12 Comparative Tax Law Losses S

COMPARATIVE TAX LAW

Comparative Tax Law, Vienna 4 – 5 November 2011

- (12) “Aspects of Constructing a Rational Framework for Loss Relief: A Sample of How Four Countries Compete,” Maureen Donnelly and Allister Young, (2005) British Tax Review

- A framework for Loss Relief in Italy, France and Spain up to October 2011 (Andrea Brignoli);

2Comparative Tax Law, Vienna 4 – 5 November 2011

Abstract:A corporate tax system seeking to be competitive and fair must offer taxpayers relief for losses. (…)The framework is constructed using two policy elements:- the averaging of losses over time andthe identification of the loss owner.Within the context of these two elements, three variables – Year, Business and Entity – serve to differentiate competitive positions along policy spectrum. The U.K.’s loss utilization rules are compared to those of three other jurisdictions – Australia, Canada and the U.S.A.

(12) “Aspects of Constructing a Rational Framework for Loss Relief: A Sample of How Four Counties Compete (Summary)



Tax treatment of capital assets

Differences in the tax treatment of trading and investment companies

Rationalization of the schedular system

Reform of U.K. Corporation tax of 2002


Donnelly and Young’s paper is focused on losses realized from business activities



TAXING COUNTRY Term for business loss

Australia Canada UK USA

Tax loss Non-capital loss Trading loss Net operating loss


Governments around the world do not apply a full refund tax loss system, rather some form of partial refunds.

A country that permit full refundability in a globalized economy of multinational business would attract transactions. Countries would probably need to have higher tax rates and to eliminate tax revenue for several years.


Two founding elementsTwo founding elements

Time Averaging Loss Ownership

Each taxation period must be considered as an independent unit.

There are two main carry over rules:

1. CARRY BACK, the loss is realized immediately;

2. CARRY FORWARD, the loss may have a partial relief result:

a) A loss applied in the future is worth less than in the year in which is set off;

b) Usually there is a carry-over period.

Identification of the owner of the loss:

1. The loss belongs to the kind of business;

2. The loss belong to the corporation;

3. The loss belongs to the shareholders of the corporation




Business

Corporation

Shareholders

The tax value of the loss increases for the taxpayer and the costs also increase for to the Tax Authority



Three decision variablesThree decision variables

Same Year (SY)/ Any Year (AY)

Same Business (SB)/Any Business (AB)

Same Entity (SE)/ Any Entity (AE)

Should the losses from one year be carried over to offset profits of any year(s) other than the loss year?

Should the losses from one business activity be offset against profits from any business?

Should the losses from one entity be offset against profits from any entity?



The Year variableThe Year variable

Country Carry back Carry forward

Australia None Indefinite

Canada 3 years 10 years

UK 1 year Indefinite

USA 2 years 20 years




The Business variableThe Business variable

Country Carry back to offset profit of…

Carry forward to offset profits of…

Australia n/a Any business

Canada Any business Any business

UK Any business if that business was carried on in the relevant year

Any business

USA Any business Any business




The Entity variableThe Entity variable


Same Year / Same Business SY/ABSame Business / Any Business SB/AB

Same Entity / Any Entity SE/AE




U.S.A. and Australia could be considered closer to AYABAE policy because they have adopted the “consolidation regime” which allows carry of losses



The Case Study and analysis of Loss UtilizationThe Case Study and analysis of Loss Utilization

The case study is analyzed in the Article from page 11 until page 14, (we will take into consideration the same data for an exercise with 3 European countries)

Donnelly and Young’s Conclusion

Policy changes in the direction of neutrality, flexibility and transparency.Appropriate limits can and should be developed.No jurisdiction offers the full and unrestricted transfer of losses across years, business and entities.


Short presentation comparing Italy, France and Spain

Short presentation of Business Losses in - Italy

- France- Spain



TAXING COUNTRY Term for business loss

Italy France Spain

perdita / perdita fiscale déficits bases imponibles negativas /

pérdidas fiscales

- Italian losses are covered by artt. 83 and 84 T.U.I.R., Testo Unico Imposte sui Redditi (Italian law on direct taxes);- French losses are covered by artt. 209 and 220 quinquies C.G.I., Code Général des Impôts (French law on taxes);- Spanish losses are covered by art. 21 L.G.T., Ley General Tributaria (Spanish law on taxes);



Country Carry back Carry forward

Italy None 5 years

France 3 years Indefinite (before 2004 5 years)

Spain None 15 years


Until 2010/2011…



Country

Carry back

Carry forward

Italy None Indefinite (but the set off will be a maximum of 80% of the taxable profit)

France 1 year Indefinite (but the set off will be a maximum of 60% of the taxable profit if the loss exceed € 1m)

Spain None 18 years (but the set off will be of 75% if the company has a turnover between € 20m and € 60m; and of 50% if the business has a turnover of more than € 60m).

From 2011/2012…

The Italian reform on losses “Legge n. 111 of 17 July 2011”The French reform “Loi 2011-1117 of 19 September 2011”The Spanish reform “ Decreto-Ley 9/2011 of 19 August 2011”



Country Carry back to offset profit of…

Carry forward to offset profits of…

Italy n/a Any business

France Any business Any business

Spain n/a Any business





Italy, France and Spain could be considered closer to “AYABAE” policy because they all have adopted the “consolidation domestic regime” which allows the taxation of the tax entities.




Case Study (in millions of Euro) Case Study (in millions of Euro)

Business 2009 2010 2011

Grape Growing

5 (10) 30

Wine Making (20)

Total 5 (10) 10

Cumulative Total

5 (5) 5



Case StudyCase Study

Using the AYSBSE (Any Year, Same Business, Same Entity) rules:Using the AYSBSE (Any Year, Same Business, Same Entity) rules:YEAR 2010 YEAR 2010

Italy

France

Spain

No carry back; the total loss of €10m will be carried forward to offset 2011 profits

Carry back option “report en arrière” tax paid in 2009 could be considered a tax credit to pay others taxes. This tax credit cannot be sold or transferred; it will be eventually reimbursed after 5 years (2015).

No carry back; the total loss of € 10m will be carried forward to offset 2011 profits



Case StudyCase Study

Using the SYSBSE (Same Year, Same Business, Same Entity)Using the SYSBSE (Same Year, Same Business, Same Entity)YEAR 2011 (exercise with “OLD rules”)YEAR 2011 (exercise with “OLD rules”)

Italy

France

Spain

The € 10m loss is carry forward, and fully utilized resulting no taxes will be paid.

The € 5m loss carry forward is offset; taxes will be paid on € 5m (maybe with the tax credit of year 2010)

The € 10m loss is carry forward, and fully utilized resulting no taxes will be paid.

In the years 2009, 2010 and 2011, in all the three countries, taxes are paid on € 5m



Case StudyCase StudyUsing the SYSBSE (Same Year, Same Business, Same Entity)Using the SYSBSE (Same Year, Same Business, Same Entity)YEAR 2011 (exercise with “NEW rules”)YEAR 2011 (exercise with “NEW rules”)

Italy

France

Spain

The € 10m loss is carry forward and set-off just for 80%. Taxes are paid on € 2m.

The € 5m loss carry forward is utilized just for € 1m (new limit). Taxes will be paid on € 2,4m (60% of € 4m) (maybe with the tax credit of year 2010).

For application of new Spanish rules we assume that our business has a annual turnover of € 20m.The € 10m loss carry forward is offset just for 75% and taxes are paid on € 2.5m.

Taxes with new rules in 3 years:Italy taxes on a cumulative total of € 7m (€ 5m + € 2m) and carry forward after 2011 € 2m;France taxes on a cumulative total of € 6.6m (€ 5m - € 5m + € 5m + € 1.6m) and carry forward after 2011 of € 1.6m;Spain taxes on a cumulative total of € 7.5m (€ 5m + € 2.5m and carry forward after 2011 € 2.5m;



ConclusionConclusion

According to Donnelly and Young, policy should change in the direction of neutrality, flexibility and transparency.

The reason of recent restrictions (at least for three European countries) about transfer of losses across years is just for countries tax revenue needs? (especially under a cash flow point of view?)



BIBLIOGRAFYBIBLIOGRAFY

From Prof. Brooks outline (12) “Aspects of Constructing a Rational Framework for Loss Relief: A Sample of How Four Countries Compete,” Maureen Donnelly and Allister Young, (2005) British Tax Review ;

Art. 84 TUIR (see http://def.finanze.it/);Perdite Fiscali: nuova disciplina (dr. Andrea Sergiacomo on Finanza e Fisco 32/2011 pag. 2746)Art. 209 and 220 CGI quinquies (see http://www.legifrance.gouv.fr);Nouvelles restrictions au report en avant et en arrière des déficits (http://frederic.charro-consulting.over-

blog.com );Principales Novedades Tributaria introducidas por el Real Decreto-Ley 9/2011, de 19 de Agosto (see

http://www.aeat.es)Verano, siesta e impuestos (see http://www.expansion.com )La disciplina fisacle delle perdite (avv. Paolo Stizza to be published on “Principi di Diritto Tributario

Europeo e Internazionale”, a cura del Prof. Sacchetto, Giappichelli)

NEW! published on 12/8/2011; Corporate Loss Utilisation through Aggressive Tax Planning http://www.oecd.org/document/61/0,3746,en_2649_33767_48570813_1_1_1_1,00.html


Thank you!Grazie!Mercì!Gratias!

Dr. Andrea Brignoli

Tax Advisor and Registered Auditor (Dottore Commercialista e Revisore Legale)

Official Reciver for the Court of Bergamo (Italy), Reserve Officer of Italian Tax Police (GdiF)

c/o Studio Lucchini studio integrato

P.zza della Repubblica n. 2, Bergamo (Italy)

Tel. +39 035 21 50 08, Fax + 39 025 24 92 27, Mob. +39 347 95 66 072, Mob. +43 660 50 50 799

Mail: [email protected]

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12 Comparative Tax Law Losses S