- QUESTION POSTED BY: Student
- TOPIC: Residency & Treaties
- PROGRAMME: Postgraduate Diploma in International TaxationFOR MORE INSIGHT ON INTERNATIONAL TAXATION, PLEASE READ THIS ARTICLE: Introduction to International Taxation: Key Concepts & Guidelines International Taxation encompasses the framework of laws, principles, and treaties that govern the tax obligations of individuals and entities engaged in economic activities that span multiple jurisdictions. This field addresses how income, profits, and gains are taxed when operations or investments extend...
- TOPIC: Introduction to Anti-Avoidance (WEEK 17)
- LECTURER: Renier van Rensburg
FULL WRITTEN ANSWER
Anti-avoidance legislation within the European Union (EU) has become increasingly harmonised, particularly in response to concerns about tax base erosionTax Base Erosion refers to the process through which a country’s taxable income base is reduced due to the shifting or minimising of income, often by multinational entities (MNEs). This can occur via several mechanisms, such as transfer pricing, income shifting, and utilising tax incentives. Erosion of the tax base impacts national revenue, reducing the funds available for public spending...base erosion and profit shiftingBEPS 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... (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...). While EU Member States, including lower-tax countries like Bulgaria, retain sovereignty over their tax systems, they must also comply with overarching EU directives aimed at preventing tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities.... The consensus within the EU regarding anti-avoidance legislation can be summarised as follows:
1. Adherence to EU Directives:
- Anti-Tax Avoidance Directive (ATAD): The ATAD is a key piece of EU legislation designed to ensure a coordinated and effective approach to combat tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities.... It includes provisions on interest limitation, exit taxation, general anti-abuse rules (GAAR), controlled foreign company (CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making....) rules, and hybrid mismatches. All EU countries, including low-tax jurisdictions like Bulgaria, are required to implement these rules.
- Country-Specific Implementation: While the ATAD provides a framework, each Member State implements the rules within its national tax lawTax 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..., sometimes with variations to accommodate local circumstances. Bulgaria, for instance, has implemented ATAD, but the impact of these rules is influenced by its overall tax policy and rates.
2. General Anti-Avoidance Rule (GAAR):
- Most EU countries, including Bulgaria, have adopted GAARs that allow tax authorities to counteract arrangements that, while formally compliant with the law, lack economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit... and are primarily motivated by tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities.... The EU’s ATAD requires all Member States to implement such a rule, leading to a broad consensus on the need for GAARs within the EU.
3. Harmonization vs. Tax Competition:
- There is a balance between harmonisation of anti-avoidance measuresAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due... and the preservation of tax competition within the EU. Low-tax countries like Bulgaria use their tax systems as a competitive advantage to attract investment, but they must do so within the framework of EU rules. The consensus is that while tax competition is permissible, it should not lead to harmful tax practices, and all countries must comply with the minimum standards set by EU directives.
4. Bulgaria’s Position:
- As a low-tax country, Bulgaria has historically attracted businesses with its favourable corporate taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The... rate (10%, one of the lowest in the EU). However, Bulgaria has implemented the required anti-avoidance measuresAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due... in line with EU directives, including ATAD. This reflects a broader EU consensus that even countries with low tax rates must prevent aggressive tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities... strategies that could undermine the integrity of the EU’s single market.
5. Cross-Border Cooperation:
- The EU also emphasizes the importance of cross-border cooperation in tax matters. Bulgaria, along with other EU countries, participates in the exchange of tax information and collaborates on audits to combat tax evasionTax Evasion refers to illegal activities or practices undertaken by individuals or businesses to avoid paying taxes. It involves intentionally misrepresenting or concealing income, inflating deductions, or underreporting earnings to reduce tax liability unlawfully. Unlike tax avoidance, which uses legal methods to minimize tax obligations, tax evasion is a criminal offence that carries significant penalties, including fines, imprisonment, and asset... and avoidance more effectively.
6. Impact of EU Court of Justice (CJEU):
- The CJEU plays a critical role in interpreting EU law, including anti-avoidance measuresAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due.... Member States, including Bulgaria, must align their national practices with CJEU rulings, which further promotes a harmonized approach across the EU.
In summary, while low-tax countries like Bulgaria benefit from competitive tax rates, they are bound by the EU’s broader anti-avoidance framework, particularly as set out in the ATAD. The consensus within the EU is that all Member States must adopt and enforce robust anti-avoidance measuresAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due..., ensuring that tax competition does not lead to harmful tax practices or significant disparities within the single market.
VIDEO TRANSCRIPT
What is the consensus in the anti-avoidance legislation between countries within the eu for example, low tax countries like Bulgaria? Very good question. So if you look at anti avoidance legislation within the eu this has become very, increasingly harmonized, especially regarding concerns about tax base erosionTax Base Erosion refers to the process through which a country’s taxable income base is reduced due to the shifting or minimising of income, often by multinational entities (MNEs). This can occur via several mechanisms, such as transfer pricing, income shifting, and utilising tax incentives. Erosion of the tax base impacts national revenue, reducing the funds available for public spending...base erosion and profit shiftingBEPS 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... and all the bips initiatives.
Now, EU member states, including the lower taxed countries like Bulgaria, daily sovereignty over their tax systems, but they must also comply with the overarching EU directives. Those directors are aimed at preventing tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities... because you want to see it as one larger, say, structure of member states and not just the individual jurisdictions as they are. So the consensus within the EU regarding these anti-avoidance legislation can be summarized as follows. So you’ve got to adhere to the EU directives. And there’s EU directors called the anti-tax avoidance directive. And then there’s very specific implementation. Now, if you look at a tad the anti-tax avoidance directive, that’s the key part of EU legislation. And it includes provisions on interest limitation, exit taxation, general anti-abuse rules or car as it is known. And then your typical CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... rules control foreign company rules. So it’s very important that even the low tax jurisdictionsTax jurisdiction refers to the authority granted to governments or local taxing bodies to impose taxes on individuals, businesses, or transactions within a specific geographical area or based on particular criteria. This concept is a cornerstone of international tax law, determining which countries have the right to tax certain individuals or entities and under what conditions. As businesses and individuals... also have to abide with these rules, even though the country’s specific rules may say one thing, they’ve also got a because they’re part of the EU they’ve got to follow a certain process and framework.
So important to look at the country’s specific implementation, which provides a framework and any member state implements the rules within international tax lawTax 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.... It has got various or variations to accommodate the local same circumstances. These rules are influenced by its overall tax policy and rates. Bring me to the next ., which is the guard, the general anti-avoidance rule. That is where most EU countries, including countries like Bulgaria, have adapted general anti avoidance rules. And that allows tax authorities to counter arrangements that while they comply with the law, they lack economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit..., and all motivated or primarily motivated by tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities....
Now, this situation does play out, and it can become very challenging within the eu states. That’s why 1 year again, because we’re dealing with not the simplest of scenarios we’re dealing with some of the exceptions to the rule. One should invite involve and good corporate or consulting advisers. Then another, which I think is quite important, is the harmonization versus the tax competition. And that exists also within the EU European Union, as it exists in many other, let’s say, larger jurisdictions or grouped jurisdictions like Africa or sub saharan Africa. So you’ll also see in some of the oceanic countries and so forth. If one looks at this, one would actually understand what is the tax competition within the eu and how do low tax countries like Bulgaria use their tax systems in a compare as a competitive advantage to attract investment, but they need to do it within the framework of the eu rules.
So sometimes this could end up being an issue where the country doesn’t necessary. And I’m not saying Bulgaria is like that. They don’t comply fully with the EU rules, but they comply sufficiently to remain within the EU and then these ways exceptions, which are entertained by the larger, let’s say, entities or the jurisdictions, albeit that it’s on the face value doesn’t comply with. What one would say is the spirit of the eu framework.
Now Bulgaria position is, it is a low tax country. It is historically attracted business with a favorable corporate taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The... rate of 10 %. One of the lowest in the eu and one of the lowest in the world. However, Bulgaria has implemented the required anti avoidance measures in line with eu director, including the a tad. And this reflects a broader EU consensus that even countries with low tax rates must prevent degrees of tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities... strategies.
So what this means then is you end up or in a situation where you’ve got cross-border cooperation between cross-border countries. And then you have the eu Court of Justice, which does come into a play with member states, including Bulgaria, must align their national practices with the an EU Court of Justice. In summary, while low-tech countries like Bulgaria benefit from competitive tax rates, they are bound by the used border anti-avoidance framework.