Advanced Issues in International and European Tax Law

Christiana HJI Panayi

• Publisher: Hart Publishing
• Year: 2015
• ISBN:
  9781849469555
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto tributario

This book examines recent developments and high-profile debates that have arisen in the field of international tax law and European tax law. Topics such as international tax avoidance, corporate social responsibility, good governance in tax matters, harmful tax competition, state aid, tax treaty abuse and the financial transaction tax are considered. The OECD/G20 project on Base Erosion and Profit Shifting (BEPS) features prominently in the book. The interaction with the European Union's Action Plan to strengthen the fight against tax fraud and tax evasion is also considered. Particular attention is paid to specific BEPS deliverables, exploring them through the prism of European Union law. Can the two approaches be aligned or are there inherent conflicts between them? The book also explores whether, when it comes to aggressive tax planning, there are internal conflicts between the established case law of the Court of Justice and the emerging policy of the European institutions. By so doing it offers a review of issues which are of constitutional importance to the European Union. Finally, the book reflects on the future of international and European tax law in the post-BEPS world.

1

Aggressive Tax Planning, Good Governance in Tax Matters and Corporate Social Responsibility: The New Themes

Increasingly, the international tax community is dominated by a high-level debate on topics such as tax avoidance, aggressive tax planning, corporate social responsibility, tax governance, transparency and exchange of information. Among others, the European Commission, the OECD and G8/G20 countries have become involved in this debate. The most important recent development has been the launch of the OECD/G20’s Action Plan to combat base erosion and profit shifting (BEPS). This chapter examines some of the factors and events that led to the BEPS project.

1.1.Harmful Tax Competition, Tax Havens, Base Erosion and Profit Shifting

Globalisation has increased the possibilities for erosion of the national tax base. The global economic crisis has exacerbated this and placed heavy burdens on government budgets.¹ In recent years, the tax practices of some well-known multinational enterprises (MNEs) have attracted attention for their aggressive tax practices,² which although legal, they often lead to very low effective tax rates. The ability to shift profits into low or no tax jurisdictions with little corresponding change in business operations has also been criticised for distorting the allocation of capital and eroding national tax bases, especially of developed countries.

Aggressive tax practices are also thought to have led to a phenomenon coined as stateless income. Stateless income has been described

as income derived for tax purposes by a multinational group from business activities in a country other than the domicile of the group’s ultimate parent company but which is subject to tax only in a jurisdiction that is neither the source of the factors of production through which the income was derived, nor the domicile of the group’s parent company.³

In an era when many countries, even those with advanced economies, face a fiscal crisis and budget deficits, stateless income is often criticised for leading to a decline in corporate tax collection.

However, MNE behaviour does not occur in vacuum. Stateless income could be construed as the result of tax competition between nations.⁴ Base erosion and profit shifting by MNEs would be largely ineffective ‘without countries offering preferential tax rules, including low/no tax regimes for particular taxpayers or income categories and benign provisions on profit measurement’.⁵ To an extent, MNE tax avoidance is just the flipside of harmful tax competition.⁶

When one talks about harmful tax competition, traditionally, tax havens and harmful tax practices come into mind. The OECD has already spent a considerable amount of time dealing with the phenomenon of harmful tax competition in the late 90s. The OECD project on harmful tax practices was launched in 1996. The initiative was carried out through the Forum on Harmful Tax Practices. In 1998, the Forum produced its first major report, entitled Harmful Tax Competition: An Emerging Global Issue.⁷ The report only covered geographically mobile activities such as financial and other service activities, including the provision of intangibles. Special tax incentives directed at manufacturing and foreign direct investment were outside the scope of the report. The concept of harmful tax competition was not defined but its harmful effects were raised.⁸

The report targeted tax havens and preferential tax regimes, though no definitions were given.⁹ Criteria were used to identify both tax havens and harmful preferential tax regimes¹⁰ and harmful tax regimes.¹¹ A number of recommendations were made for domestic legislation, tax treaties and international co-operation. The Forum was responsible for supervising the implementation of the standstill and roll back provisions.

The publication of the report led to intense dialogue aimed at eliminating preferential tax regimes within OECD and non-OECD countries. This report and subsequent reports¹² encouraged—rather forcefully—OECD and non-OECD jurisdictions to strengthen their commitments to the principles of transparency and effective exchange of information. These standards were developed by the Global Forum on Taxation¹³ but not all jurisdictions showed the same willingness. Following the 2001 Progress Report, in 2002, the Model Agreement on Exchange of Information on Tax Matters was created and used as the basis for the negotiation of many Tax Information Exchange Agreements. Even though the US gradually became less supportive of the OECD’s project insisting on certain changes,¹⁴ the project was quite successful and by 2006 all regimes which were identified as generating harmful tax competition were abolished, the last one being the Luxembourg 1929 holding company regime. In the 2006 Progress Report,¹⁵ it was claimed that the project had fully achieved its initial aims and the mandate given by the OECD Council on dealing with harmful preferential tax regimes in member countries was met. It was announced that future work in this area would focus on monitoring any continuing and newly introduced preferential tax regimes identified by member countries.

Much of the discourse on the OECD’s harmful tax competition project was eventually linked to the benchmarks of transparency and exchange of information. In the G20 meeting of finance ministers and central bank governors, there was a call ‘on financial centres and other jurisdictions within and outside the OECD which have not yet adopted these standards to take the necessary steps, in particular in allowing access to bank and entity ownership information’.¹⁶

Whilst the general feeling was that the OECD’s project on harmful tax competition was being wound up, the global financial crisis which started around 2008 led to a renewed ‘attack’ on tax havens, and later on to jurisdictions that were perceived as facilitating aggressive tax planning. The G20 Communiqué issued at the London 2009 Summit stated that major failures in the financial sector and in financial regulation and supervision were fundamental causes of the financial crisis. The G20 leaders agreed to take action against non-cooperative jurisdictions, including tax havens, and if necessary to deploy sanctions to protect their public finances and financial systems.¹⁷ The era of banking secrecy was declared to be over and countries were called upon to adopt and implement the international tax standards of transparency and information exchange—standards which had assumed top priority by then. This message was reinforced at the G8 meeting in July 2009 and subsequent G8 and G20 meetings, though no sanctions have yet to be taken.

Since 2009, the OECD has been publishing progress reports on the implementation of the internationally agreed tax standard¹⁸ by jurisdictions surveyed by the Global Forum. In these progress reports, there were three lists of jurisdictions: the white list,¹⁹ the grey list²⁰ and the black list.²¹ In the April 2009 progress report, there were four jurisdictions on the black list²² and numerous jurisdictions on the grey list. This list has been regularly updated and there are now no countries on the black list. All jurisdictions covered by Global Forum have now committed to the international tax standards and more than half have implemented them. Furthermore, a peer review process has begun to monitor jurisdictions, reviewing the legal and regulatory framework, the actual implementation of standards, their tax treaties and tax information exchange agreements.

Notwithstanding the self-declared successful conclusion of the OECD’s harmful tax competition project, tax havens still exist—many mostly reconfigured and with different characteristics. It is a widely made assertion that the existence of tax havens has contributed to the financial crisis and has had a major impact on the fiscal sustainability of countries.²³ Other criticisms focus on the impact of tax havens on developing countries and measure the loss of revenues to such countries only and not on developed countries.²⁴ These claims are not easily proven though.

One of the endemic problems of the tax havens discourse is that it is still beleaguered by definitional uncertainty. Its scope is also uncertain and ever changing—notwithstanding the work of the OECD, or perhaps because of the work of the OECD in this area. In a report commissioned by the Norwegian government in 2008²⁵ the damaging effect of tax havens was examined. It was argued, inter alia, that tax havens increase the risk premium in international financial markets, that they undermine the tax system and public finances and they increase the inequitable distribution of tax revenues. It was also reported that tax havens reduce the efficiency of resource allocation in developing countries and generally reduce their revenues and damage their growth. They also make economic crime more profitable. Not much empirical evidence was shown to support these conclusions though. Instead, it was conceded that ‘economic literature cites a number of positive aspects related to tax havens’.²⁶

In this report, it was emphasised that ‘the classic tax havens are not alone in promulgating systems that cause loss and harm to public and private interests in other states’.²⁷ In other words, tax haven regimes are not the prerogative of small sunny islands with minimal tax rates. High-tax countries could also have regimes which are akin to those of tax havens. In any case, as commented, while offshore financial centres may be relevant to the discredited international financial system, their role tends to be exaggerated or misconstrued.²⁸

Advocacy groups, non-governmental organisations (NGOs) and civil society in general have also had an important role in raising public awareness on tax havens as well as on what they perceive to be illegitimate tax planning practices and tax dodgers. For example, the UK Uncut movement, a grass-roots activist group, has conducted demonstrations across the U...