Tax Policy of BRICS and Developing Countries. Sergio André Rocha (Rio de Janeiro State University)

Transcription

1 January 23, 2018 Tax Policy of BRICS and Developing Countries Sergio André Rocha (Rio de Janeiro State University)

2 Part I Origins of International Taxation

3 The So-Called International Tax Regime 3

4 The So-Called International Tax Regime 4

5 Origins of International Taxation Consolidation of the Income Tax during the first decades of the 21th Century England: /1910 France: 1914 Prussia: 1891 United States: (16th amendment) Brazil:

6 Origins of International Taxation Double Tax Convention Between Prussia and Austro Hungary

7 Origins of International Taxation 7

8 Origins of International Taxation 8

9 Origins of International Taxation 1928 League of Nations Publishes its Model Conventions 9

10 The So-Called International Tax Regime Source country has the right to tax active income, as long as the minimal activity threshold is met (presence of a permanent establishment or similar requirement). The residence country has the right to tax passive income. 10

11 The So-Called International Tax Regime In both cases there is a core element that is blatantly disregarded: the consumer market. Developing countries should have the right to tax active income regardless of a PE as well as passive income. 11

12 Origins of International Taxation 1928 League of Nations Publishes its Model Conventions 12

13 Origins of International Taxation 1943 Review of the 1928 Model in the League of Nations meeting in Mexico City* * Countries that participated in this meeting: Argentina, Bolivia, Canada, Chile, Colombia, Ecuador, Mexico, Peru, United States, Uruguay, and Venezuela. 13

14 Origins of International Taxation 1946 Review of the 1943 Model in the League of Nations meeting in London 14

15 Origins of International Taxation 1946 Review of the 1943 Model in the League of Nations meeting in London 15

16 Origins of International Taxation 1948 The Organisation for European Economic Co-operation is created 16

17 Origins of International Taxation 1961 The OEEC is transformed into the OECD 17

18 Origins of International Taxation 1963 The OECD publishes its first Model Convention 18

19 Origins of International Taxation Developed and Developing Countries on Different Sides Source vs Residence 19

20 Origins of International Taxation Developed and Developing Countries on Different Sides Source vs Residence

21 Origins of International Taxation Shortcomings of the UN Model Convention Decision to use the OECD Model as basis for the UN Model 21

22 Main Differences Between the Models Article 5 l Permanent Establishment Article 7 l Business Profits Article 10 l Dividends Article 11 l Interest Article 12 l Royalties Article 12-A l Fees for Technical services Article 14 l Independent Professional Services Article 21 l Other Income Article 23 l Tax Sparing 22

23 Part II Tax Treaties and Developing Countries

24 Tax Treaties and Developing Countries What is a developing county or emerging economy? 24

25 Tax Treaties and Developing Countries Why would a developing country sign a double tax convention? 25

26 Tax Treaties and Developing Countries If a developing country signs a double tax convention, why would it not use the UN Model as basis for the treaty assuming that the other contracting state would accept it? 26

27 Tax Treaties and Developing Countries If a developing country signs a double tax convention, why would it include articles 5 and 7 in a tax treaty? 27

28 Tax Treaties and Developing Countries Epistemologies of the North and International Tax Imperialism 28

29 Tax Treaties and Developing Countries International taxation and the theory of institutional capacities. 29

30 Tax Treaties and Developing Countries The successful case of Brazil: The Country s treaties are more protective of source country s taxing rights than the UN Model 30

31 Tax Treaties and Developing Countries: Brazil Article 5 follows the UN Model Taxation of services at source treated as royalties Taxation of royalties at source Taxation of rentals as royalties Taxation of other income at source Tax sparing in treaties with developed countries No arbitration as an instrument to settle disputes 31

32 Part III Change of Scenery

33 Change of Scenery Globalization + Harmful Tax Competition + Tax Sovereignty = Crisis of the International Tax Regime 33

34 Change of Scenery Is countries tax sovereignty and the bilateral approach of the International Tax Regime generator of double taxation and double non-taxation? 34

35 Tax Treaties and Developing Countries Is countries tax sovereignty and the bilateral approach of the International Tax Regime generator of double taxation and double non-taxation? 35

36 Change of Scenery Is countries tax sovereignty and the bilateral approach of the International Tax Regime generator of double taxation and double non-taxation? 36

37 Change of Scenery Differences between the Global Forum and the OECD from a developing country perspective. 37

38 Change of Scenery The Income Tax is in crisis. Challenges in characterizing and localizing income have put this tax to the test. 38

39 Change of Scenery Is the Income Tax worth saving? 39

40 Tax Treaties and Developing Countries Is the Income Tax worth saving? 40

41 Tax Treaties and Developing Countries Is the Income Tax worth saving? 41

42 Change of Scenery We are not accusing you of being illegal, we are accusing you of being immoral. Margaret Hodge Former Chair of the Public Accounts Committee (UK) 42

43 Part IV The BEPS Project

44 44

45 BEPS Action Plan Action 1: Addressing the Tax Challenges of the Digital Economy Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements Action 3: Designing Effective Controlled Foreign Company Rules Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation Action 11: Measuring and Monitoring BEPS Action 12: Mandatory Disclosure Rules Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting Action 14: Making Dispute Resolution Mechanisms More Effective Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties 45

46 International Taxation in Post-BEPS Times Is BEPS equally a problem for developed and developing countries? 46

47 International Taxation in Post-BEPS Times From a competitive International Tax Regime to a cooperative regime. The great paradox of International Taxation: Competition and Cooperation. 47

48 International Taxation in Post-BEPS Times Are developed countries victims, perpetrators, or both? 48

49 International Taxation in Post-BEPS Times Are large multinationals to blame? The role of ethics in taxation. 49

50 International Taxation in Post-BEPS Times The role of the OECD and the risks for developing countries. Harmonization and International Tax Imperialism. 50

51 International Taxation in Post-BEPS Times Any tax reform involves disputes in the following levels: Disputes between States, that have divergent interests Disputes between States and taxpayers Disputes between taxpayers 51

52 International Taxation in Post-BEPS Times Have taxpayers rights been left in last place in this whole discussion? Repercussions on domestic tax systems as a whole not only on large multinationals. 52

53 International Taxation in Post-BEPS Times Have taxpayers rights been left in last place in this whole discussion? Repercussions on domestic tax systems as a whole not only on large multinationals. 53

54 Part V BEPS Project and Developing Countries

55 Participation of Developing Countries in the BEPS Project DIRECT PARTICIPATION IN THE BEPS PROJECT 14 countries from a cross-section of regions and per capita income-levels directly participate in the Committee on Fiscal Affairs and the Working Party meetings on the BEPS Project. Who are these countries?: Albania, Azerbaijan, Bangladesh, Croatia, Georgia, Jamaica, Kenya, Morocco, Nigeria, Peru, Philippines, Senegal, Tunisia, and Viet Nam. Two Regional Tax Organisations - the African Tax Administration Forum (ATAF) and the Inter-American Centre for Tax Administration (CIAT) - are also directly involved in the Project. The OECD organised in December 2014 a workshop with these countries on their engagement in the BEPS Project. Through their direct involvement, countries are able to provide input at the working and the decision-making levels, and to ensure that their specific concerns are taken into account in the solutions developed to tackle BEPS. Source: 55

56 Participation of Developing Countries in the BEPS Project REGIONAL NETWORKS ON THE BEPS PROJECT Regional Network meetings are being set up for an ongoing and more structured dialogue process with a broader group of developing countries, particularly low-income countries which may lack the capacity to participate directly in the BEPS Project. A first round of meetings was organised in February/March 2015 in which 61 countries and jurisdictions participated. Who are these countries? Afghanistan, Argentina, Azerbaijan, Bangladesh, Belize, Benin, Bhutan, Botswana, Brazil, British Virgin Islands, Burkina Faso, Cambodia, Cameroon, Chile, China (People's Republic of), Colombia, Congo, Costa Rica, Côte d Ivoire, Democratic Republic of the Congo, Ecuador, El Salvador, France, Gabon, Georgia, Guatemala, Guyana, Honduras, Hong Kong (China), India, Indonesia, Japan, Korea, Laos, Malaysia, Maldives, Mali, Marshall Islands, Mexico, Morocco, Myanmar, New Zealand, Niger, Pakistan, Panama, Peru, Philippines, Senegal, Singapore, Sint Maarten, Slovak Republic, Spain, Sri Lanka, Chinese Taipei, Tajikistan, Thailand, Togo, Tunisia, Turkey, Uruguay, Viet Nam. Source: 56

57 Participation of Developing Countries in the BEPS Project BEPS Inclusive Framework The Inclusive Framework on BEPS was established to formalise the enhanced cooperation between a broad group of countries. More than 85 countries and jurisdictions have already joined the Framework, collaborating at the level of the Committee on Fiscal Affairs and of its Working Parties. Steering Group Members: Argentina Brazil Canada China (People s Republic of) France Georgia Germany India Italy Japan Netherlands Nigeria Norway Senegal Singapore South Africa Spain Switzerland United Kingdom United States. Members of the Inclusive Framework on BEPS take joint action to implement the BEPS Action items and set additional standards. Source: 57

58 Participation of Developing Countries in the BEPS Project BEPS Inclusive Framework Members commit to implementing the BEPS package and the four minimum standards. Implementing measures protects your tax base, such as the development of provisions to avoid treaty abuse and provisions for Country-by-Country Reporting. Being part of an inclusive dialogue on an equal footing directly shapes the standard setting and monitoring processes on BEPS issues. 58

59 Participation of Developing Countries in the BEPS Project BEPS Inclusive Framework l Main Objectives Monitoring implementation and the impact of the different BEPS measures is a key element of the work ahead. Members of the inclusive framework will develop a monitoring process for the four minimum standards as well as put in place the review mechanisms for other elements of the BEPS Package. The inclusive framework will also support the development of the toolkits for lowcapacity developing countries. The inclusive framework will allow members to feed their views into the toolkit work, and likewise the latter might impact the remaining BEPS standard-setting work. Source: 59

60 Participation of Developing Countries in the BEPS Project How strong will OECD s pressure on developing countries be? The cases of tax transparency and FATCA. 60

61 UN s Work on BEPS The United Nations has set up a Subcommittee on Base Erosion and Profit Shifting Issues for Developing Countries. This Subcommittee drafted a questionnaire, which was answers by the following countries: Brazil Chile China Ghana India Malaysia Mexico Singapore Thailand Tonga Zambia Source: 61

62 UN s Work on BEPS The questions asked to the selected jurisdictions were the following: 1. How does base erosion and profit shifting affect your country? 2. If you are affected by base erosion and profit shifting, what are the most common practices or structures used in your country or region, and the responses to them? 3. When you consider an MNE s activity in your country, how do you judge whether the MNE has reported an appropriate amount of profit in your jurisdiction? 4. What main obstacles have you encountered in assessing whether the appropriate amount of profit is reported in your jurisdiction and in ensuring that tax is paid on such profit? 62

63 UN s Work on BEPS The Subcommittee listed the actions if found more relevant for developing countries as follows: 1. Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments 2. Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances 3. Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status 4. Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation 5. Action 11: Measuring and Monitoring BEPS 6. Action 12: Mandatory Disclosure Rules 7. Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting 63

64 UN s Work on BEPS Based on the list, asked the following: 1. Do you agree that these are particularly important priorities for developing countries? 2. Which of these OECD s Action Points do you see as being most important for your country, and do you see that priority changing over time? 3. Are there other Action Points currently in the Action Plan but not listed above that you would include as being most important for developing countries? 64

65 UN s Work on BEPS Based on the list, asked the following: 4. Having considered the issues outlined in the Action Plan and the proposed approaches to addressing them (including domestic legislation, bilateral treaties and a possible multilateral treaty) do you believe there are other approaches to addressing that practices that might be more effective at the policy or practical levels instead of, or alongside such actions, for your country? 5. Having considered the issues outlined in the Action Plan, are there are other base erosion and profit shifting issues in the broad sense that you consider may deserve consideration by international organisations such as the UN and OECD? 65

66 UN s Work on BEPS Countries Replies: Brazil 1. BEPS is a threat to the Country s tax revenues. 2. Main causes of BEPS: (i) fictitious prices in international commerce; (ii) artificial indebtedness; (iii) fictitious transactions with tax havens and preferential tax regimes; and (iv) artificial transfer of residency. 3. Brazil s Tax Administration has tools to identify BEPS cases. 4. Agrees with UN s list. 5. Most relevant: Actions 4, 8, 9 and10, 12, and 13. Other relevant Actions are numbers 1, 3, 5, and 7. 66

67 UN s Work on BEPS Countries Replies: Chile OECD Member 1. The Country does not have the instruments to fight BEPS. It also does not have information to monitor it. 2. Main causes of BEPS: (i) abuse of transfer pricing; (ii) transactions with tax havens and preferential tax regimes; and (iii) intercompany transfers of unjustified costs interest deductions, royalty payments, and service payments. 3. Agrees with UN s list. 4. Most relevant: Actions 4, 6, 8, 11, and 12, and 13. Other relevant Action is number Suggests changes in the Models to better balance taxing rights. 67

68 UN s Work on BEPS Countries Replies: China 1. Even though China cannot quantify it, it understands BEPS is a serious problem. 2. Main causes of BEPS: (i) abuse of transfer pricing; (ii) transactions with tax havens and preferential tax regimes; and (iii) intercompany transfers of unjustified costs interest deductions, royalty payments, and service payments. 3. Agrees with UN s list. 4. Most relevant: Actions 8, 9, 10, 11, and 13. Other relevant Actions are numbers 1 and

69 UN s Work on BEPS Countries Replies: India 1. Current international tax standards favor developed countries. 2. Main causes of BEPS: (i) excessive payments to foreign affiliated companies in respect to interest, services, management fees, service fees, and royalties; (ii) transfer pricing; (iii) operations of digital companies that do not pay taxes in India; (iv) avoidance of PE status; (v) use of low tax jurisdictions without substance. 3. Agrees with UN s list. 4. Most relevant: Actions 1, 4, 6, 7, 8, 9, 10, 12, and 13. Other relevant Action is number Exchange of information as a goal to be pursued. 69

70 UN s Work on BEPS Countries Replies: India [ ] the approach of expecting developing countries to implement all the decisions made by developed countries appears to be somewhat patronizing and should be avoided. Steps must be taken to involve the developing countries in all decisions that are made. 70

71 UN s Work on BEPS Countries Replies: Mexico OECD Member 1. Acknowledges that BEPS affects Mexico. 2. Main causes of BEPS: (i) sales of Mexican companies through low tax jurisdictions with no exchange of information; (ii) migration of intangibles developed in Mexico to low tax jurisdictions; (iii) avoidance of PE status; (iv) excess debt. 3. Agrees with UN s list. 4. Most relevant: Actions 6, 8, 9, 10, 12, and 13. Other relevant Actions are numbers 2 and Exchange of information as a goal to be pursued. 71

72 Developing Countries Action by Action Action 1: Addressing the Tax Challenges of the Digital Economy 1. This Action is highly relevant for developing countries. Digital economy has put in check the notion that a physical presence is necessary for a company to operate in a given country. 2. The outcome of Action 1 has been very modest so far. 3. Will developed countries adopt a position that might hurt them? What is more valuable, the technology itself or the consumer market? 72

73 Developing Countries Action by Action Action 2: Neutralising the Effects of Hybrid Mismatch arrangements 1. Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double nontaxation, including long-term deferral. 2. How to define which country has the right to tax in double non-taxation cases? 3. Domestic policies of developing countries might be impacted by the outcomes of this action. 73

74 Developing Countries Action by Action Action 3: Designing Effective Controlled Foreign Company Rules 1. This Action deals with a subject that is domestic in nature, even though some degree of coordination might be desirable. 2. Its outcome has the mere form of recommendations of best practices. 3. Developing countries with few multinationals might not be interested in enacting CFC rules. 4. Brazil has de most extensive CFC rules in the world. 5. Tax policy considerations. 6. No downside for developing countries. 74

75 Developing Countries Action by Action Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments 1. Just like in Action 3, the outcome of Action 4 appears in the form of a recommendation of a best practice in the control of excessive indebtness. 2. Implementation of this Action s recommendations is left for domestic law. 3. No downside for developing countries. 75

76 Developing Countries Action by Action Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance 1. This is a relevant action for developing countries, many of which have transitioned or are in transition to substance-over-form approaches and enacted rules to counteract preferential tax regimes. 2. No downside for developing countries. 76

77 Developing Countries Action by Action Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances 1. Going back to the question: To what extend are bilateral tax treaties necessary? 2. Is it possible that developing countries are looking at making treaty shopping possible when signing a tax treaty? In developing countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology. They are able to grant tax concession exclusively to foreign investors over and above the domestic tax law provisions. In this respect, it does not differ much from other similar tax incentives given by them, such as tax holidays, grants, etc. Developing countries need foreign investments, and treaty-shopping opportunities can be an additional factor to attract them. [...] Supreme Court of India - Azadi Bachao Andolan cas 77

78 Developing Countries Action by Action Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status 1. The Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan, OECD, 2013a) called for a review of that definition to prevent the use of certain common tax avoidance strategies that are currently used to circumvent the existing PE definition, such as arrangements through which taxpayers replace subsidiaries that traditionally acted as distributors by commissionnaire arrangements, with a resulting shift of profits out of the country where the sales took place without a substantive change in the functions performed in that country. Changes to the PE definition are also necessary to prevent the exploitation of the specific exceptions to the PE definition currently provided for by Art. 5(4) of the OECD Model Tax Convention (2014), an issue which is particularly relevant in the digital economy. 2. No downside for developing countries. 78

79 Developing Countries Action by Action Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation 1. What is the purpose of transfer pricing rules? 2. Are risk and functions good proxies for the application of transfer pricing rules by developing countries? 3. Different approaches: Brazil s case. 79

80 2017 IFA Congress: The Future of TP 1 The ALS will remain the main dominant criterion for allocating taxing rights in cross-border transactions within MNE groups 2 Uncertainty as a consequence of the application of risk and functional analysis 3 Preference for a substance-over-form approach in the context of transfer pricing 80

81 2017 IFA Congress: The Future of TP 4 Increase in tax audits, TP litigation, and potential double taxation 5 Use of simplified approaches in some cases 6 Concern that changes in TP might be used to shift tax revenues from one country to another 81

82 Developing Countries Action by Action Action 11: Measuring and Monitoring BEPS 1. One of the difficulties of the BEPS Project was that there is not actual quantitative information about how big the problem is. Action 11 aims at generating such data. 2. The report recommends that the OECD work with governments to report and analyze more corporate tax statistics and to present them in an internationally consistent way. 3. Data protection concerns. 4. No downside for developing countries. 82

83 Developing Countries Action by Action Action 12: Mandatory Disclosure Rules 1. This Action is aligned with the interests of those developing countries that have moved to substance-over-forms systems. 2. This Report provides a modular framework that enables countries without mandatory disclosure rules to design a regime that fits their need to obtain early information on potentially aggressive or abusive tax planning schemes and their users. 3. Similarly to Actions 3 and 4 this Report focuses on recommendations to domestic laws. 4. No downside for developing countries. 83

84 Developing Countries Action by Action Action 13: Guidance on Transfer Pricing Documentation and Country-by- Country Reporting 1. Action 13 of the Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan, OECD, 2013) requires the development of rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNEs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template. 2. Data protection concerns. 3. In principle no downside for developing countries. Risk of shift of tax revenues and increased administrative burden. 84

85 Developing Countries Action by Action Action 14: Making Dispute Resolution Mechanisms More Effective 1. Developing countries have little experience with MAP. 2. OECD s statistics confirm that developing countries have little experience with MAP. New cases in 2016: Argentina (3); Brazil (4); Chile (3); China (32); Mexico (10); South Africa (6); and Turkey (9). 3.In the same period: Belgium (426); Canada (124); France (296); Germany (353); Netherlands (113); United Kingdom (109); United States (179). 4. Major concern for developing countries: arbitration. 85

86 Developing Countries Action by Action Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties 1. Action 15 of the BEPS Action Plan provides for an analysis of the tax and public international law issues related to the development of a multilateral instrument to enable countries that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested countries will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution. 2. This is a key Action for developing countries, which should be very careful before undertaking any obligation that could be against their interests. 86

87 Part VI Developing Countries and the Multilateral Instrument

88 Developing Countries and the Multilateral Instrument Many developing countries including all BRICS except Brazil signed the MLI. Are there concerns for developing countries in signing the MLI? If there are concerns, why would they sign the MLI? 88

89 Part VII Concluding Remarks

90 January 23, 2018, Many thanks for your time 90