Aggressive tax planning using international ‘tax arbitrage’ is a growing concern and governments should consider introducing or revising tax laws to deny the benefits of ‘hybrid mismatch arrangements’, the OECD has concluded in a new report.
Aggressive tax planning using international ‘tax arbitrage’ is a growing concern and governments should consider introducing or revising tax laws to deny the benefits of ‘hybrid mismatch arrangements’, the OECD has concluded in a new report.
Unlike the typical offshore structure using tax havens, tax arbitrage ‘is premised on the fact that a commercial activity is taxable at the usual rate of tax and seeks out differences in tax rules in two or more jurisdictions to achieve a tax benefit’, said Nigel Feetham, a tax lawyer and visiting professor at Nottingham Law School in his introduction to Tax arbitrage: The trawling of the international tax system, published last year.
Feetham said there were ‘hundreds of thousands’ of lawyers, accountants, bankers and others working in international tax structuring through entities located in ‘offshore centres’. In contrast, tax arbitrage was ‘sophisticated and bespoke’.
‘As these are private deals, there is generally no publicity surrounding them,’ he said. ‘Given its highly specialised nature, at most not more than 300 individuals work in this sector worldwide.’
The EC launched a public consultation last week on the double non-taxation of cross-border companies, the stated aim being to ‘gauge the full scale of the problem’ and see where the ‘main weaknesses’ lie. The consultation closes on 30 May and the EC intends to develop the ‘most appropriate policy response’ before the end of 2012.
The OECD report Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues, published today, describes arrangements that ‘exploit national differences in the tax treatment of instruments, entities or transfers to deduct the same expense in several different countries, to make income “disappear” between countries or to artificially generate several tax credits for the same foreign tax’.
The OECD said recent decades ‘witnessed a constant increase in the level of sophistication in the structuring of cross-border transactions’. Hybrid mismatch arrangements had been encountered by tax administrations in ‘many countries’, often leading to double non-taxation.
‘Anecdotal evidence shows that billions of dollars in tax revenues are at stake,’ the OECD added. ‘New Zealand settled cases involving four banks for a combined sum exceeding NZ $2.2bn.
‘Italy recently settled a dozen cases involving hybrids for an amount of approximately €1.5bn. In the United States, the amount of tax evaded in 11 foreign tax credit generator transactions has been estimated at US $3.5bn.’
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said the OECD ‘strives to eliminate double taxation and other obstacles to cross-border trade and investment’. At the same time, he added, ‘we are working hard to make sure that there are no tax loopholes between tax systems that would allow some taxpayers to gain an unfair competitive advantage over others’.
Aggressive tax planning using international ‘tax arbitrage’ is a growing concern and governments should consider introducing or revising tax laws to deny the benefits of ‘hybrid mismatch arrangements’, the OECD has concluded in a new report.
Aggressive tax planning using international ‘tax arbitrage’ is a growing concern and governments should consider introducing or revising tax laws to deny the benefits of ‘hybrid mismatch arrangements’, the OECD has concluded in a new report.
Unlike the typical offshore structure using tax havens, tax arbitrage ‘is premised on the fact that a commercial activity is taxable at the usual rate of tax and seeks out differences in tax rules in two or more jurisdictions to achieve a tax benefit’, said Nigel Feetham, a tax lawyer and visiting professor at Nottingham Law School in his introduction to Tax arbitrage: The trawling of the international tax system, published last year.
Feetham said there were ‘hundreds of thousands’ of lawyers, accountants, bankers and others working in international tax structuring through entities located in ‘offshore centres’. In contrast, tax arbitrage was ‘sophisticated and bespoke’.
‘As these are private deals, there is generally no publicity surrounding them,’ he said. ‘Given its highly specialised nature, at most not more than 300 individuals work in this sector worldwide.’
The EC launched a public consultation last week on the double non-taxation of cross-border companies, the stated aim being to ‘gauge the full scale of the problem’ and see where the ‘main weaknesses’ lie. The consultation closes on 30 May and the EC intends to develop the ‘most appropriate policy response’ before the end of 2012.
The OECD report Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues, published today, describes arrangements that ‘exploit national differences in the tax treatment of instruments, entities or transfers to deduct the same expense in several different countries, to make income “disappear” between countries or to artificially generate several tax credits for the same foreign tax’.
The OECD said recent decades ‘witnessed a constant increase in the level of sophistication in the structuring of cross-border transactions’. Hybrid mismatch arrangements had been encountered by tax administrations in ‘many countries’, often leading to double non-taxation.
‘Anecdotal evidence shows that billions of dollars in tax revenues are at stake,’ the OECD added. ‘New Zealand settled cases involving four banks for a combined sum exceeding NZ $2.2bn.
‘Italy recently settled a dozen cases involving hybrids for an amount of approximately €1.5bn. In the United States, the amount of tax evaded in 11 foreign tax credit generator transactions has been estimated at US $3.5bn.’
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said the OECD ‘strives to eliminate double taxation and other obstacles to cross-border trade and investment’. At the same time, he added, ‘we are working hard to make sure that there are no tax loopholes between tax systems that would allow some taxpayers to gain an unfair competitive advantage over others’.
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