International Tax: When Countries go Rogue – a summary article

VERSION 1 – Summary: Tax PlanningTax planning is the process of organising and structuring one’s financial affairs in a manner that legally minimises tax liabilities while ensuring compliance with relevant tax laws. The primary objective of tax planning is to reduce the amount of taxes paid, optimise the use of available tax benefits, and preserve wealth. It can be applied at various levels, including personal... International Article on “Taxpayers Going Rogue, summarized article by Cecilia Stassen

With multinational entities and digital companies becoming an everyday occurance and the status quo of doing business, governments are concerned with the shifting of profits away from the jurisdiction in which the entities mainly operate.

In light of the above the BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... project was started to deal with this actual or perceived shift of profits. The project started in 2013, but is only now, 5 years down the line really being implemented. With the fast pace in which the digital economy is changing and the simplicity with which cross-border trade can happen, the issues under discussion in 2013 has likely changed drastically or expanded. The result is that BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... is not adequately addressing all methods of profit shiftingProfit Shifting is a strategic practice employed by multinational enterprises (MNEs) to reduce their global tax liability by shifting profits from high-tax jurisdictions to low- or no-tax jurisdictions. The primary method involves transferring income-generating activities, intangible assets, or other high-value components within the group to countries with favourable tax regimes. Profit Shifting is a critical concern for tax authorities and....

As a result of the above governments are starting to discuss or even implement domestic legislation to tax these digital companies. For instance, to tax the companies on their gross revenues, based on where users are located and advertising revenue generated.

The risk of a company or group being subject to tax on the same income in two jurisdictions are increasing and this shift in policy by the various governments are forcing international enterprises to re-evaluate their international structures on a continual basis. The entities can no longer assume that their structures will remain tax efficient.

Companies are urged to consider the following when looking at their structures:

• Who are suppliers, customers and investors and where are each situated;
• Where is value created and how does tis compare with where income is generated;
• Keep up to date with proposals to change legislation and understand how it will impact their structure, and also those of their suppliers as some additional taxes may have a financial impact in the form of higher costs of inputs;
• Engage with industry leaders to enter into consultations with the authorities regarding proposed changes;
• And ultimately, act early.

VERSION 2 – Tax PlanningTax planning is the process of organising and structuring one’s financial affairs in a manner that legally minimises tax liabilities while ensuring compliance with relevant tax laws. The primary objective of tax planning is to reduce the amount of taxes paid, optimise the use of available tax benefits, and preserve wealth. It can be applied at various levels, including personal... International Article on “Taxpayers Going Rogue, summarized article by Nataly Marchbank

Lawrence Field, International Tax: When Countries go Rogue Bloomberg BNA 1 (2018)

Article summarized:

• Cash strapped tax authorities looking to entice businesses to get them to domicile themselves within their economies.

• Presents a real risk of suffering double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... as tax authorities are taking unilateral action.

• Globalisation has transformed the world in which tax legislationTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public... was originally intended for.

• BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... began in 2013 initiative to protect tax baseThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... of nations in a coordinated way by way of a coherent approach.

• Many countries moved relatively quick and after 5 years proposals were being implemented.

• BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... only fixed partly the problem, as BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... initiatives catered for the 2008 financial crisis and nor problems for 2020.

• An area that has moved rapidly is the digital economy.

• Tax competition amongst states are more prevalent and challenging the traditional methods of taxing.

• Countries such as UK, EU and Italy are looking at ways to tax digital transactions. This ranges from taxing digital companies where they earn their income rather than taxing profits to taxing gross revenues on where users are located to levying on certain digital transactions.

• Traditional business models are being disrupted by these possible taxing scenarios due to a possible threat of good old-fashioned trade wars.

• Companies need to be nimble in the face of these new challenges and understanding the changing landscape and evaluate how this may impact their business models and seek out specialist tax advice to overcome any confusion regarding such changes.