspective of clients and their professional advisers.

We will be examining these issues in greater detail firstly at the IBSA discussion group in Paris this coming Thursday and then in the IBSA Annual Conference to be held at the Landmark hotel London on 19th November. For more details of all our events, please go to the IBSA website (click here).

THE BEPS ACTION POINTS

Digital economy

It is believed that the digital economy provides opportunities for tax planning by transferring income into countries with low tax rates. The Report has a lot of background material describing the opportunities but is very short on solutions. It points to a number of other Action points and proposals related to the solutions, such as re-drafting the permanent establishment definition. It considers creating a virtual permanent establishment (PE) for electronic activities, but does not currently recommend this, although a special group working on the digital economy has in fact been set up and work is to continue.

What has been agreed is that the words ‘preparatory and auxiliary’ should be carefully reviewed, as currently an exception to the creation of a PE exists if the activities are merely preparatory and auxiliary to the principal activities of the entity concerned. The PE definition, which is a fundamental component of double tax treaties, has been due for reform for many years, and the issue of whether the activities of independent agents should be ignored when considering whether a PE exists is also considered.

Certainly commissionaire arrangements are highlighted as central to the activities of a foreign enterprise and thereby create a PE where the commissionaire is located. Also, one of the proposals is to prevent the artificial avoidance of the ‘per se’ status. In Article 5.4 there are a number of activities excluded from creating a permanent establishment, such as the maintenance of a stock of goods for a foreign enterprise, and the opening of a representative office for that enterprise. Thus warehousing a stock of goods was always considered as a ‘per se’ preparatory and auxiliary activity which would not create a PE. One of the recommendations is that for those countries who wish to do so, all of the 5.4 exceptions will require proof that the activity is preparatory and auxiliary. For example, maintaining very large warehouses in a country close to customers, so customers can go online at 12pm and get delivery the next day, is a key element of the business proposition.

Access to double tax treaties

As regards Action point 6, the OECD has not yet finalised its recommendations regarding a final Limitation of Benefits (LoB) proposal to prevent treaty access in certain circumstances. Indeed, the US has recently modified its own LoB provisions to widen the derivative benefits qualification, even encouraging treaty shopping by this albeit limited shift, perhaps in response to the need to encourage inward investment. Clearly the LoB provisions need a lot more consideration before a global implementation under the proposed multilateral instrument, as different countries have different investment requirements.

However, clearly treaty shopping is a major focus of the OECD, and this will apply not just to multinational enterprises but smaller companies as well. It may prove much more difficult in the future to rely on double tax treaty provisions than hitherto. An alternative proposition put forward by the OECD to the inclusion of a comprehensive LoB clause in double tax treaties, is a ‘principal purpose test’ (PPT) which the UK has had in some of the articles of its treaties up until now, and the UK has persuaded the OECD and G20 to offer this as an alternative applicable to the entire treaty. However, this will create uncertainty since it is based on the subjective intention of the relevant person, and this threat of uncertainty is a common thread emanating from the entire BEPS project.

Hybrid instruments

The first part on Action 2 on hybrid instruments was unveiled a year ago, and has a primary rule and a defensive rule. Where one has a payment treated as deductible interest in a source country but a non taxable receipt in the recipient country, then the primary rule would require the country of source to deny the deduction. If they do not do that, then the country of residence could refuse to give an exemption permitting the non taxable receipt.

What is interesting though is the extent to which countries such as Luxembourg will implement the primary rule, and indeed the defensive rule (no double deduction of expenses). There is likely to be peer pressure on these countries to adopt these measures and amend their legislation, but the OECD has also guaranteed the sovereignty and integrity of each country to adopt legislation necessary for their own economic and political purposes.

Limiting interest expense

Action point 4 is the issue of non-deductible interest and the cap of between 10% and 30% of EBITDA on both internal and external debt. Whilst limits have been imposed on internal debt for many years as a development of thin capitalisation rules, including external debt in the equation has far reaching issues. For example, the external recipient will always be taxed on the interest receivable, but the payor may have a limited deduction, resulting in a tax mis-match. And companies within an international group may require finance in particular sectors where EBITDA is limited, even thought the overall group finance is within the prescribed limits. This has in fact been recognised by the OECD and further work is intended on this potentially controversial issue.

The UK is planning to replace the worldwide debt cap with provisions on interest limitation designed on the basis of the OECD and G20 proposals. There would be for each country a de minimis limit, which for the UK would be £1 million of interest deduction per annum, thereby excluding all but the largest MNEs from this cap. Moreover, the OECD suggests that if a group can justify a higher interest deduction, it may exceed the 30% cap. Nevertheless, the interest cap on internal and external finance is likely to lead to uncertainty of tax liabilities between tax authority and the tax payer; again this element of uncertainty and the subjective approach recommended by the OECD in various of its Action points may lead to more conflicts than resolutions.

Transfer pricing

Turning now to what was initially considered as the focus of BEPS, Action points 8 – 10 contain recommendations related to transfer pricing, and the need for all companies of whatever size to prepare transfer pricing memoranda with a Master File and Local Files covering their group business and intercompany transactions. Existing transfer pricing concepts have been maintained, but the focus has been more on which companies are capable of accepting the risks inherent in creating the profits allocated to them. Also, the transactional profit split method seems to have been proposed as more relevant than previous OECD recommendations. What is interesting is that legal ownership is therefore not necessarily conclusive in determining profit sources, and quantifying risks is so subjective that it could automatically lead to many disputes in this area.

Thus the OECD recommendations move towards giving revenue authorities greater power to disregard what the corporate group has put into place, by way of cost contribution agreements, legal ownership of IP and indeed the whole issue of transfer of risk. For example, contractual allocation of risk to a company will not necessarily be respected if the company does not have the control over the risk or the financial resources to bear that risk. That will fundamentally conflict with freedom and sanctity of contract.

Again, this may create the potential for two or more tax administrations to make tax adjustments based on such subjectivity (e.g. who can bear the relevant risks) which could cause havoc to multinational companies without a very clear cut mutual agreement procedure which is adopted within a limited time frame?

Country by country reporting

MNEs with turnover in excess of €750 million will have to adopt country by country reporting for all countries in which they operate with effect from 1 January 2016. Although this apparently may only affect about 1,500 to 2,000 companies worldwide, there are major concerns with this approach.

Should the reports be made public, when the essential reason for having these reports is to effectively be a risk indicator of where a company might be under-paying in a particular jurisdiction? Besides this concern of confidentiality of data, the administrative burden of marrying up financial statements of subsidiaries (with perhaps differing accounting periods) with their relevant tax returns and the CbC template offered by the OECD, may prove very costly. And would tax administrations be able to assimilate and utilise all the information coming from CbC reporting statements? Clearly, the likely consequence of CbC reporting is that it will provide scope to revenue authorities’ for more enquiries with the multinationals concerned, leading to uncertainty of tax liabilities and ever increasing compliance costs.

Mutual agreement procedure

It is apparent therefore that there will be much more scope for arguments between taxpayers and revenue authorities, and indeed between revenue authorities themselves, as a result of the various recommendations made by the OECD. To some extent, these arguments have been relevant for many years, and the codification of the various recommendations perhaps do not create a fundamental additional set of arguments. But adopting the subjective issues within the recommendations may certainly create additional issues.

Fortunately, the OECD have recommended in Action point 14 that the Mutual Agreement Procedure (MAP) be strengthened and create certainty within a limited time frame of the outcome of investigations between tax authorities. Minimum practices contained in this Action point are a good start in creating binding MAPs and there will be a new forum on mutual agreement procedure where countries will come under peer pressure to live up to the recommendations. 20 countries have signed up in principle to arbitration where MAPs cannot readily conclude taxing rights and amounts, so this is a good start.

Multi-lateral Instrument

The last Action point 15 is a method of streamlining the process of amending tax treaties in accordance with the BEPS recommendations. This will automatically implement certain of these recommendations, such as the permanent establishment amendments, treaty abuse in the form of a limitation of benefits provisions and the incorporation of a Principal Purposes Test, into separately negotiated double tax treaties. The time frame for this multilateral instrument is that it should be drafted by 31 December 2016. However, the wholesale provisions may not be acceptable in their entirety to all countries, so the implementation of this instrument will be interesting as some countries see elements of the instrument contrary to their economic requirements.

Summary

The hype about BEPS has been very considerable over the past 2 years. With the greatest of respect to its protagonists, the reality is something of a damp squib. Far too many pages written on each Action point without the conclusions one would expect from a two year study (and indeed one that has been in progress for much, much longer than 2 years). It feels like a huge amount of time and money has been spent on attacking the practices of a limited number of multinational enterprises, whilst introducing uncertainties such as how much one is now able to rely on mutually agreed double tax treaties taking into account the existence of a multilateral instrument which will affect the provisions of the relevant bilateral treaty. BEPS also introduces many recommendations which are based on subjective ideas, such as the companies able to accept risk in the transfer pricing provisions, or what is the principal purpose of certain transactions.

Clearly this is an ongoing project, and rather than having a final outcome in October 2015, tax practitioners and their clients will face ever increasing uncertainties of their tax obligations and how their intercompany and external contractual arrangements should be implemented. The taxpayer’s charter for most developed countries is that there should be simplicity, fairness and clarity of tax legislation. My personal viewpoint is that the involvement of so many countries in attempting to codify aggressive tax planning is a retrograde step in achieving the essential elements of this charter.Your views would be welcome

With kind regards

Roy Saunders

The post October 2015 (155) – LIFE AFTER BEPS appeared first on IFS Consultants Ltd.

Initially, he had just eight weeks to find £20 million to pursue his business, and this came from a private equity company which allowed him to set up a large number of solar panels on land already owned. This then attracted external investment including money from pension funds, but sadly no more finance from the private equity company. Moreover, banks would not provide development finance secured on the assets owned by the company in view of the security already held by the private equity company in the form of a floating charge, leaving the Client unable to secure finance against specific assets. With major cash flow difficulties, including a very substantial debt to HMRC for VAT, and without further funds from the private equity company, the company faced severe problems but was rescued by an organisation that was using EIS money to help pay for the construction work already underway. This then achieved the turnover required to repay HMRC and provide further development finance. Ultimately, the private equity company was bought out and further finance achieved, and this has now generated almost £400 million of turnover in the four years since the company started.

The Client is now considering the next stage of finance which may potentially be an IPO but is more likely to be arranging for pension funds to finance the further assets needed to continue generating power for the national grid. Now that the government has removed subsidies for the solar energy sector, the Client is also considering expanding his business horizons, particularly through entering the energy storage market, and it was left to the two other panellists to discuss funding techniques and issues related to future acquisitions.

Richard Feigen stated that the single most important element in securing finance was to ensure that there is solid management working behind development prospects. Initially, friends and family may provide seed finance as they usually require little persuasion regarding management functions, but even strategic or anchor investors at the incubation stage will need to ensure that there is appropriate management in place. Angel funds can range from investment funds to crowd funding at the early stages of corporate development, and peer to peer lending is now gaining popularity although it rarely works for early stage businesses.

Once the business has a positive EBITDA, it can seek to attract venture capital investors and venture capital trusts as these provide substantially more funding. The IPO contemplated by the Client requires a greater level of scrutiny and may not be appropriate for entrepreneurs who need the flexibility of diverting from a stated development pathway in light of changing market conditions, such as has been experienced in the renewable energy sector.

Matthew Stratton stated that as regards acquisitions, this may well be appropriate for the client to consider in order for his business to consolidate and diversify into different areas. It may provide instant access to further intellectual property required for the sector and indeed expand the customer base with a corresponding increase in the PR potential, allowing greater economies of scale to be achieved. Acquisitions may certainly encourage further finance to be available, and may attract the interest of larger companies within the sector.

Questions were then asked by the members who attended the meeting (there were approximately 75 registrants for the evening) and these ranged from financing issues, intellectual property issues and general business strategy. As regards IP, the Client explained the technological advancements in remotely controlling electricity usage through software development, and explained that the scope of IP development in this field is enormous.

Crowd funding was discussed, but it was explained that brokers don’t usually wish to get involved in crowd funding and there may well be issues with supporting legal agreements. However, retail bonds issued by the company may be an alternative way of attracting small investors. Both crowd funding and retail bonds may require a higher cost of capital, as will mini-bonds, and as a result pension fund money is considerably cheaper. As had been explained at the meeting, private equity funding may be an alternative source of finance, but may come with complex legal issues which could affect the growth of a company.

The meeting ended with me thanking the panellists and all the attendees, as well as our hosts Ince & Co who then sponsored drinks on a terrace overlooking the Tower of London for the next couple of hours of enjoyable networking. I did mention to the attendees that all of the discussions that we had covered would be worked on in greater detail at the IBSA annual conference on 19th November at The Landmark Hotel London. The title of the conference is ‘Issues Affecting the International Development of SME’s’ and will cover financing, tax, economic, intellectual property and business strategy issues. For those who wish to have further information please visit the IBSA website (click here).

Also, the website will show the various discussion group meetings being held over the next couple of months which are open to all IBSA members. Our meeting in Paris on 29th October will discuss the continued use of countries such as Luxembourg and Switzerland in international business structuring following the action plans delivered by the OECD in its BEPS project (which will be discussed between Philip Baker QC and me in a webinar on 23rd October); on 5th November we will be holding a meeting in Lisbon to discuss investment into African markets through countries such as the UK and Portugal; this will be followed by a meeting in Zurich on 1st December on the topic of ‘Residence Planning and Exit Strategies for Entrepreneurs’; and the next London branch meeting will be on 3rd December on the topic of ‘International Business Structuring for Family Offices’.

I do hope that you enjoy reading our IFS newsletters, and it would be really nice to hear from you with any comments you may have.

With kind regards

Roy Saunders

The post October 2015 (154) – GROWTH: FUNDING THE DEVELOPMENT OF AN SME appeared first on IFS Consultants Ltd.

Funding individual entities within a group can be through internally generated funds as well as external arrangements. Internal funding is commonly tax driven and relies on both the deduction of interest charges in the paying entity coupled with the avoidance of any relevant withholding tax on interest payable to non-residents by that entity. Moreover, if the group uses hybrid arrangements, the interest receivable by the corresponding group entity may avoid a tax charge in the recipient’s country. Thus, a typical arrangement would be for a group company to be financed by a Luxembourg company which makes a loan to the entity requiring funds and in turn issues PECs (Preferred Equity Certificates) to the parent funding entity. Provided the interest payable falls within the transfer pricing guidelines, ie is at an arm’s length rate, the interest may be deductible in the paying entity and exempt from withholding tax under the relevant double tax treaty with Luxembourg. In turn, the Luxembourg entity includes the interest income as taxable profits but claims a deduction for the amount payable under the PECs according to a relevant Luxembourg tax ruling deeming the amount payable under the PEC as allowable interest deduction.

A US parent will be able to treat the amount received under the PEC as dividend income which is taxable only on a receipts basis rather an accrual one, thereby providing tax deferral if the Luxembourg company merely accrues the PEC cost. Moreover, as a result of the ability to convert the capital and income under the PEC into equity, an eventual sale of the equity can provide a capital gain which is more advantageously treated than income. The net effect is that tax in the paying entity’s country of residence has been reduced through this hybrid instrument, whilst a tax deferral coupled ultimately with a lower-taxed capital gain is achieved in the US.

The OECD has recommended in Action Plan 2 of its BEPS initiative that such hybrid arrangements constitute unacceptable tax avoidance and should no longer be tolerated within OECD countries. The full recommendations of the OECD are due to be published in mid-October in respect of this and other Action Plans under the BEPS initiative, such as Treaty Access limitations. Thus immediately thereafter, Philip Baker QC and I will be summarising these various initiatives in a webinar to be broadcast at 12:00 hrs on 23 October. For those interested in listening to this webinar, please (CLICK HERE).

There are some arrangements which are both relevant for internally generated finance and external funding; these create tax deductible payments without the corresponding withholding tax and other charges. Deeply discounted securities are effectively loans made where the ‘interest’ element is already taken into account within the funds loaned to the recipient entity, which is then obliged to pay the full amount of the loan back to the payor on redemption. The expression ‘a rose by any other name’ springs to mind, but under current UK tax legislation, the difference between the actual cash received through the loan arrangements and the amount ultimately payable is not considered interest subject to withholding tax. If hybrid arrangements are to be abolished, then surely similar techniques must also be vulnerable.

I have spoken at a couple of seminars recently on residence planning, particularly as they relate to exit strategies on sales of businesses. I have also attended a recent round table discussion at Howard Kennedy on the ‘business of divorce’ which discussed how the value of businesses can be affected by matrimonial difficulties. The connection I made between the two was the real life example of an individual leaving the UK prior to selling his business, believing that his wife would come with him. His mistake was to think that his wife loved him more than she loved her grandchildren who were, of course, remaining in the UK with their parents. She decided to stay in the UK; the couple got divorced, and the associated settlement and legal fees exceeded the tax savings by a considerable margin. The moral is that the first question one should ask a client who is considering changing his place of residence is “have you discussed this with your partner?”

I will be sending out a further newsletter in the next couple of weeks summarising the IBSA discussion group meeting of 29 September and hope to see many of you at future events.

With kind regards

Roy Saunders

The post September 2015 (153) – FUNDING INDIVIDUAL ENTITIES WITHIN A GROUP appeared first on IFS Consultants Ltd.

As I have explained in previous newsletters, I established the International Business Structuring Association (IBSA) to promote such transparency and demonstrate the integrity of the professional advisory community who become members of the IBSA. In our second year of the Association, we have been commended by our members for the discussion groups we have held around the world on various topics including intellectual property protection, private equity financing techniques, developing strategies for international businesses and other pressing issues with the current OECD BEPS initiative. It is through the dissemination of knowledge amongst our members that our common entrepreneurial clients can benefit, and I am proud to report that we now have principal branches in the US, Asia, UK and Continental Europe, with potentially smaller chapters in countries such as Luxembourg, Switzerland and Malta.

For those IFS readers of our newsletters who would like to become members of IBSA, I would be happy to invite them as my guests to the next discussion group to be held on 29 September at the offices of Ince & Co opposite the Tower of London, on the subject of growth funding, M&A and structuring the growth of entrepreneurial businesses, details of which can be found on the IBSA website. For those readers who are based in Continental Europe and who cannot make the London meeting, you are welcome to attend the Paris meeting the next day on 30th September at the offices of Jeantet et Associés on the hot topic of Supply Chain Methodology and the continued use of countries such as Luxembourg, Switzerland and Malta in international business structuring.

Our annual conference is to be held at The Landmark Hotel in London on 19 November, and we are now taking bookings for this conference entitled ‘Issues Affecting the International Development of SME’s’. This one-day conference delivered by IBSA members will discuss financing, tax and relevant economic issues, the protection and development of intellectual property and business strategies for the development of SMEs. Again, information on this conference can be found on the IBSA website.

And finally, welcome back after the long summer break. I hope that you enjoyed your summer and look forward to seeing you again in the near future.

With kind regards

Roy SaundersTHE TAX ADVISOR’S ROLE TO TAX PLANNING

Tax mitigation and tax avoidance

Tax avoidance is to be distinguished from tax mitigation.

In the words of Lord Nolan:

The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.

Furthermore, it is widely accepted that taxpayers who mitigate their tax liability are not likely to be subject to anti-avoidance legislation. Even a US Court of Appeals judge has proclaimed:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

Tax mitigation is often the result of forward tax planning. It amounts to a reduction of a taxpayer’s tax liability, not by entering into an ‘arrangement’, but by a reduction of taxable income or by an increase in deductible expenses, or perhaps the availability of tax credits.

Tax avoidance generally includes situations where a person’s liability to pay tax is avoided, reduced or deferred. However, unlike mitigation, tax savings results are achieved in a way that government did not intend.

Acceptable tax mitigation

In some cases, the government promulgates laws that are aimed at a reduction, often permanent, of tax liability for taxpayers. Where taxpayers avail themselves of such opportunities by directing their affairs in such a way as to reduce taxes, the tax mitigation is acceptable. Tax incentives and tax holidays are examples of such measures introduced by government. Another example is that a married couple can reduce their exposure to inheritance tax by ensuring their wills are drafted in such a way that on the death of the first spouse all assets vest in the surviving spouse, on whose death inheritance tax will be due. Alternatively, it may be possible for a married couple resident in a civil law jurisdiction to separate their assets.

Unacceptable tax avoidance

Some tax avoidance is within the confines of the law, but was not intended by government. Such tax avoidance often results from loopholes or defects in the law, and is contrary to what government intended. A common example is treaty shopping, of which we have written in previous newsletters and which is the target of Action Point 6 of the OECD BEPS initiative.

Tax mitigation and avoidance relate to the question of whether a tax liability has arisen, but with tax evasion a tax liability has always arisen, albeit hidden from the tax authorities – with or without intent. Innocent tax evasion exists where the intent to defraud the tax authorities does not exist (e.g., where reportable income remains forgotten in a bona fide manner), and may lead to a reassessment. Fraudulent evasion exists where the taxpayer intended to defraud the tax authorities, and may lead to a criminal prosecution together with a reassessment.

Constituent elements of avoidance

In determining whether a tax avoidance scheme exists, tax authorities look for certain elements when analysing the facts. Some of these elements are discussed below:

Tax minimisation or elimination: the onus is on the tax authorities to prove that the tax paid was less than would otherwise have been the case.

Lawfulness or legality of the transaction: tax planning, tax mitigation and tax avoidance are carried on within the confines of the law; tax evasion (for example, the non-declaration of profits), on the other hand, is illegal. In the current era of media attack against tax planning, the difference between tax avoidance and tax evasion is often a very thin line.

Relevance of the purpose or motive of the taxpayer: generally, tax arrangements of which the primary motive and/or purpose is tax minimisation can be rebutted by the tax authorities.

Artificiality: where steps that have no other purpose than the avoidance of tax are inserted into a transaction, artificiality exists, but on its own, artificiality is not usually enough to justify sanction by the tax authorities. In this respect, common law developed the ‘business purpose’ and ‘substance over form’ rules. Under the former, a transaction must have a main purpose other than tax avoidance to be acceptable to the tax authorities; under the latter, the facts must be assessed according to bona fide economic and commercial substance, and not the formal content. Comparable concepts under civil law are the abus de droit and fraus legis concepts.

Economic reality of transactions: generally, taxpayers are not entitled to tax advantages resulting from legal means that are different from the economic reality. This includes the exploitation of defects/loopholes in the law.

Legislative intent or purpose: it is generally held that a tax avoidance scheme is an attempt to reduce the tax liability to a level below that which the legislature intended, and legislative intent is generally decisive of the question of legitimacy of the result.

The tax adviser’s role

In order to assess whether tax advice is lawful, the tax adviser must have a client who is willing to divulge all the relevant facts. It is an impossible task to give meaningful tax advice if what is being disclosed is only half the story. This, however, creates difficulties in itself, because if the tax adviser is aware of circumstances that constitute, for example, ‘money laundering’, he is duty bound to make an official report to the relevant authorities. Not only that, but ‘tipping off’ the client that a report is being made is also an offence. The tax adviser’s role and responsibilities have come a long way since September 2001, when the tax adviser’s profession, along with many others, changed overnight. Money laundering legislation introduced subsequent to that date has imposed upon each tax adviser an overriding obligation to ensure that all aspects of the advice given are legal. The consequences are very penal and, as such, ‘know your client’ policies and internal take-on and review procedures are vitally important to ensure and maintain the integrity of the office.

Anti-money laundering legislation

The regulations relating to money laundering differ from country to country, and the continuing evolution of the problem means that the rules are constantly being rewritten and updated. Through its Financial Action Task Force (FATF), the OECD has forced compliance on many of the world’s tax havens using a blacklist and the threat of sanctions for those who fail to comply with money laundering regulations, information exchange, and the like.

Transparency and the OECD BEPS initiative

The OECD has become the think-tank for developed countries and has repositioned itself as the brain of tax in terms of international fiscal policies. It is acknowledged that a global tax system is a fiction: ultimately, there will always be disparity between tax systems, and competitive tax rates and incentives are inevitable and desirable in a market economy. BEPS is trying to provide a holistic viewpoint so that tax authorities know the relevant questions to ask. The key words of transparency, openness, communication and accountability, is the underlying premise of the BEPS project, requiring businesses to engage with tax authorities and vice versa. Volunteering to share information means that the tax authorities have accessibility to the affairs of their corporate taxpayers, so that they may decide whether they wish to review in more detail tax computations submitted. However, to share such information, big businesses will require confidentiality, particularly where what may be regarded as trade secrets could be shared with competitive companies.

The OECD Common Reporting Standard (CRS)

The CRS is due to be implemented by all banks with effect from next year, with tax authorities requiring banks to collect and report certain information about the individual beneficial owner and their financial accounts held with the bank. Where corporate or other non-personal entities have accounts with banks, it is a requirement that the beneficial owner (and if there is more than one, all beneficial owners) are identified on separate forms held by the bank which may become available to tax authorities. The term ‘beneficial owner’ is an individual who can exercise control over the relevant entity either from his/her shareholding, or control over voting rights, or even potentially control through debenture and other loan documents. The complexity of ascertaining the correct beneficial owner for certain entities is readily apparent.

The CRS form requires the beneficial owner to state their current residence address, mailing address if different, their date and place of birth, and then specifically the country where he/she is resident for tax purposes. This again can lead to considerable confusion where the individual may be considered to be tax resident in more than one country, or indeed not tax resident in any country. The form to be submitted requires disclosure of tax residence on a certain date during the relevant fiscal year, when perhaps it is difficult to know whether the individual has ‘lost’ their tax residence in one country or ‘acquired’ a tax residence in another country. There is also the concept of extended residence where for example an Italian or Spanish resident moves to a country with a privileged tax regime, in which case the individual may be unaware that they remain a tax resident of those countries – a fact which is not reflected on the CRS form. Although a US individual may have discontinued their tax residence in a particular year, if they return to the US within a three year period, they will be considered tax resident in the intervening three years as well.

In this age of multi-national entrepreneurial activity, many individuals will have homes in various countries and spend differing periods of time in these countries in the relevant fiscal years, and may find it impossible to determine which country will decide on their tax residency. There is indeed scope for identifying other countries in the form where the individual may be considered to be tax resident, but the individual’s assessment of their tax residence status may not coincide with the views of relevant tax administrations. The CRS form does require confirmation that the individual has a tax or legal advisor to assist them in the completion of tax filing obligations, but again this is subjective determination, and the form is not required to be signed by the tax advisor.

Conclusion

The tax advisor’s role in assisting clients with their tax obligations is clearly much more complex than hitherto. Clients may be blissfully unaware of the changes that have taken place over the past decade in determining acceptable versus unacceptable tax planning, but they need to be aware that the proceeds of their profits and gains may be reported to one or more interested tax jurisdictions. Bank secrecy is therefore a thing of the past, and what is most concerning is that information may be given to an interested tax administration that has no legal right to claim taxes based on an individual’s non-residence of that country. However, proving non-residence, and especially defending spurious claims made by tax administrations can be an extremely costly and stressful exercise. The tax advisor’s role is to ensure that their clients meet the demands of transparency towards relevant tax administrations, whilst at the same time, legally minimising the tax burden according to the concept of acceptable tax mitigation.

The post August 2015 (152) – THE TAX ADVISOR’S ROLE TO TAX PLANNING appeared first on IFS Consultants Ltd.