The Future of Tax Planning: Is This Still Relevant?

For the last time, international tax policies have been greatly affected by BEPS, namely, Base Erosion as well as Profit Shifting initiatives. Apparently, the given policy is expected to counter treaty shopping and tax evasion and also have tax rates optimized worldwide. Here’s a closer glimpse at the measures.

BEPS comes up with MLI

The G20 alongside OECD inspired the BEPS initiative. The move is expected to have vulnerabilities in world tax regulations neutralized. One means regulations that let corporate revenue be moved to zero-tax or low areas. The BEPS Multilateral Instrument or, merely, MLI handled by BEPS turns out to be a crucial element of the project. The MLI lets nations make amendments to their bidirectional tax pacts for the purpose of incorporating BEPS actions without long-lasting talks.

MLI: Key points

• Dispute resolution: More effective conflict resolution tools, in particular, obligatory binding arbitration that greatly assist in resolving various tax disputes.
• New permanent establishment regulations: The regulations change the way a persistent establishment is defined. As a result, it is getting more difficult for firms to dodge taxes by simply reporting no considerable operations in a particular country.
• Anti-abuse rules: From time to time treaty abuse occurs. For example, firms use tax treaties in a way enabling to decrease tax liabilities. The new MLI regulations prevent that.

More than 100 areas have already accepted the Multilateral Instrument initiatives, thus showing their firm support for fighting tax avoidance. It’s very difficult to structure businesses in a tax-efficient manner, but it’s real with a huge effort applied.

Pillar Two by OECD

To say the truth, the BEPS moves were not alone. The OECD has joined too. It has rolled out Pillar Two aimed at making the world tax system more competitive. The very idea of Pillar Two is that multifunctional firms are charged a minimal tax on their world revenue.

Major Pillar Two elements:

• STTR (Subject to Tax Rule): The very essence of this measure is that some transactions, including royalties plus interest, face a least cess. Secondly, if the transactions are tax-free or might face an insignificant cess, then the source nation imposes a withholding cess for the purpose of meeting the least rate.
• Global Least Cess Rate: Here, the revenue of multifunctional corporations faces a minimum tax rate of about 15%. It should withstand revenue shifting to various low-tax areas.
• UTPR (Undertaxed Payments Regulation): It lets nations ramp up cesses on transactions to associated market participants in certain areas, namely, where the revenue’s taxed below the least value. The move counters base erosion via so-called deductible transactions.
• IIR (Income Inclusion Regulation): It urges the parent firm to pay extra tax in case its subsidiary firms face taxes below the least value. It guarantees the subsidiary firms’ revenue is charged at the least value in the area of the subsidiary firm or the area of the parent firm.
• Malta: In 2024, Malta accepted the European Union Least Cess Directive. It was demonstrated by the issue of the corresponding law for that year. Then, the Malta Tax&Customs Authority took time to explain the directive and also informed about the possibility of postponing the execution of certain parts of the document and how local firms should handle their obligations in the light of the directive.  As for the law, it’s actual since 31 December 2023.

The initiative Pillar Two is expected to have tax rates harmonies worldwide. It should encourage multifunctional corporations to refrain from shifting their revenue to low-tax areas. The European Union is currently demonstrating big progress in implementing these regulations. The EU members were obliged to adhere to the revenue inclusion as well as under-taxed transactions regulations by the end of the last year.

Tax conventions are probed by the EC

The EC has recently probed the tax conventions of some key multifunctional firms, in particular, Fiat alongside Starbucks and also Google as well as Amazon under its government aid regulations. The commission wanted to find out whether these firms underwent something from European Union members that could be regarded as unfair state benefit. There’s a concise evaluation of the case:

Starbucks

The watchdog caught the firm getting government aid illegally from the Netherlands back in 2015. It discovered Starbucks managed to greatly diminish its taxable revenue thanks to the cess privilege given by the Dutch government to the firm. For the firm, the Netherlands turned out to be a lower-tax area. The watchdog urged the company to pay about €30m to the Dutch state in back taxes.

Google

The watchdog found out that Google made use of some tricks enabling it to shift its revenue to lower-tax areas. However, to be honest most of Google’s faults had to do with its antitrust files. Nevertheless, some of its cess practices attracted the watchdog’s attention. The EC caught the company decreasing its tax liabilities in the EU that harmed fair rivalry in the currency bloc.

Amazon

In 2017, the watchdog also probed into the tax conventions Amazon made in Luxemburg. According to the thorough probe conducted by the watchdog, Luxemburg dared to grant Amazon some tax advantages. As a result, the company successfully dodged taxes on nearly ¾ of its EU revenue. Nevertheless, Amazon had to have back taxes worth €250m repaid as compensation for Luxemburg.

Fiat

There was another case that had much in common with Amazon’s case mentioned above. It also had to with the illegal exploitation of the tax conventions with Luxemburg. That European country provided the Italian firm with some cess discounts via pricing conventions, which decreased the taxable revenue of the firm. Therefore, the EC accused Fiat of its filthy manipulation of the tax conventions, and as in the case above, Fiat also managed to have its taxable gain decreased. Since it violated the bloc’s code, the firm was forced to shell out approximately €30m.

Fighting for fair competition

The watchdog did a good job to make competition in the currency bloc fairer by thoroughly probing into the tax conventions of several well-known firms. Those firms distorted the European market by manipulating the tax conventions. Tax cheating endangers the integrity of the European market. The EU watchdog prevents it and stimulates transparency alongside true rivalry in the bloc. Malicious tax planning questions the very idea of fair free-market rivalry, but in all cases mentioned above violators ended up with back tax payments to EU members whose tax arrangements they exploited illegally.

Extra tax anti-evasion measures

A number of states have reinforced their tax anti-evasion legislation. They have adopted:

• Transfer cost terms: According to the new code, deals between associated participants are made at arm’s length costs without harming competition.
• Intensive data exchange:  Some overseas pacts, in particular, two-way tax pacts alongside the Common Reporting Standard provoked more intensive tax data exchange between nations. It ramped up lawfulness, thus making it more troublesome for multifunctional firms to conceal assets or income offshore.
• Basic tax anti-evasion regulations: The given rules give cess watchdogs more opportunities to withstand various tax evasion scenarios.
• Controlled overseas corporation regulations: The code doesn’t allow multifunctional firms to shift revenue to low-tax areas.

Summing up

The latest tax anti-avoidance moves such as Pillar Two and BEPS are aimed at protecting a fairer competitive environment for all market participants by making them act more transparently in terms of taxation. The all-nation move towards better tax fairness alongside newly-implemented stricter rules has made tax avoidance barely possible.