This article appears in the June issue of our International Corporate Structures newsletter.
During my career, I have had great fun being involved in international tax planning initiatives, sometimes as the initiator but mainly as part of a global team. I say ‘fun’ because although we were dealing with complex tax and non tax issues, a sense of humour was essential to maintain focus and sanity.
For me, the best results were always achieved by working with others with a common aim of meeting commercial and operational practicality, as well as the crucial tax objective of substance over form.
Some of the planning areas which I have always enjoyed include:
- Permanent establishments
- Front office product support
- Transfer pricing
- Group reorganisations
- Funding structures including hybrid entities and instruments
- Optimising funding cost deductions
- Maximising tax loss utilisation
Do I see an end to tax planning as a result of BEPS? My short answer is no, not entirely. I do think some planning adaptations will be needed but its demise is unlikely unless tax laws are very tightly drafted, kept very simple and most importantly recognise commerciality.
The evidence so far suggests global legislators are moving in the opposite direction by drafting overly complex, ambiguous and very wordy tax law. Combining this with their continuing lack of commercial awareness gives, in my view, law that is open to interpretation … a tax adviser’s dream!
The compliance and documentation requirements of BEPS 13 will undoubtedly be a priority for multinationals and their in house tax teams and advisers for the foreseeable future. However, in keeping with other areas, compliance and planning are intertwined, so, I can see BEPS compliance going hand in hand with BEPS planning.
Going back to some of my favourite planning topics, here are two examples of how I see BEPS impacting tax planning:
Permanent Establishments (PEs)
Today’s digital world was never anticipated when Tax Treaties defined what was and was not a PE. BEPS has led to a broadening of scope by including virtually any presence in a country e.g. salesforce or back office staff.
Multinationals should be reviewing their global operational structure, including staff mobility programmes, to avoid any unexpected PEs arising with the consequential increased tax costs this is likely to create.
Funding Structures and Hybrids
Hybrid structures and hybrid financial instruments have long been a focal point in planning as they generated benefits as a result of tax laws in different jurisdictions treating the entity/instrument in differing ways.
Hybrids are currently the target of extensive anti avoidance initiatives driven by the OECD and the EU under BEPS. Corporates that currently have hybrids within their group should be reviewing the structures and instruments to see what changes are necessary.
BEPS seems to be aimed at curtailing international tax planning by promoting the introduction of overly complicated laws and regulations. For this reason, I do not see planning disappearing, as multinationals and all taxpayers should only be expected to pay the tax legally due. However, I would advise multinationals to review the scope and approach they apply to tax planning as anything that does not meet commercial reality and substance over form will undoubtedly fail in a challenge by global tax authorities.