Article on Presentations IBA Conference 2013 Multinational Corporate Tax Planning

12.2013

++ Excerpt from an article published in the IBA magazine in 2013 regarding two presentations held during the IBA "13th Annual Tax Planning Strategies US and Europe" conference, which took place in London on April 11-12, 2013. Javier Valls, as an attendee of the conference, was commissioned by the organizers to prepare a summary article ++

Conference 1: "What is acceptable tax planning for multinationals?"

The conference “What is acceptable tax planning for multinationals?” opens with the reflections of Sara Luder, who highlights the current relevance of this debate, characterised by a troubling level of politicisation. The media plays an active role in the public discourse surrounding the taxation of multinationals, often without technical expertise in tax law, leading to sensational headlines and erroneous conclusions. Luder refers to the concept of the "tax gap", understood as the perceived gap between the tax burden borne by high-capacity taxpayers and the amount they actually pay. Paradigmatic examples — Google and Starbucks — illustrate complex structures across jurisdictions aimed at significantly reducing the global tax burden of the group. Carol P. Tello discusses research conducted by the US Senate on the taxation of very large companies, in which the tax directors of Microsoft and HP gave testimony.

The focus of the analysis was the transfer of intellectual property to so-called offshore jurisdictions, declaring such income as "permanently reinvested" to avoid taxation in the US. The data presented reveals a notable increase in the accumulated non-US profits of US multinationals. Tello recalls the "President’s framework for business tax reform" from February 2012, which highlights that "income shifting" is a serious concern, stating that "there is evidence that US companies use accounting mechanisms to shift profits from where they are actually earned to tax havens and other low-tax jurisdictions." Statistical examples from the OECD demonstrate the increasing disconnection between the location of economic activity and the location of profits declared for tax purposes.

In this context, another participant, Stuart Chessman, draws attention to political concern over the low effective tax rate of US multinationals. He discusses the controversy surrounding the so-called "loopholes" and the "active finance" exception of "Subpart F", which regulates the "CFC rules". He emphasises that the debate in the US does not address issues of "global fairness" or "apportionment."

From a European perspective, Pierre-Henri Durand describes the increasing tax pressure on individuals in France and the indirect effect on corporations. He refers to the "Colin & Collin report", which proposes revising the concept of "permanent establishment" in the "digital economy" and suggests greater transparency in the exchange of tax information on multinationals. He notes the frequent confusion between personal and corporate taxation in the French debate.

Martin Klein observes that in Germany, the media discourse has focused on "tax information exchange" with Switzerland and individual fraud cases, with the taxation of businesses largely sidelined until recently. Rob Havenga, for his part, explains that the Netherlands maintains a pragmatic stance in the face of media pressure, defending "tax competition" as a legitimate tool. Reto Heuberger (Switzerland) notes that the Swiss media focus is more on high salaries, the exchange of tax information, and the taxation of foreign residents with very high incomes and wealth, rather than on low corporate taxation, also highlighting the anti-EU sentiment and the defence of traditional banking secrecy in the country.

In the general debate, the speakers raise the question: "Is there a moral code that could require multinationals to pay more tax than is required by law?" Rob Havenga responds clearly: “taxes should be ruled by rules, not by moral.” However, we must remember that every tax system is based on a constitution, which incorporates ethical values regarding justice and equality in the application of the tax. International tax competition prevents a consensus on how to correct the abuses pointed out by the media.

In this context, the OECD's BEPS (Base Erosion and Profit Shifting) project emerges to analyse the causes and solutions to base erosion. At the same time, the EU has published an Action Plan to strengthen the fight against tax fraud and evasion, although the requirement for unanimity among member states hampers any substantial progress.

The Dutch approach prioritises international cooperation and the development of "international standards," while maintaining "healthy tax competition". This balance between preserving its strategic position and participating in anti-fraud initiatives reflects the Netherlands' traditional stance since the liberalisation of capital in the late 1980s.

When asked “how will the OECD’s base erosion and profit shifting (BEPS) project try to handle these issues?”, Carol P. Tello recalls the G20 statement from June 2012 supporting a multilateral approach. Reto Heuberger and Martin Klein expand on the discussion of tax competition, recalling the "race to the bottom", "harmful tax practices", and the "EU Code of Conduct" from 1997. In Switzerland, the coexistence of "income tax harmonisation" and "competition with tax rates" is linked to its federal and democratic structure.
The speakers agree on the limited effectiveness of the "General Anti-Avoidance Rules" (GAAR), which lead to increased litigation and legal uncertainty. Sara Luder concludes with scepticism about the Common Consolidated Corporate Tax Base, given the lack of political consensus in the EU. Martin Klein adds that conflicts over the allocation of income between states, even in the US, cast doubt on the feasibility of a common European system.

In her article "Multinational Tax Planning" (Slaughter and May, December 2012), Sara Luder summarises the distortions in public discourse: income and profits are confused, the location of clients is mistakenly equated with the location of taxable profits, and "transfer pricing" is considered what is, in fact, tax evasion. She stresses that "the allocation of profits amongst jurisdictions can never be wholly within the control of the UK (…) These issues are complicated, and need careful consideration. The current knee-jerk reactions are doing little to provoke an informed debate on international tax policy."

It is worth noting that historically, anti-avoidance rules — such as "CFC rules" or "tax transparency" — emerged in the US in the 1960s in response to increased tax pressure caused by the Vietnam War and social programmes, later spreading to Europe with laws such as the German AStG of 1972. However, double taxation treaties designed in the 1960s no longer respond to an economy based on services, intangible assets, and highly mobile capital. Today, tax competition is even seen as a mechanism for fiscal harmonisation within the EU. Despite political discourse, real progress remains very limited: states act only when their competitors do. In practice, it must be concluded that “The economy goes global, but taxes stay national.”

Innovations in information exchange and the technical role of the OECD constitute the truly transformative elements. Tax advisors call for caution, consensus, and regulatory coherence. The position of national tax administrations is particularly delicate: they must increase revenue and combat fraud, but they operate within increasingly complex legal frameworks that multiply litigation.

Conference 2: Government Roundtable

In this second conference, Lydia Challen and Reeves C. Westbrook introduce the key challenges identified by Achim Pross (OECD): “hybrid mismatch arrangements, corporate reorganisations, use of favourable regimes, derivative instruments, transfer of risks and valuable IP, leverage and other deductible payments.” Practical examples show how intra-group royalty structures result in low or non-taxation in the presence of low-tax jurisdictions. Double taxation treaties, designed to avoid double taxation, now face the reverse problem of double non-taxation. Ginny Chung (USA) and Kate Ramm (UK) point out that “low-tax countries” “poison” income flows, turning them into "tax-free income."

The debate raises crucial questions: "May manufacturing and marketing profits be transferred to low-tax entities purely on the basis of contractual allocation of risk and funding? Does the arm’s length principle work here?" In a context where the principle of contractual autonomy can generate artificial results, it is also asked whether states should apply the concept of "permanent establishment" more aggressively to these entities. This concept, developed in the 1950s and 1960s, is proving inadequate in a digital economy where sales are made without physical presence.

Pross warns that the interconnectedness of tax systems means that any change in one will affect the others. For administrations, the challenge is to identify “structures or key tools” on which to focus their tax reviews, prioritising “PE rules,” “taxation of intangibles,” and “transfer pricing.” The real enemy — emphasises Ginny — is "double non-taxation". This is compounded by the great difficulty in interpreting the documentation provided by companies and the constant changes in regulation, creating administrative uncertainty.

In the Netherlands, Bartjan Zoetmulder highlights the increasing political pressure every time the media publishes controversial cases. Although there is consensus on the need for action, there is no clear direction in sight. It is emphasised that the problem is essentially multilateral and must be addressed without compromising Dutch tax competitiveness. Ginny Chung concludes that the BEPS process is only a first step in a long and politically sensitive path, while Kate Ramm summarises the dilemma: "it is difficult to say what is acceptable, but almost everyone knows what is unacceptable."

Looking ahead, progress is observed in the definition of intangible assets and the updating of transfer pricing rules. In the UK, the priority is "information sharing" and "pressure on transparency"; in the US, the OECD reports are awaited; and in the Netherlands, social and political pressure for yet undefined changes continues.

Comparing both conferences, it is evident that representatives of national administrations adopted a more reserved tone, focusing on combating double non-taxation and reviewing intercompany contracts. There is agreement on the need for multilateral action, although the "anti-avoidance rules" remain contentious. A fundamental question remains open: “Should businesses take a more proactive role and be more transparent? Should tax administrations, in turn, be more open-minded and accept legitimate tax planning?”
Finally, it is acknowledged that the dynamics will continue to be shaped by the balance between political pressure and the search for a “win-win play” among states.