THE LEGITIMACY OF TAX PLANNING TODAY

Transcription

1 THE LEGITIMACY OF TAX PLANNING TODAY NICHOLAS JACOB WRAGGE LAWRENCE GRAHAM LLP SOLICITORS LONDON, SINGAPORE, DUBAI, MOSCOW, MONACO, PARIS, BRUSSELS, MUNICH

2 THE LEGITIMACY OF TAX PLANNING IN TODAY S WORLD - Governments continue to blur the distinction between tax avoidance & tax evasion - Tax avoidance confused with money laundering - Tax avoidance is immoral? - Perceived right of every citizen to minimise amount of tax paid - Is that being eroded? - Do efforts to stamp out tax planning and increasing tax rates lead to... - Damage to onshore economies? - Are we only really talking about semantics? - What about FATCA & CRS?

3 THE LEGITIMACY OF TAX PLANNING IN TODAY S WORLD What are we really talking about? The moral high ground The UK draft code of practice for banks Transfer Pricing Double tax treaties General anti-avoidance rule (GAAR) The OECD's approach BEPS, FATCA & CRS IIlegal tax fraud/evasion/avoidance Do these efforts damage "onshore" economies?

4 THE LEGITIMACY OF TAX PLANNING IN TODAY S WORLD - INTRODUCTION It is in governments' interest to make as much planning as possible illegal. But is that right? Isn't it in govts' interest to create an entrepreneurial spirit? Yet we all want to stamp out improper tax evasion so we all pay less tax! How creative can you be? How literally can you interpret tax legislation? How much do you have to take the spirit of the legislation into account How much do morals matter?

5 THE MORAL HIGH GROUND How much should morality enter into the equation? Should we be able to take advantage of loopholes or a lack of clarity in legislation on a literal interpreation? Or should we look to the spirit of the legislation? Or what the legislators intended? Why do we have to look at the spirit if drafting is inadequate? Is it fair to have a GAAR to cover inadequacy of drafting? This issue will come up more under CRS There will be many questions asked as info gets disclosed

6 MORALITY Previously acceptable tax planning now may be viewed as aggressive Are there now a different set of values? Planners increasingly forced to look beyond legal risks to consider political & reputational risks Media planners now important Regarded as unfair and shirking of social responsibility Maybe taxpayers need to seek to engage more with tax authorities & develop messaging strategies to defend increase in shareholder value

7 TRANSFER PRICING Christian Aid has assessed that trade mispricing by multinationals amounts to US$160bn pa Difference between deliberate mispricing or faked transns and attempt to tax arbitrage on a commercial basis Some still say that tax havens cause part of the tax gap in mature countries Revenue authorities always have the option of challenging a company s transfer pricing process Often because countries disagree on size of slice of the cake Concern is that developing countries may lose out more as it is more diff for them to challenge mature countries

8 DOUBLE TAX TREATIES How can you be sure that anti-avoidance provisions prevent DTTs from applying? Clients often ask if they can set up a co in a jur with a better DTT to save tax Benefits of DTT should not be available where main purpose is to secure more favourable tax position Also if obtaining more favourable treatment is contrary to object & purpose of provisions Not in line with Vienna Convention on Law of Treaties Should GAAR override?

9 TREATY SHOPPING Eng co Personnel to serve custs in India. More than 90 days = PE under DTT India bus Second personnel to M co Mauritius Co M I DTT has no services PE concept. Only PE if fixed pl of bus in India

10 BASE EROSION & PROFIT SHIFTING OECD BEPS project attempt to construct a unified approach against aggressive tax behaviour to prevent corporate profits from escaping tax Important that this is international as otherwise would increase tax arbitrage between countries Most plans eg Dutch/Irish/Dutch Sandwich used by Starbucks, Apple & Google do not violate antiavoidance provns tax arbitrage Public awareness & scrutiny of tax based transactions Possible retroactive action over last ten years Ethics & Morality are taking over legality - legislators

11 BEPS Will develop new standards to prevent double non-taxation Tougher rules on CFCs to prevent tax avoidance by holding profits in offshore subs Deterrence against treaty shopping & multiple deductions If profits earned in a country then that country can tax them Profits will be more difficult to split between IP than trading; current DTT & TP rules facilitate such separation BEPS action plan sets out 15 specific actions

12 RUSSIAN TAX CHANGES De-offshorisation & amendments to the CFC legn Proposed Introduction of a Capital Amnesty Draft Law Clarification of the Federal Tax Service Regarding Transfer Pricing adjustments Income from the indirect sale of immovable property - tax must still be withheld at source Russia signed up to CRS in 2018 The world is changing...

13 GENERAL ANTI-AVOIDANCE RULE (GAAR) (1) Increasing consideration and use of GAAR Plug filler for lazy or inadequately drafted legislation? Or is it simply putting into one provision existing antiavoidance legislation? GAAR generally requires a revamping of existing antiavoidance legislation Extremely difficult to draft Australia, NZ, Canada has a GAAR Danger is change of balance of power and threat of use

14 GENERAL ANTI-AVOIDANCE RULE (GAAR) (2) Well known principles in Furniss v Dawson & Ramsay have been effective where no commercial purpose Does a GAAR give more certainty? As such it is a deterrent MacNiven (2001) Ramsay doctrine was not a judicial anti-avoidance doctrine based on a bus purpose test, but allows freedom to apply a literal test as opposed to a purposive test UK has a general Anti-Abuse system

15 TAX FRAUD & DISHONESTY Tax Fraud is generally a dishonest admission and criminal Fraudulent evasion of income tax (UK) dishonest What is dishonesty? - Absence of an honest belief as to tax liability - Standards of reasonable and honest people - Did he realise he had not met those standards? Tax evasion is generally fraud Switzerland distinction between tax fraud and tax evasion; tax fraud is more serious

16 EXECUTION & CONCEALMENT Planning may be legitimate, but execution may be illegal or poor or insufficient to implement the planning Also failure to disclose fully to revenue authorities R v Charlton (1996) accountants and barrister involved in planning were all jailed for deliberately concealing ineffective transfer pricing and offshore companies being controlled in the UK Tax advisers had been dishonest, and had set up Jersey companies - device or sham for purpose of evasion Abusive tax avoidance compounded by incomplete presentation of facts to HMRC supported by professionals

17 TAX PLANNING & TAX MITIGATION Every man is entitled to order his affairs so that the tax attaching under the appropriate acts is less than it otherwise would be per Lord Tompkin Tax mitigation allows a taxpayer to take a fiscally attractive option afforded to him. Perfectly legitimate business in planning eg - doing things in different tax years - Spreading ownership between different family members - Using reliefs - Using different vehicles

18 FATCA & CRS Globally co-ordinated approach to tax disclosure Jurs obtain financial info from their financial institutions & annually automatically exchange that with other jurs Obviously this will enable jurs to enforce tax liabilities But it will lead to many more questions as to whether tax planning (which does not rely on non-disclosure) is effective Advisers will have to be more prepared to justify planning Banks & Trust cos will need to review existing & vet new structures Greater concern over confidentiality

19 DINNER PARTY CONVERSATIONS So you help people avoid tax?? Isn t that immoral in today s world?? How can you justify helping the wealthy avoid tax when the less well off can t do it?? No I help people to plan their tax affairs I help make sure they use the reliefs that they are allowed to use I help them plan in accordance with the law Is the problem the law, the interpretation of the law or the fact that morality is more important than the law?

20 CONCLUSIONS Brebner v IRC if two ways of carrying out a transaction one paying the max in tax and the other paying none or less tax does not mean that purpose is tax avoidance None condone illegal tax avoidance, but have govts gone too far in stopping creative but legitimate tax planning? Is there a real question that it is the quality of legislative drafting that is the problem? Maybe we should have an intly agreed standard OECD? Lack of coherent intnl tax system maybe have one agreed legal doctrine enforced by centralised authority? BEPS a step Now serious undercurrents with sometimes no legal tax merit

21 YES I'VE GOT THE BALANCE RIGHT! YES I'VE GOT THE BALANCE RIGHT!