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Tony Wickenden: A turning point in tax treaty history

A new agreement should increase the worldwide corporate tax take by 10 per cent by cracking down on those companies avoiding it

Corporation tax has been in the news a lot over the last few years.

Here, the strategy has been to reduce it in order to make the UK an attractive place to do business; something especially important given Brexit-related uncertainty.

This seems to have worked to some degree but we have also witnessed the furore over big multinationals avoiding it all too easily and in large amounts, with coffee and tech companies the most publicised exponents of the art.

Then there is the OECD-led “base erosion and profit shifting” initiative. BEPS refers to avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

Over 100 countries and jurisdictions are collaborating to implement the initiative’s measures, and the UK has led the way with its own version in the shape of the diverted profits tax (the so-called “Google/Amazon” tax).

The fightback begins

There is no doubt the public’s interest – no, anger – in this matter is most ignited by large corporates trading in a country but not paying their fair share of tax. This is a sentiment clearly held in the UK but internationally, too.

So it was encouraging to see the news earlier this month that some 70 countries have signed a pact to crack down on international tax avoidance, with changes backers say will increase the worldwide corporate tax take by up to 10 per cent.

How advisers can avoid tax evasion penalties

Countries including the European Union’s 28 members, India, China and Australia (but not the US) signed an agreement in Paris that will make changes to thousands of treaties to halt abuse by companies and improve dispute resolution.

It has been reported the agreement is part of an initiative launched by the G20 group to tackle the aforementioned BEPS in the wake of a public backlash over avoidance by companies such as Amazon, Apple and Google.

It is intended to put a stop to “treaty shopping” – the practice of routing income to countries with attractive tax treaties via “brass plate” companies with little presence on the ground beyond a mailing address.

It is likely to have a particular impact on countries such as Luxembourg and the Netherlands, where treaty shopping has raised the stock of foreign direct investment far beyond the size of the countries’ economies.

The OECD, a champion of the agreement, said it was a “turning point in tax treaty history”. Once ratified by its signatories (a process that may take until 2019) it will result in the simultaneous revision of 2,000 treaties, saving governments decades of negotiations.

The agreement will benefit developing countries forced to sign unfair treaties that often meant companies paid tax elsewhere. The United Nations has estimated poorer countries lose as much as $100bn a year in taxable profits diverted to other countries.

Boring is the new exciting, which is great news for financial planners using tried and tested strategies.

The treaty changes are also set to improve dispute resolution, addressing concerns by tax authorities and businesses about the growing number of disagreements between countries over taxing rights.

The spirit of the law

This important development represents another example of worldwide co-operation to defeat tax avoidance that erodes the global tax base. It is a big subject with big implications but it is representative of firm national government legislation.

The world is changing. What used to be acceptable as being within the letter of the law is no longer if it is outside of the spirit of the law and defeats the intention of national governments.

The approach to combat tax avoidance by companies to a large extent mirrors that taken to thwart aggressive tax avoidance by individuals.

It is the substance of tax planning arrangements in relation to the intent of Parliament that will determine whether they succeed or fail.

Boring is the new exciting, which is great news for financial planners using tried and tested strategies.

Tony Wickenden is joint managing director of Technical Connection. 
You can find him Tweeting @tecconn

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Comments

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  1. Interesting. Not the USA. I wonder if Delaware is still a tax haven?

    So we roll over for them with all this FACTA nonsense. High time perhaps to shrug off this overweening arrogance and hegemony.

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