Law Offices of Simon Shen

30/08/2011 - Due to the recent financial and economic crisis, global corporate losses have increased significantly. Numbers at stake are vast, with loss carry-forwards as high as 25% of GDP in some countries. Though most of these claims are justified, some corporations find loop-holes and use ‘aggressive tax planning’ to avoid taxes in ways that are not within the spirit of the law. This aggressive tax planning is a source of increasing concern for many countries and they have developed various strategies to deal with it.

Working cooperatively, countries can deter, detect and respond to aggressive tax planning while at the same time ensuring certainty and predictability for compliant taxpayers. Corporate Loss Utilisation through Aggressive Tax Planning, which builds on Addressing Tax Risks Involving Bank Losses (2010), looks at a number of commonly used schemes and identifies three key risk areas: corporate reorganisations, financial instruments and non-arm’s length transfer pricing. Though these are generally used for sound business and economic reasons, some taxpayers use them to obtain undue tax advantages. For example, countries have identified financial instruments that create artificial losses or obtain multiple deductions for the same loss. They have also seen loss-making companies acquired solely to be merged with profit-making companies and loss-making financial assets artificially allocated to high-tax jurisdictions through non arm’s length transactions.

The report outlines strategies to detect and respond to these aggressive tax planning schemes. Detection usually takes place through audits, special reporting obligations on losses, mandatory disclosure rules, rulings, and co-operative compliance programmes. Responses require a comprehensive approach focusing on aggressive tax planning schemes, as well as on their promoters and users. Early engagement between taxpayers and tax authorities in the framework of disclosure initiatives and co-operative compliance programmes also has positive effects, convincing some tax payers not to use or promote certain schemes.

Through the OECD, countries share intelligence on aggressive tax planning schemes and increase international co-operation on detection, responses, and evaluation. Governments should also introduce policies to restrict the multiple use of the same loss and to introduce or revise restrictions on the use of certain losses in the context of mergers, acquisitions, or group taxation regimes. Finally, the report identifies emerging threats for tax revenue, such as aggressive tax planning schemes based on after-tax hedges, and suggests that countries analyse the policy and compliance issues related to them.

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The internationally agreed tax standard on exchange of information, as developed by the OECD and endorsed by the UN and the G20, provides for full exchange of information on request in all tax matters without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged.

There can be no “hard and fast” line on how to measure progress in the implementation of the standard. The tables in the Progress Report represent an objective assessment of the situation in the countries surveyed by the Global Forum and has been guided by the work of the OECD’s Committee on Fiscal Affairs and the Global Forum. These experts have suggested that at this point in time, a good indicator of progress is whether a jurisdiction has signed 12 agreements on exchange of information that meet the OECD standard. This threshold will be reviewed to take account of (i) the jurisdictions with which the agreements have been signed (a tax haven which has 12 agreements with other tax havens would not pass the threshold), (ii) the willingness of a jurisdiction to continue to sign agreements even after it has reached this threshold and (iii) the effectiveness of implementation.

Until recently, Austria, Belgium, Luxembourgand Switzerland had reservations about key aspects of the Article 26 standard. Now all 30 Member countries have not endorsed and agreed to implement the standard. In 2000 there were more than 40 offshore financial centers that did not accept these standards. Today there are none. Also, in 1998 other major financial centers such as Hong Kong and Singapore were not prepared to endorse the standards. Today they have taken steps this year to implement the standard. So over the last ten years the OECD has succeeded in getting these standards endorsed by all major financial centers.

The key principles of transparency and exchange of information for tax purposes can be summarized as follows:

• Exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of a treaty partner.

• No restrictions on exchange caused by bank secrecy or domestic tax interest requirements.

• Availability of reliable information, particularly accounting, bank and ownership information and powers to obtain it.

• Respect for taxpayers’ rights.

• Strict confidentiality of information exchanged.

Exchange of information on request occurs where one country’s competent authority asks for particular information from another competent authority. Typically, the information requested relates to an examination, inquiry or investigation of a taxpayer’s tax liability for specified tax years. The standard prohibits fishing expeditions. Before sending a request, the requesting country should use all means available in its own territory to obtain the information except where those would give rise to disproportionate difficulties. The request should be made in writing but in urgent cases an oral request may be accepted, where permitted under the applicable laws and procedures. Requests should be as detailed as possible and contain all the relevant facts, so that the competent authority that receives the request is well aware of the needs of the applicant contracting party and can deal with the request in an efficient manner. The OECD has developed guidance on what could be included in a request.

Information exchanged for tax purposes must be treated as confidential. Bilateral tax treaties and TIEAs contain rules to ensure that information is used only for authorized purposes and thereby protect taxpayer privacy rights. Confidentiality rules also apply to information exchanged pursuant to other instruments. Typically unauthorized disclosure of tax related information received from another country is a criminal offence.

Tax information received from another country can only be used for the purposes stated in the agreements. A country is free to decline a request for information in a number of situations. One reason for declining to provide information relates to the concept of public policy. “Public policy” generally refers to the vital interests of a country, for instance where information requested relates to a state secret. A case of “public policy” may also arise, for example, where a tax investigation in another country was motivated by racial or political persecution.

No. All countries have some form of bank secrecy. What is important is that it can be lifted in well defined circumstances to enable countries to enforce their own tax laws and to respond to requests for information pursuant to TIEAs or at tax treaties so the treaty partners can administer their own laws.

Yes. The standards impose an obligation to exchange all types of information forseeably relevant to the administration and enforcement of the requesting country’s domestic tax laws. This could include information on companies and trusts and their owners and beneficiaries. Moreover, a state cannot decline to provide information in response to a request for exchange of information solely because it is held by a person acting in an agency or fiduciary capacity, such as a trustee.