Tax abuse (6/7) Flashcards
The Anti Tax Avoidance Directive (ATAD) article 6
- For the purposes of calculating the corporate tax liability, a Member State shall ignore
an arrangement or a series of arrangements which, having been put into place for the
main purpose or one of the main purposes of obtaining a tax advantage that defeats the
object or purpose of the applicable tax law, are not genuine having regard to all relevant
facts and circumstances. An arrangement may comprise more than one step or part. - For the purposes of paragraph 1, an arrangement or a series thereof shall be
regarded as non-genuine to the extent that they are not put into place for valid
commercial reasons which reflect economic reality. - Where arrangements or a series thereof are ignored in accordance with paragraph 1,
the tax liability shall be calculated in accordance with national law.
The GAAR tests (General Anti-avoidance Rules )
Artificiality: not genuine having regard to all relevant facts and circumstances
Motive: put into place for the main purpose or one of the main purposes of
obtaining a tax advantage
Defeat Object and Purpose of Corporate Tax Law: What is the object and what is the purpose of tax law?
Burden of Proof: Where to find it
What is a CFC
A corporate entity that is registered and conducts business in a different
jurisdiction or country than the residency of the controlling owners.
what is wrong with CFC’s
t is wrong if the CFC structure was created for tax avoidance, which is done by
setting up offshore companies in jurisdictions with little or no tax, such as
Bermuda and the Cayman Islands.
Thin capitalization
Hidden equity capitalization through excess loans.
* It is an artificial use of interest bearing debt instead of equity by shareholders
with the sole or primary motive to benefit from tax advantages.
Arms length principle
represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises.
Methods for determining arms length principle
Transactional price methods:
- Comparable uncontrolled price method (CUP)
- Resale price method (RPM)
- Cost Plus Method (CPP)
Transactional Profit Methods;
1. Transactional net margin method (TNMM)
2. Profit split method (PSM)
Transfer pricing
It is an economic term refers to the valuation process for transactions
between related entities.
Article 26 of the OECD Model details the following elements of information
exchange:
- the duty to exchange;
- the mechanism by which information shall be exchanged;
- the duty to protect information received;
- the acceptable grounds for declining to exchange requested information;
and - the unacceptable grounds for declining to exchange information.
Article 26 of the OECD Model
provides an explicit and established
framework for exchanging information by specifying the terms under
which information useful or relevant to the administration or
enforcement of the domestic tax laws or tax treaties can be requested
or received from treaty partners.
* The provision reflects the understanding that transparency is
essential for the effective operation of a tax system (including all
aspects of taxation, not just an income tax).
There are four fundamental questions that article 26 of the OECD Model seek
to address
(1) who can request information?
(2) about whom can information be requested?
(3) what information can be requested? and
(4) when can a request for information be denied?
Limits on exchange of information
- Compliance with the request would conflict with the requested state’s (or the
requesting state’s) domestic laws and administrative practice - Requesting state cannot acquire information under its own domestic laws
- Compliance with the request would divulge trade secrets
- Obligation to notify taxpayer of request
- Public policy
How to exchange information
- There are three basic methods for exchanging information:
(1) on request;
(2) spontaneous; and
(3) automatic.
Improper Use of Tax Treaties
Defined by OECD as:
A guiding principle is that the benefits of a double taxation convention should not be
available where a main purpose for entering into certain transactions or arrangements
was to secure a more favourable tax position and obtaining that more favourable
treatment in these circumstances would be contrary to the object and purpose of the
relevant provisions.
whats wrong with treaty shopping
The DTTs apply only to the residents
of the contracting states. It is viewed as being a form of tax avoidance which
can be tackled at domestic or international level.
