Transparency continues to be at the forefront of international tax discussions. It’s the topic of articles, the focus of speeches, and the goal of legislation.
But those discussions are tense and very divided, even among tax administrators.
Advocates for more transparency are looking to identify and minimize a perceived tax gap, including profit shifting, paying nil taxes in low tax jurisdictions, and operating in what some call tax havens.
For all the talk, there are still fundamental outstanding questions: Is everyone starting at the same place, and what is the end game?
To really move the needle forward effectively, all stakeholders need to embrace a willingness to participate by starting from a common base of understanding, free from unintentional bias and perceptions that aren’t conducive to productive discussion.
That common base of understanding is rooted in tax terminology. Agreeing upon a common language is of utmost importance to ensure everyone is starting the debate at the same starting point.
For example, “tax transparency,” “tax evasion,” and “aggressive tax planning,” are terms readily intermixed by stakeholders, resulting in heated debates, albeit the bases of such arguments may be very dissimilar.
While it may seem pedantic, let us start with common definitions.
Transparency vs. Evasion
Merriam-Webster defines transparent as “being free from pretense or deceit, easily detected or seen through, readily understood, and/or characterized by visibility or accessibility of information especially concerning business practices.”
Tax transparency provides a window for a high-level understanding into an MNE’s business practices via tax information. There is no inference—either implicitly or explicitly—that such information is tainted by tax evasion, which is described in the dictionary as “a willful and especially criminal attempt to evade the imposition or payment of a tax.”
Aggressive tax planning, pursuant to EU guidance, results from the mismatch of tax rules between different tax jurisdictions. As a result, non-conformity of dissimilar legislative laws for similar tax attributes will lead to a natural mismatch of tax results, resulting in tax advantages by MNEs for a relevant jurisdiction. Notably, offsetting disadvantages arising from natural mismatches are not addressed.
With respect to aggressive tax planning and tax evasion, there are established guardrails in the international space.
Starting with the EU, the European Commission provided a recommendation in 2012 on aggressive tax planning (2012/772/EU). The premise of the Commission’s recommendation was the Treaty on the Functioning of the European Union (TFEU), based on the constitutional basis of the EU.
It cited aggressive tax planning as obtaining an advantage from the technicalities of a tax system, or of mismatches between two or more tax systems, for the purpose of reducing a MNE’s tax liability.
The Commission’s driving force for the recommendation was to implement the adoption of a common general anti-abuse rule (GAAR) by Member States. The purpose of this common EU GAAR was to counteract aggressive tax planning practices falling outside of unilateral anti-avoidance rules.
Secondly, the Organization for Economic Cooperation and Development (OECD) is a key international principle-making stakeholder. The Global Forum on Transparency and Exchange of Information for Tax Purposes (Forum) is one of the OECD’s key international bodies implementing global transparency standards, acting as a key advocate to tackle offshore tax evasion.
The Forum includes a collaboration with approximately 160 jurisdictions dedicated to improving transparency and the exchange of information for tax purposes. It accomplishes this through implementation of two complementary international standards, meant to provide closer cooperation between tax authorities around the world.
The first standard is the exchange of information request (EOIR), through which tax authorities can request relevant tax information from each other. The second standard provides automatic exchange of information (AEOI), developed in 2014, with automatic exchange mechanisms.
Avoiding Double Taxation
The EU advocated for the use of GAAR to overcome perceived tax advantages of MNEs. However, it’s important to underscore that what was not recommended is that multilateral tax administrations strive to achieve equal parity for similar tax attributes.
One example, utilizing GAAR and the perception of aggressive tax planning, is the limitation of interest expense by a borrower for intercompany debt.
As a result of the limitation, the tax benefit of intercompany interest expense may be delayed for many years, or perhaps never achieved, whereas the tax obligation of the lender is not similarly limited.
However, the resulting mismatch was largely ignored, citing the fact that it may be a timing difference, although in reality the discounted value of the realized tax benefit for the interest expense may be ultimately little, or perhaps zero. To the extent this interest income would have had a bilateral limitation to match the relevant interest expense, this mismatch may have been largely remedied.
Now that tax administrations have GAAR and other tax avoidance rules to address potential aggressive tax planning positions, what are MNEs doing?
They are taking measures to avoid what they see as double taxation via transfer pricing audit adjustments without complementary jurisdictional offsets; taxation of the same income twice in multilateral jurisdictions without total credit/exemption of the underlying taxes paid (e.g., U.S. Subpart F and global intangible low-taxed income rules); local taxation of changes for indirect group members; deemed transaction and general/targeted anti-abuse rules, etc.
A common foundation for tax planning by MNEs is the avoidance of double taxation.
However, as international tax legislation in recent years has resulted in unmatched complexity—a tsunami of compliance diligence and little time to implement new legislation—the reality of double taxation usually results in varying degrees.
Multinational organizations cannot easily move business operations, functions, or risks around the world to solely address such legislation. Tax planning also follows the business and its transformational changes, although the global overriding objective is the avoidance of double taxation.
As a result, non-governmental organizations and other stakeholders are continually looking to achieve a higher level of tax transparency.
And in keeping with our established common definition, that means a better understanding of the global business, via accessibility to information, with respect to the jurisdictional tax effects that have an impact on cash taxes, effective tax rates, and earning per share calculations.
Tax transparency advocates are continually striving to obtain additional details underlying certain amounts reported in public documents.
However, tax provisions and tax-related disclosures in public documents do not convey the complex modeling, assumptions, and calculations involved to derive the disclosed topline information.
MNEs understand that results of one jurisdiction, as compared to another, or details of specific amounts reported in public financial statements, do not adequately convey an understanding of the myriad international tax rules underlying that basis.
In fact, tax complexities now dictate modeling necessities for MNEs to derive conclusions from elements that are interrelated and multi-prong, no longer capable of simple intuition and application of a single tax rate for a transaction.
Additionally, further disclosure compromises confidentiality.
Tax administrations, and the OECD, are generally advocates of tax confidentiality, the foundation upon which the Country-by-Country Reporting rules were established.
The reason for that is because tax information includes confidential business information that may also provide strategic details to competitors. Once public, that information is no longer protected by confidentiality provisions that are a necessary component of every tax administration’s policies and procedures.
Where Do We Go From Here?
So now what? Now, we begin from an identical starting point, devoid of unintentional bias as a requisite rule of engagement.
Notwithstanding the obstacles of continuing to engage in discussions around international tax transparency, all stakeholders should strive to present and understand new ideas in an effort to reach a meeting of the minds.
In the process, transparency advocates will hopefully gain a clearer understanding of the complex international tax landscape, as MNEs paint a simpler picture behind the public documentation stage unveiling the complex myriad of unilateral and global tax legislation that is not at all intuitive.
The goal for us all should be a win-win result, as opposed to a myopic view leading to further debates and intense public exchanges.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Keith Brockman is a CPA, CGMA, and authors a Best Practices international tax blog at strategizingtaxrisks.com. He is a frequent presenter at international tax conferences, having over 30 years of experience as a corporate tax executive. He has served on tax committees in the U.S. and Europe with Tax Executives Institute and Manufacturers Alliance for Productivity and Innovation.