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1. The world is changing: The gradual evolution of tax planning...................................................................... 1

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The world is changing The gradual evolution of tax planning

Author Anonymous

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Abstract Change on a global scale tends to be gradual and that is certainly true when it comes to tax planning.

But as slow as it is, like the continental drift, the change is inexorable. Structures that were once common

business practice now carry with them significant risks, both in terms of challenge from the tax authorities and

reputation. Low tax jurisdictions which offer their clients high degrees of secrecy are finding their economic

model increasingly challenged by the rise of automatic information exchange. The curtain has not been instantly

lifted, but as it is steadily drawn back, the benefits of using tax havens and aggressive avoidance schemes are

diminishing while the risks are growing. Europe's five leading economies last month agreed to automatically

exchange a wide range of tax information multilaterally, while finance ministers from Belgium, the Netherlands,

Poland and Romania backed the creation of a global system of automatic information exchange that could be

based on the US Foreign Account Tax Compliance Act (FATCA). Across the Asia Pacific region, too, authorities

are working closer together to exchange information for tax purposes. n the US, tax reform remains a slow

process, and there remain considerable uncertainties, but taxpayers are keeping a weather eye on how

developments will affect tax planning in years to come.

Links Check Article Linker for full-text, Click here to request the full text article

Full text The world of tax planning is changing, bringing new risks and challenges for taxpayers. The change

may be gradual, but companies should not ignore how significant it is.

Three hundred million years ago, all the continents of Earth were joined up in one great landmass called

Pangaea. The continents have been pulling apart across the aeons since, ever so slowly forming the world we

know today.

Change on a global scale tends to be gradual and that is certainly true when it comes to tax planning. But as

slow as it is, like the continental drift, the change is inexorable.

Structures that were once common business practice now carry with them significant risks, both in terms of

challenge from the tax authorities and reputation.

Low tax jurisdictions which offer their clients high degrees of secrecy are finding their economic model

increasingly challenged by the rise of automatic information exchange. The curtain has not been instantly lifted,

but as it is steadily drawn back, the benefits of using tax havens and aggressive avoidance schemes are

diminishing while the risks are growing.

Europe's five leading economies last month agreed to automatically exchange a wide range of tax information

multilaterally, while finance ministers from Belgium, the Netherlands, Poland and Romania backed the creation

of a global system of automatic information exchange that could be based on the US Foreign Account Tax

Compliance Act (FATCA).

Across the Asia Pacific region, too, authorities are working closer together to exchange information for tax

purposes.

In Latin America, there is an increasing focus on transfer pricing. Chile introduced its transfer pricing legislation

last year, while Ecuador has been introducing more laws into its tax system to stop companies making use of

low tax jurisdictions to siphon profits away from the country. Strategies include making it impossible for

companies whose shareholders are located in tax havens to participate in public procurement, charging

additional taxes on dividends and presuming related-party relationships between transacting parties.

In the US, tax reform remains a slow process, and there remain considerable uncertainties, but taxpayers are

02 February 2015 Page 1 of 30 ProQuest

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keeping a weather eye on how developments will affect tax planning in years to come.

The gradual pace of change in the global tax planning market should give companies time to adapt, but the

change is inevitable and taxpayers must ensure they do not get left behind as the world moves towards

accepting automatic information exchange as its new gold standard.

Tax planning and the risks involved is increasingly becoming a boardroom concern. But companies continue to

depend on tax advisers to help them plan their tax affairs. That the challenges are greater than ever reinforces

the need for companies to get the right advice, not simply for short-term tax minimisation, but for creating long-

term substantial structures with solid business justifications that can stand the test of time in a changing world.

Methodology

In December and January, International Tax Review asked its readers, and the tax directors of the world's

leading multinational companies, to vote for their top three tax planning firms in more than 50 jurisdictions

across the world. The votes were added up to produce the survey results. No votes from advisory firms were

counted and firms could not send submissions to improve their chances of being ranked. The objective was to

find out if there are other firms that did not appear in our World Tax directory that the market regarded highly

because they had a particular specialty. Or if there were firms that appeared in World Tax and were known as

dependable groups of tax advisers without having any star practitioners. Would they be rated for their

excellence in tax planning? This survey should be seen as complementary to World Tax, which looks at the

whole profile of a firm, not just its size and its deal flow.

Contents

Asia Pacific Where Asia-Pacific authorities draw the line on tax planning

Across the Asia-Pacific region, tax authorities' concepts of what constitutes acceptable tax planning differ

substantially. It is therefore important that taxpayers try to understand the approach of the authorities where

they are operating. Joe Dalton speaks with John Nash, manager of international revenue strategy at New

Zealand's Inland Revenue Department (IRD), Carmel Peters, head of international tax policy at the IRD, and

Mark Konza, deputy commissioner of the Australian Taxation Office's (ATO) large business and international

unit, to find out where they draw the line on tax planning. Europe, Middle East and Africa The end of the

beginning for Europe's tax havens

Europe's tax havens including Cyprus and the Channel Islands have faced a number of serious challenges in

recent months, tarnishing their attractiveness for multinational companies and high net worth individuals looking

to plan their tax affairs. Salman Shaheen finds out why it may not be the end for their economic model, or even

the beginning of the end, but it is the end of the beginning. Latin America How transfer pricing in Latin America

can affect your company's tax planning

The transfer pricing environment in Latin America shows a number of contrasts from country to country. Sophie

Ashley looks at the differing levels of implementation, along with some of the biggest developments in theregion and explains how these aspects can affect your company's tax planning. North America US companies

keeping an eye on tax planning implications of reform

While there has not quite been the same media interest or public backlash against companies' tax contributions

in the US and Canada as has been seen elsewhere - predominantly in the UK - tax planning has still come in for

greater scrutiny in North America in the last year. Matthew Gilleard explores the latest developments.

Asia Pacific

Australia

China

Hong Kong

India

Indonesia

Japan



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Malaysia

New Zealand

Philippines

Singapore

South Korea

Taiwan

Vietnam

Europe, Middle East and Africa

Austria

Baltic States

Belgium

Cyprus

Denmark

France

Finland

Germany

Greece

Gulf Cooperation Council

Ireland

Israel

Italy

Luxembourg

Malta

Netherlands

Norway

Poland

Portugal

Russia

South Africa

Spain

Sweden

Switzerland

Turkey

UkraineUK

Latin America

Argentina

Brazil

Chile

Colombia

Mexico

Peru

Uruguay

Venezuela

North America

Canada



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of this and what taxpayer activities does it work most effectively for?

MK: If taxpayers are unsure of the correct tax treatment of a transaction, to reduce uncertainty they can apply

for a private ruling asking to be assessed in relation to an existing or proposed transaction, including the

application of a general anti-avoidance provision.

We will work with draft material for prospective transactions. However, the draft documentation must be

materially similar to the end product. We may also ask for more information and can make assumptions in some

circumstances based on our understanding of the information they have provided.

Private rulings can be useful in obtaining our views on uncertain legal positions. Under the law, taxpayers can

object to a private ruling decision. If a taxpayer objects, we may ask them for further submissions to support

their argument.

JN and CP: All taxpayers are able to apply for a binding ruling to give them certainty on the tax implications of

an arrangement. An arrangement can be anything from a complex funding transaction to a straightforward

subdivision of land.

We can issue rulings in respect of proposed transactions that are seriously contemplated, or transactions that

have been entered into or completed as long as the due date for filing a tax return in respect of the relevant

period has not passed.

For most ruling applications, we deliver a draft ruling or indication of our view within three months of an

application being made. Prospective binding ruling applicants should contact us to arrange a pre-lodgement

meeting before they lodge their application.

The purpose of a pre-lodgement meeting is to help the taxpayer to decide whether to apply for a ruling and how

to submit the best application possible. At a pre-lodgement meeting, we will discuss the scope of the proposed

ruling, the type of information and level of detail that should be provided, as well as our timeframes and fees.

Providing written advice on how the tax laws apply is a feature of our self-assessment system and is central to

our role. A ruling is our opinion on the tax interpretation of the law and is binding on us but not on the taxpayer.

For class, product and private rulings, providing a full and true disclosure of all the material facts allows us to

form a view. If all material facts are not disclosed the ruling cannot be relied upon.

ITR: What advice would you give to multinationals carrying out tax planning that involves your jurisdiction to

help them reduce the risk of getting into a dispute with the tax authority?

JN and CP: We encourage full and frank dialogue on difficult or complex issues. We prefer to work through

arrangements with multinationals up front, avoiding disputes where possible.

The clear attraction of this approach for business is certainty - multinationals that behave transparently can

expect an earlier resolution of tax issues with less extensive audits and lower compliance costs.

MK: Our self assessment approach is to encourage and support open and cooperative relationships with

taxpayers in real time, not retrospectively.Our interactions with taxpayers are guided by the Taxpayers' Charter and we encourage early engagement and

the discussion of major transactions before they occur. These form part of our approach where the

management of tax risk is seen as being the key to good corporate governance.

The ATO offers a range of compliance products and services to help large business taxpayers meet their

compliance obligations including: Pre-lodgement compliance reviews to provide practical certainty for taxpayers

by considering tax risk issues in real time; and Annual compliance arrangements or advance pricing

arrangements tailored to taxpayers with good tax risk governance and who engage cooperatively with the ATO.

These agreements can guide future compliance and reduce compliance costs.

ITR: What will be the tax authority's main areas of audit focus moving forward?

MK: Areas of focus in the ATO's compliance programme 2012-13 for large business include: Amendments to

taxation of financial arrangements; Profit shifting - transfer pricing and thin capitalisation; Non-disclosure of

foreign sourced income and assets; and Inappropriate outcomes involving consolidation.



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Generally speaking though, most of the questions that come up in international tax are about: Who is taxed;

what should be taxed; where it should be taxed; and how much it should be taxed.

Carmel Peters: New Zealand is seeking a broader concept of permanent establishment in its treaties

We also have a structural risk in the potential for lack of transparency in offshore activities. It comes up in all

areas of our international work, but is particularly significant in the context of combating non-disclosure of

foreign sourced income and assets.

JN and CP: We maintain a balanced programme involving a wide range of tax compliance activities. In the year

ahead, we intend to continue with a special focus on transfer pricing matters and complex financing

transactions, which often involve hybrid entities, instruments and transfers.

We also intend to take a closer look at withholding tax avoidance and possible treaty shopping arrangements in

particular.

ITR: How is your tax authority working with other authorities across Asia-Pacific to clamp down on abusive tax

planning?

JN and CP: We have a very close relationship with our major tax treaty partner, Australia. We routinely

exchange information with the ATO on both taxpayers and industries, and also operate a trans-Tasman

financing desk involving experts from both tax administrations exchanging new or emerging issues in regard to

funding arrangements.

Across Asia, we have definitely noticed an upward trend in exchanges of information between tax authorities.

Such exchanges are assisting us greatly in the earlier identification of aggressive arrangements which may

adversely impact the New Zealand tax base.

MK: Two principal strategies the ATO uses for dealing with transparency risk and which underpin all our other

work on specific international risks are: Exchange of information with treaty partners and increasing the number

of treaties and agreements; and International engagement through forums and capacity assistance to share

intelligence, improve our ability to influence international policy and provide practical cooperation with other

jurisdictions.

Australia is party to 44 double tax agreements, 42 of which are in force. Australia has also signed 33 tax

information exchange agreements (TIEAs), 30 of which are in force, and 14 additional treaty partners via the

Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

In recent times, these TIEAs have grown in importance as a result of the emphasis placed by a number of

international organisations, such as the OECD and its Global Forum, and the G20, on the prevention of tax

evasion through exchange of information.

We are also active members of the Joint International Tax Shelter Information Centre (JITSIC) which includes

the Asia Pacific region countries of Japan, US, South Korea and China. JITSIC aims to assist in the

identification, understanding and mitigation of risk arising from those who promote or take part in abusive taxschemes through the sharing of intelligence and best practices on identifying and addressing known and

emerging abusive tax schemes.

ITR: Is your jurisdiction negotiating any new international tax treaties? If so, will these tax treaties offer any

opportunities for multinationals to improve the tax efficiency of their structures in future?

JN and CP: New Zealand is negotiating double tax agreements (DTAs) with Luxembourg, Vietnam and the UK

while protocols are being negotiated with Austria, Belgium, India and the Netherlands.

New Zealand's treaty policy generally follows the OECD model. However, certain features of our DTAs are

aimed at protecting the New Zealand tax base. In particular, we seek a broader concept of permanent

establishment (PE) - including a services PE provision - positive withholding tax rates on interest and royalties,

and anti-treaty shopping rules.

MK: DTAs with South Korea, Canada, the Netherlands and UK are under revision and the protocol to the Indian

DTA was introduced into Parliament in November.



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The Multilateral Convention on Mutual Administrative Assistance in Tax Matters became fully effective for

Australia on January 1 2013. To date, it has 43 signatories with membership expected to continue growing.

Under the Convention, we have gained 14 new treaty partners from across Europe, South America and Africa.

The Convention is a freestanding multilateral agreement that promotes international cooperation for the

effective enforcement of national tax laws. It provides us with a solid legal framework to facilitate inter-country

exchanges of tax information and other forms of administrative assistance.

Key drivers of this tax treaty network are to support the global economy and to prevent double taxation. Tax

treaties support proper tax planning and sometimes provide concessions between treaty partners like a

reduction in non-resident withholding tax from 30% to 15% in some cases.

We are now better placed than ever before to combat international tax evasion and ensure that businesses

operate within the law, while still respecting the rights of our taxpayers.

ITR: Are any new tax-related investment incentives being introduced which taxpayers may want to factor into

their future planning?

JN and CP: New Zealand has not introduced any specific new tax-related investment incentives. However, from

2012, new tax rules were enacted that allowed non-residents to make portfolio investments through a New

Zealand-based managed fund into investments outside New Zealand, without paying New Zealand tax.

Australia

Tier 1

Deloitte

Ernst &Young

PwC

Tier 2

Allens

Ashurst

Baker &McKenzie

Clayton Utz

Corrs Chambers Westgarth - Taxand

Greenwoods &Freehills

King &Wood Mallesons

KPMG

Minter Ellison

China

Tier 1

Baker &McKenzieDeloitte

DLA Piper

Ernst &Young

KPMG

PwC

Tier 2

Clifford Chance

Hendersen Taxand

Hwuason Lawyers

Jun He Law Offices

Zhong Lun Law Firm

Hong Kong



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Tier 1

Baker &McKenzie

Deloitte

Ernst &Young

KPMG

PwC

Tier 2

Clifford Chance

DLA Piper

India

Tier 1

BMR Advisors - Taxand

Deloitte

Ernst &Young

KPMG

PwC

Tier 2

Amarchand &Mangaldas

BDO Consulting

ELP Advocates &Solicitors

Khaitan &Co

Indonesia

Tier 1

Ernst &Young

Hadiputranto Hadinoto &Partners

PwC

Tier 2

Deloitte

KPMG

PB Taxand

Japan

Tier 1

Baker &McKenzie

Deloitte Tohmatsu Tax CoErnst &Young Shinnihon Tax

KPMG

Tier 2

Grant Thornton

Kojima Law - Taxand

Morrison &Foerster

Nagashima Ohno &Tsunematsu

Nishimura &Asahi

Malaysia

Tier 1

Deloitte

Ernst &Young



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KPMG

PwC

Shearn Delamore &Co

Tier 2

Taxand Malaysia

Wong &Partners

New Zealand

Tier 1

Bell Gully

Deloitte

Ernst &Young

KPMG

PwC

Russell McVeagh

Tier 2

Chapman Tripp

Minter Ellison Rudd Watts

Simpson Grierson

Philippines

Tier 1

Manabat Sanagustin

SyCip Gorres Velayo &Co

Tier 2

Deloitte

Quisumbing Torres

Salvador &Associates - Taxand

Zambrano &Gruba Law Offices

Singapore

Tier 1

Drew &Napier

Ernst &Young

KPMG

PwC

Tier 2 Allen &Gledhill

Baker &McKenzie.Wong &Leow

Deloitte

South Korea

Tier 1

Deloitte Anjin

Kim &Chang

Samil PwC

Tier 2

Ernst &Young

Lee &Ko

Yulchon



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Taiwan

Tier 1

Deloitte

KPMG

PwC

Tier 2

Baker &McKenzie

Ernst &Young

Lee and Li

Vietnam

Tier 1

Deloitte

KPMG

PwC

Tier 2

Baker &McKenzie

Ernst &Young

Grant Thornton

VDB Loi

Europe, Middle East and Africa

The end of the beginning for Europe's tax havens

Europe's tax havens including Cyprus and the Channel Islands have faced a number of serious challenges in

recent months, tarnishing their attractiveness for multinational companies and high net worth individuals looking

to plan their tax affairs. Salman Shaheen finds out why it may not be the end for their economic model, or even

the beginning of the end, but it is the end of the beginning.

In 1942, when Europe was facing a very different crisis from the one it faces today, Winston Churchill declared

the tide of World War II was finally changing.

"Now this is not the end," Churchill declared. "It is not even the beginning of the end. But it is, perhaps, the end

of the beginning."

In a less often quoted part of that Mansion House speech, Churchill went on to say he would not preside over

the breakup of the British Empire. But when the British Empire did break up, it left in its wake a network of tax

havens which, along with other financial centres with low tax rates and strong secrecy laws, have played a

significant role in European tax planning over the last few decades.

That role is now changing.The economic turmoil that has devastated Cyprus and led to the EU's major economies pushing for greater

transparency and automatic information exchange (AIE) is weakening the attractiveness of offshore financial

centres and changing client behaviour when it comes to tax planning.

It may not be the end of Europe's tax havens. It may not even be the beginning of the end. But it is, perhaps,

the end of the beginning.

Automatic information exchange

The fiercest opponents of tax avoidance consider the 2009 G20 summit and the explosion of OECD tax

information exchange agreements (TIEAs), which were supposed to end tax havens, to be a false dawn.

"Tax authorities are saying that information exchange upon request is not working and the problem hasn't gone

away," says Richard Murphy, director of Tax Research. "Politicians have now realised automatic information

exchange could work."

Inspired by the US's Foreign Account Tax Compliance Act (FATCA), EU countries are increasingly moving



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towards AIE, which campaigners believe holds the key to ending abusive practices in secrecy jurisdictions.

In March, Jersey announced that it would join Guernsey and the Isle of Man in signing a FATCA-like agreement

with the UK, which International Tax Review exclusively predicted back in November.

The deal will see specific financial and non-financial information on UK residents and their accounts held in the

Crown Dependencies being reported to the UK on an annual basis. It will also see disclosure facilities with fixed

penalties for those wishing to come forward and regularise their tax affairs before the new regime of automatic

information exchange comes into being.

Meanwhile, the governments of Europe's five largest economies - France, Germany, Italy, Spain, and the UK

(collectively, the G5) - last month agreed to automatically exchange a wide range of tax information

multilaterally.

"This is an important further step in the fight against tax evasion and represents the next stage in promoting a

new standard in the automatic exchange of tax information," says David Gauke, UK Exchequer Secretary to the

Treasury. "This builds on the agreements we have reached with the Isle of Man, Guernsey and Jersey and the

discussions currently underway with the Overseas Territories."

The move was welcomed by Algirdas Semeta, European Commissioner for Taxation and Customs Union, Audit

and Anti-Fraud.

"This initiative is a very clear sign that the automatic exchange of information, which has been the long-time EU

standard, is the only way forward," says Semeta. "The recent evolution of the US approach further confirms this.

I can only support any effort to speed up expanding the scope of automatic exchange and of pushing our

standard globally. Transparency is the key when it comes to fighting tax evasion and the global environment

today leaves little room for those who resist it."

This development is not enough to satisfy all in the tax justice movement. Richard Brooks, former tax inspector

and author of The Great Tax Robbery: How Britain became a tax haven for fat cats and big business , writes it

off as a futile gesture from politicians who need to appear to be doing something, while Nick Shaxson,

investigative journalist and author of Treasure Islands , is concerned that the pilot will not help developing

countries whose economies are exposed to companies shifting profits into tax havens.

But John Christensen, director of the Tax Justice Network, welcomes the move not only for its recognition that

AIE is the effective standard for tackling tax evasion, but also because the G5 finance ministers indicate that

this is regarded as a prototype for a multilateral and global standard.

"One major proviso, however, is that the new initiative should not derail the upgrading of the EU's Savings Tax

Directive, which urgently needs to be extended to cover legal entities like offshore trusts, foundations and

companies," Christensen says. "If the finance ministers are genuinely prepared to invest time and effort into this

project, it is perfectly possible that the days of secret offshore trusts and bank accounts are finally over."

It is clear that the first rumblings of multilateral AIE do not spell the end for Europe's tax havens and aggressivetax planning, but the behavioural shift it could cause among taxpayers may well spell the end of the beginning.

"Anti-avoidance measures together with increased transparency and increased cross-border sharing of

information are certainly making it harder for those engaged in the more artificial kinds of tax planning," says

Paul Morton, head of group tax at Reed Elsevier.

As AIE is extended, it will create a climate where tax non-payers cannot take the risk of not declaring. Rather

than leading to a big increase in investigations on the back of a new flow of data, the ultimate consequence will

be voluntary compliance.

"Tax havens aren't over, but they don't realise the implications of the new era of automatic information

exchange by default," says Murphy. "They can continue to offer low tax rates, but what will be the point without

secrecy if clients have to pay the same tax at home anyway?"

Murphy believes that those offshore centres providing value added services other than secrecy, such as

reinsurance in Guernsey, will continue to be able to attract business. But for jurisdictions such as Jersey which



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provide little more than a trust service, the end of their economic model is in sight.

"By the end of the decade we will see a substantial change in the operations of tax havens," Murphy says.

"There will be some serious casualties."

But it is not all bad news for multinational companies who have used offshore jurisdictions to reduce their tax

bill. Removing the opportunities for tax avoidance through tax havens would put pressure on company directors

to invest for the longer term rather than boosting share value through short-term tax avoidance. In the long run,

this may prove to be much less risky, as the collapse of Cyprus shows just how precarious offshore jurisdictions

can be.

The fall of Cyprus

Cyprus' banking crisis has damaged its reputation as an attractive offshore financial centre

Source: Franco Pecchio

Cyprus, which has long been used by Russian multinational companies and wealthy individuals to reduce their

taxes, saw its reputation as an attractive planning location rocked by its bank crisis.

Advisers in Cyprus maintain their country remains an attractive investment location.

"The Cypriot crisis is essentially a banking crisis and this has nothing to do with its attractiveness as a tax

structuring jurisdiction," says Michalis Zambartas of Eurofast Taxand. "In addition, it should be noted that aside

from the two troubled banks, there are other banks in Cyprus, both local and international, which are very

healthy and have actually seen a substantial increase in their business in the last weeks."

Zambartas stresses that Cyprus has been an international business centre for more than 30 years since it

offered - as opposed to many of its competing jurisdictions - a very attractive tax regime, cost-effective services,

a legal system based on English law and "good weather".

"I do not see how these latter advantages have been affected by the crisis of those two banks," Zambartas

says.

But these advantages have been concretely affected by the crisis. Perhaps the clearest sign that Cyprus is

becoming a less attractive location for tax planning is that it has been forced to raise its corporate tax rate to

12.5%. While still possessing a comparatively low rate, Cyprus' economic woes mean it is having to

compromise on the tax system which made it a thriving offshore financial centre.

Zoe Kokoni, also of Eurofast Taxand, points out that the advantages for holding companies - the majority of

companies registered in Cyprus - will not be affected as the rule of no withholding taxes will not be changed.

On paper, everything that makes Cyprus an attractive tax planning location for multinational companies remains

in place. But in the wake of its banking crisis, the capital controls and losses for savers, taxpayers are likely to

be much more wary of the jurisdiction.

"We do not have a presence in Cyprus but given recent events I would have thought that the damage to its

reputation is considerable and long lasting," says Ian Brimicombe, head of group tax at AstraZeneca.For the campaigners, Cyprus' game as a tax haven is over.

"The Cypriot offshore finance industry is in meltdown; it's hard to believe they can restore confidence in their

business model for many, many years," says Christensen. "The domestic economy requires major adjustments,

not least retraining the huge number of people formerly employed in offshore financial services, and this will

require a complete overhaul of the tax system to raise the necessary revenues to finance this transition. I also

find it inconceivable that the EU and the Financial Action Task Force will continue to tolerate the astonishingly

lax anti-money laundering compliance that has prevailed in Nicosia since the 1980s."

"Cyprus is still a de facto tax haven, but not a de jure one," says Murphy who argues that Cyprus' current woes

owe much to its activity as an offshore financial centre. He warns that Luxembourg, which also has a ratio of

banking transactions to GDP that is significantly out of proportion, may face similar problems, posing a risk for

multinationals that have large deposits there.

Cyprus' example - the crashing and burning of an economy built around tax incentives - is an extreme one. The



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rest of Europe's low-tax jurisdictions may not suffer the same fate, but with warning signs on the horizon and the

rise of AIE, they may be forced to diversify their economies to weather the coming storm.

Trends in tax planning

Alongside these developments, companies report that tax planning in Europe is changing.

"There has been a continued move away from complex and artificial structures to straightforward planning,

based on developments in the business, involving transfer pricing or business models," says Morton. "Some in-

house departments have reduced their planning activities and focussed more on compliance and transfer

pricing. Professional service firms are spending more time understanding the business of their clients."

Morton also reports that authorities have become much more confident in challenging tax planning

arrangements.

"Anti-avoidance law has reached a new level of effectiveness and corporates are increasingly worried about

reputational issues," Morton says.

The legal focus on tax planning has brought some clarity and compliance advantages for taxpayers.

"Evolving EU case law and its adoption in domestic legislation has made planning in Europe more certain, for

example the reformed UK controlled foreign company (CFC) laws," says Brimicombe. "Planning is somewhat

easier as the rules are becoming clear, however anything that constitutes artificial avoidance rightly will more

likely be reversed."

Morton notes that anti-avoidance legislation has been tightened and in some countries the tribunals and the

courts are taking a harder line against avoidance. However he says it would be a concern if anti-avoidance

efforts began to impede straightforward business transactions. He regards the availability of advanced pricing

agreements and rulings as very important.

The media and society have also played a big role in recent trends in tax planning.

"The recent media focus on the level of tax contributions made to EU economies has prompted business to

consider its own communications on issues such as transparency and disclosure," says Brimicombe.

"Reputational risk is a significant factor in any arrangement where tax plays a significant role in delivering

economic benefits."

Last man standing

The level of focus on tax havens in recent years has been unprecedented. But for campaigners, there is one

financial centre which has escaped attention: The City of London.

"The UK is a tax haven in many ways," says Brooks. "Two give the game away. One, a non-dom rule combined

with immigration law favouring the ultra-wealthy, making us what advisers now call a "tax residence solution".

Two, the recent CFC law changes set out the UK's stall as the place for multinationals to put up a brass plate

and avoid tax here, there and everywhere. Britannia is tarting herself out."

Shaxson says the UK is not particularly secretive in its own right, but does offer a plethora of offshore-like taxand secrecy incentives.

"More importantly, the UK is a key player in the offshore world because of its role as a protector of the Crown

Dependencies and Overseas Territories, which involve some of the biggest tax havens in the world," Shaxson

says. "Britain could strike down their offshore facilities if it wanted to, but it has chosen not to."

Shaxson believes there will be some dent in European tax haven activities and the UK will have to bring its

dependencies into line somewhat, but he describes tax havens as a "cancer that has metastasised through the

global economy".

Given the UK's central role in the offshore financial industry, it will have to play a central role if abusive tax

planning through tax havens is to end.

The expansion of automatic information exchange in Europe and the fall of Cyprus have begun to erode the

hitherto unquestioned truths on which tax havens conducted their business: Secrecy and security.

But for Europe and the wider world to truly tackle aggressive avoidance and the economic model of tax havens,



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it will take another British prime minister to stand up and say: "This is not the end. It is not even the beginning of

the end. But it is, perhaps, the end of the beginning."

Austria

Tier 1

Deloitte

Ernst &Young

KPMG

LeitnerLeitner

PwC

Wolf Theiss

Tier 2

BPV Hugel Rechtsanwalte

Freshfields Bruckhaus Deringer

Baltic States

Tier 1

Deloitte

Ernst &Young

PwC

Tier 2

Borenius

KPMG

Sorainen

Tark Grunte Sutkiene

Belgium

Tier 1

Deloitte

Liedekerke

Linklaters

Tier 2

Baker &McKenzie

Ernst &Young


KPMG

Loyens &LoeffPwC

Cyprus

Tier 1

Deloitte

Ernst &Young

KPMG

PwC

Tier 2

Andreas Neocleous &Co

Baker Tilly Klitou

Chrysses Demetriades

Consulco



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Eurofast Taxand

Denmark

Tier 1

Deloitte

Ernst &Young

KPMG

Plesner

PwC

Tier 2

Bech-Bruun - Taxand

Bruun &Hjejle

Kromann Reumert

France

Tier 1

Bredin Prat

CMS Bureau Francis Lefebvre

de Pardieu Brocas Maffei

Tier 2

Arsene Taxand

Baker &McKenzie

Clifford Chance


Mayer Brown

Taj

Finland

Tier 1

KPMG

PwC

Roschier Attorneys

Tier 2

Deloitte

Ernst &Young

Hannes Snellman

GermanyTier 1

Deloitte

Ernst &Young

Flick Gocke Schaumburg


PwC

WTS

Tier 2

Allen &Overy

Hengeler Mueller

Linklaters

P+P Pollath + Partners



18/32

Greece

Tier 1

Ernst &Young

PwC

Zepos &Yannopoulos - Taxand

Tier 2

Deloitte

KPMG

Photopoulos &Associates

Gulf Cooperation Council

Tier 1

Cragus Group

Deloitte

Ernst &Young

KPMG

PwC

Tier 2

Cramer-Salamian (in association with Abdulla Al-Ali &Associates)

Stibbe

Ireland

Tier 1

Arthur Cox

Deloitte

KPMG

Matheson

PwC

Tier 2

A&L Goodbody

Ernst &Young

William Fry Tax Advisors - Taxand

Israel

Tier 1

Deloitte

Ernst &YoungHerzog Fox &Neeman

KPMG

PwC

Tier 2

BDO Israel

Fahn Kanne &Co - Grant Thornton

Gornitzky &Co

Shekel &Co

Italy

Tier 1

Maisto e Associati

Vitali Romagnoli Piccardi e Associati



19/32

Tier 2

Bonelli Erede Pappalardo

Chiomenti Studio Legale

Di Tanno e Associati

Studio Tributario e Societario STS Deloitte

Luxembourg

Tier 1

Allen &Overy

Clifford Chance

Ernst &Young

KPMG

Loyens &Loeff

PwC

Tier 2

Arendt &Medernach

ATOZ - Taxand

Bonn Steichen &Partners

Deloitte

Malta

Tier 1

Deloitte

KPMG

PwC

Tier 2

Avanzia Taxand

Ernst &Young

Fenech &Fenech Advocates

Netherlands

Tier 1

Atlas Tax Lawyers

Baker &McKenzie

Deloitte

KPMG Meijburg

Loyens &LoeffPwC

VMW Taxand

Tier 2

Ernst &Young

Norway

Tier 1

Deloitte

Ernst &Young

Thommessen

Tier 2

Bugge Arentz-Hansen &Rasmussen

PwC



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Wiersholm Mellbye &Bech

Poland

Tier 1

Deloitte

Ernst &Young

KPMG

PwC

Tier 2

Baker &McKenzie

Crido Taxand

Domanski Zakrzewski Palinka

MDDP

Salans

Portugal

Tier 1

Deloitte

KPMG

Morais Leitao Galvao Teles Soares da Silva &Associados

Uria Menendez

Tier 2

Abreu Advogados

Cuatrecasas Goncalves Pereira

Ernst &Young

Garrigues - Taxand

PwC

Vieira de Almeida &Associados

Russia

Tier 1

Baker &McKenzie

Ernst &Young

KPMG

PwC

Tier 2

DeloittePepeliaev Group - Taxand

Salans

South Africa

Tier 1

Deloitte

ENS - Taxand

Ernst &Young

KPMG

PwC

Webber Wentzel

Tier 2

Bowman Gilfillan



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Werksmans Attorneys

Spain

Tier 1

Cuatrecasas Goncalves Pereira

Garrigues - Taxand

Uria Menendez

Tier 2

Baker &McKenzie

Deloitte


KPMG

Landwell

Sweden

Tier 1

Deloitte

Mannheimer Swartling

PwC

Tier 2

Ernst &Young

KPMG

Skeppsbron Skatt Taxand

Switzerland

Tier 1

Ernst &Young

Homburger

PwC

Tax Partner-Taxand

Tier 2

Deloitte

Lenz &Staehelin

Oberson Avocats

Walder Wyss

Turkey

Tier 1Deloitte

Ernst &Young

Mazars Denge

PwC

Tier 2

BDO Denet

Erdikler-Taxand

KPMG

Ukraine

Tier 1

Ernst &Young

PwC



22/32

Tier 2

Baker &McKenzie

Deloitte

Egorov Puginsky Afanasiev &Partners - Taxand

KM Partners

Konnov &Sozanovsky

KPMG

Sayenko Kharenko

Ulysses

UK

Tier 1

Allen &Overy

Alvarez &Marsal Taxand

Clifford Chance

Deloitte

Ernst &Young


Linklaters

PwC

Slaughter and May

Tier 2

Herbert Smith Freehills

KPMG

Macfarlanes

Norton Rose

Latin America

How transfer pricing in Latin America can affect your company's tax planning

The transfer pricing environment in Latin America shows a number of contrasts from country to country. Sophie

Ashley looks at the differing levels of implementation, along with some of the biggest developments in the

region and explains how these aspects can affect your company's tax planning.

The government of Ecuador, under Rafael Correa, has taken a tough stance on tax havens

Source: Agencia Brasil licensed under CC BY 3.0 BRLatin America is at differing stages in its transfer pricing

development. From the relatively well established economy of Mexico, which has a transfer pricing regime

reasonably in line with the OECD, to the up and coming economic superpower that is Brazil, which doesn'tadhere to OECD transfer pricing principles, taxpayers also have to negotiate countries such as Chile, which

only introduced transfer pricing legislation towards the end of last year.

Negotiating Brazil

In September 2012, Brazil converted into law some significant changes to its transfer pricing regime. The

changes (Law 9430/96 (Law 9430), introduced by the Executive Measure 563 (EM 563)) have been in force

since the beginning of this year, but taxpayers can choose to apply the changes to the 2012 fiscal year.

The wording of Law 12715 differs from the one of EM 563. The main changes are as follows: undefined RPLP:

Profit Margin - EM 563 detailed the activities performed on the imported goods, assets services or rights

(manufacturing, trading etcetera) to determine the applicable profit margin while the list of activities of Law

12715 merely mentions the products. For example, EM 563 listed that the manufacturing of tobacco was subject

to the 40% profit margin while Law 12715 has merely mentioned tobacco. Therefore, according to the rules of

EM 563, a company that only resells tobacco would be subject to the 20% profit margin, but with the final



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wording of Law 12715 it will have to use the 40% profit margin; undefined Interest: EM 563 established that the

benchmark for these transactions would be achieved by using the Libor rate for six-month deposits in US dollars

plus a spread that should be determined year-by-year by the Ministry of Finance. Law 12715, on its turn,

provided that the spread is 3% per year and that it can be reduced or restored up to 3% by the Ministry of

Finance. ; and undefined Quoted price on import (QPI) and Quoted price on export (QPE): Law 12715 clarified

that, in case the exported or imported commodity has no listed prices in internationally recognised stock

exchanges, the taxpayer can use the prices obtained from data bases, provided by internationally renowned

research entities, to determine the benchmark. In what refers to exports, it will also be possible to use prices

established by regulatory agencies or regulatory entities, duly published in the Official Gazette.

The changes are designed to give taxpayers more certainty in their planning, in particular about which methods

they should apply to their profit margin calculations.

"The expectation is for this regulation to clarify some relevant points such as, for example, the procedures to

apply the QPI and QPE methods, the guidelines to determine the profit margin of the RPLP method and also

the introduction of a transition rule for loans that were already in place at the time of the beginning of the

application of the new rule," says Cristiane Magalhaes and Pedro Leonardo Stein Messetti of Machado

Associados.

Fewer disputes?

Guidance has also been published on Law 12715/12, which is designed to adjust margin requirements to work

better with the economic environment and to close loopholes. For taxpayers with manufacturing or assembly

operations in Brazil, which fall into the 20% corporate tax category, the law will be beneficial because the

guidance brings more certainty but for those taxpayers that do not, the law will bring disadvantages.

"The wording in many parts is not clear and will provide the basis for different interpretations and consequently

additional areas of litigation," says Werner Stuffer of Ernst &Young. "The high gross margin for certain sectors

(40%/30%) will continue the trend to apply alternative methods to achieve a transfer price that is acceptable for

Brazilian purposes but closer to the transfer price internationally required."

Taxpayers now have better guidance about whether they are engaged in industries that are subject to different

gross margin requirements. It is hoped the guidance will help to reduce the number of litigation cases piling up

in the tax courts, of which there are more than 350 concerned with the application of the PRL 60 method.

The profitability threshold, for exports and safe harbours, has been raised from 5% to 10%. A cap on

intercompany export transactions now means they should not be more than 20% of total net export

transactions. "We understand however that this was an oversight by the tax authorities and that they intend to

fix that with a new normative instruction, which should be applicable only for 2013 onwards," says Stuffer.

The just-published Normative Instruction means that any imports or exports listed in the accompanying Annex 1

or 2 will have to be tested using PCI (quotation on imports) and PECEX (quotation on exports) respectively. Theinstruction lists commodity exchanges that should be recognised to apply the new methods and also the

publications of authorised institutions in the case of commodities not traded on a stock exchange market.

Ecuador's battle against tax havens

Ecuador has been introducing more laws into its tax system to stop companies making use of low-tax

jurisdictions to siphon profits away from the country. Strategies include making it impossible for companies

whose shareholders are located in tax havens to participate in public procurement, charging additional taxes on

dividends and presuming related-party relationships between transacting parties.

"The greatest feature of the Ecuadorian Tax Havens regulation is that it does not just refer to countries,

territories and jurisdictions, but to regimes," says Alexis Carrera of Ernst &Young. "That is, if a company is

domiciled in a country whose income tax rate exceeds 13.8% (13.2% in 2013), but is host to a special regime

and tax reduction that allows you to pay less than the fee, then that company shall be presumed as located in a

tax haven by Ecuador."



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Carrera says the consequences of a jurisdiction being ruled as a tax haven are not trivial, since, although one of

the consequences of relations with tax havens may be the requirement to document transfer pricing, the biggest

drawbacks are the limitations that are set to repatriation of capital, because dividends paid to tax havens require

withholding the difference between the full fare for individual income tax (35%) and for corporate income tax

(23%), additional to not enjoying exemption for Currency Exportation Tax (CET) (an additional 5%).

"This punishment has pushed formal companies, with stockholders located in tax havens, to seek changes in

their corporate structure, moving their entities to other jurisdictions where there are sufficiently high rates of

income tax (over 60%), but there is no additional taxation on dividends received, to avoid a double taxation to

their profits," he added.

Aggression from Argentina

A number of developments in Argentina have forced taxpayers to address their planning strategies. For one;

three significant tax treaties, with Switzerland, Chile and Spain, were repealed in 2012.

"While those treaties did address, efficiently, double-tax concerns and helped to ensure some certainty as to the

tax costs over time in long-term tax structuring, their unilateral repeal by Argentina brought about uncertainty as

to overall efficiency of the treaty framework in general," says Cristian Rosso Alba of Rosso Alba, Francia

&Associados.

Rosso Alba also says there was a precedent set on this type of repeal in 2008 with the Argentine-Austria tax

convention: "Such decision was then viewed as an isolated one, which was focused on an old-designed treaty.

This impression is certainly different, nowadays."

Rosso Alba also pointed towards the IRS's attitude to foreign multinationals operating in Argentina and says the

tax authority has been very active in auditing and construing notices of deficiencies; mainly on exporters of

commodities and pharmaceutical companies. He advises taxpayers to collect evidence on the substance of

their foreign trading partners and warned that, in many cases, this evidence has to be filed before the Argentine

courts.

Stepping out on the TP scene

While some countries are struggling to qualify their positions, meaning taxpayers are struggling to keep control

over their planning strategies, other countries are only just stepping out onto the transfer pricing scene.

Chile introduced transfer pricing legislation in October 2012. Law No 20.630 includes the new Article 41 E of the

Income Tax Law, which relates to transfer pricing. It clarifies the transfer pricing methods (following the

guidelines of the OECD, though including a non-specified, residual and, effectively, a last-resort method to be

chosen by the taxpayer), introduces the advance pricing agreements (APA) with the fiscal authority for up to

three years (subject to revision in very exceptional cases) and allows the taxpayer to file for the recognition of

out-of-range prices resulting from adjustments in their prices, practiced by other countries that have entered into

a tax treaty with Chile.The new law also shifts the taxpayers' obligations to a more proactive position. They have to file an annual

sworn statement with their operations, not only with related, but also with non-related entities. "This raises some

concern about the confidentiality of the information," says Munoz. "The burden of proof changes, charging the

taxpayers with the obligation to prove that they used the best method and comparables to guide their transfer

pricing policies.

"On the other hand, the new law provides the companies with the transfer pricing studies, which, though not

compulsory, give them the best and perhaps the only way to sustain a sound transfer pricing policy," he adds.

Argentina

Tier 1

Deloitte

Marval O'Farrell &Mairal

PwC



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Rosso Alba Francia &Asociados

Teijeiro &Ballone Abogados

Tier 2

Bruchou, Fernandez Madero &Lombardi - Taxand

Ernst &Young (Pistrelli, Henry Martin y Asociados)

Nicholson y Cano

Perez Alati Grondona Benites Arntsen &Martinez de Hoz

Brazil

Tier 1

Ernst &Young Terco

Machado Associados, Advogados e Consultores

Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados

Pinheiro Neto Advogados

PwC

Tier 2

Deloitte

KPMG

Lefosse Advogados

Machado Meyer Sendacz Opice

Ulhoa Canto Rezende e Guerra

Chile

Tier 1

Barros &Errazuriz - Taxand

Carey y Cia

Ernst &Young

Tier 2

Baraona Abogados

KPMG

Philippi Yrarrazaval Pulido &Brunner

Colombia

Tier 1

Deloitte

Ernst &Young

KPMGOrozco Pardo &Asociados

PwC

Tier 2

Baker &McKenzie

Brigard &Urrutia

Godoy &Hoyos Abogados

Gomez-Pinzon Zuleta - Taxand

Lewin &Wills

Mauricio A Plazas Vega Abogados y Cia

Posse Herrera &Ruiz

Prieto Carrizosa

Quinones Cruz Abogados



26/32

Mexico

Tier 1

Chevez Ruiz Zamarripa y Cia

PwC

Tier 2

Basham Ringe y Correa

Deloitte

Mancera (Ernst &Young)

Ortiz Sainz y Erreguerena

Tron Abogados

Peru

Tier 1

Estudio Echecopar / Baker &McKenzie

Hernandez &Cia

PwC

Rodrigo Elias &Medrano

Tier 2

Ernst &Young

Rubio Leguia Normand

Uruguay

Tier 1

Ferrere

Guyer &Regules

PwC

Tier 2

Deloitte

Estudio Bergstein

Grant Thornton

KPMG

Venezuela

Tier 1

Baker &McKenzie

Norton Rose

Tier 2Deloitte

D'Empaire Reyna Abogados

PwC

Rodriguez &Mendoza

Torres Plaz &Araujo

North America

US companies keeping an eye on tax planning implications of reform

While there has not quite been the same media interest or public backlash against companies' tax contributions

in the US and Canada as has been seen elsewhere - predominantly in the UK - tax planning has still come in for

greater scrutiny in North America in the last year. Matthew Gilleard explores the latest developments.

A familiar pattern is emerging in the debate on comprehensive reform of the US tax code. While there is

consensus reform is necessary ("In the US it is clear the current system is not optimal," says Ginny Chung,



27/32

attorney adviser in the Treasury's office of International Tax Counsel), there seems to be a perennial application

of the Spanish " manana " principle as progress stalls time and again. Just as lawmakers reach down to the ball

that business and lobbyists have urged them to pick up, a stray foot enters to kick it once more into the long

grass. Asked about reform prospects in 2012, the majority of taxpayers said it was an issue for 2013; inquire

again in 2013 and the most common response is "2014 or beyond".

Last year, Citizens for Tax Justice produced a report which indicated that 26 Fortune 500 companies used tax

planning to pay no US federal income tax in the preceding four years. International Tax Review suggested then

that the biggest impact of such findings would manifest itself in the push for tax reform, which, of course, would

throw up plenty of new tax planning opportunities and obstacles. However, the tax code remains largely as it

was in 1986, and in some cases, having flirted with reform, certain tax planning provisions (particularly relating

to transaction tax planning) have actually regressed to their former state.

"In recent years, the Internal Revenue Service (IRS) instigated a 10 week expedited process for obtaining a

private letter ruling on a proposed transaction," says David Zimmerman of Miller &Chevalier in Washington. "But

in the last 12 months, with staffing shortages at the IRS and with the effects of sequestration coming into play,

the mechanism really wasn't being allowed to work and really became a dead letter. So it has now been

formally withdrawn, meaning we are essentially back where we started."

Layla Aksakal, also of Miller &Chevalier, says planning work relating to transactions is still going ahead, but that

fundamental tax reform is now in the back of taxpayers' minds when entering transactions.

"Taxpayers are considering how planning they are looking at would fare under a reformed tax code, particularly

how it would fare if territoriality is introduced because taxpayers are taking that proposal seriously given that it

would bring the US more in line with international norms," says Aksakal.

And consideration of how planning techniques would be treated under a reformed code is not the only reason

the meandering developments on Capitol Hill are being keenly watched. Preserving the ability to influence a

new-look tax code is also on taxpayers' agendas.

"Some clients are trying to model and plan how they would fare under various proposals that have been put on

the table. Some want to be involved in the legislative process and to influence the reform debate, so there has

been an adjustment of approach both in terms of assessing tax planning work under possible future legislation

and in terms of acting in such a way that would not impact the taxpayer's ability to influence the reform debate,"

explains Zimmerman.

UTP disclosures

Jim Ditkoff, senior vice president, finance and tax at the Danaher Corporation in Connecticut, says the most

important changes in US tax planning in recent years relate to the disclosure of uncertain tax positions (UTPs).

US corporations must provide reserves for potential tax assessments (foreign or domestic), unless it is "more

likely than not" (MLTN) that the taxpayer's position will ultimately be sustained, he explains."In determining MLTN, it is assumed that all relevant facts are known to the tax authorities. So speculation on

whether the taxpayer will be audited in a particular jurisdiction, or whether the tax auditors will discover and

challenge the UTPs, are irrelevant," says Ditkoff. "Moreover, where a US corporation decides to take a position

that does not meet the MLTN threshold on a US tax return, that position must be fully disclosed on that return."

A key factor for assessing whether a UTP is likely to prevail is whether it has economic substance. Following

the wording of the legislation, that means whether the transaction changes the taxpayer's economic position in

a meaningful way, apart from federal income tax effects, and whether the taxpayer has a substantial purpose

(apart from federal income tax effects) for entering into the transaction. Ditkoff points out that failing to

adequately disclose a UTP that does not meet the codified economic substance test can lead to the taxpayer

being hit with a 40% penalty.

"There is as yet no evidence that the IRS is abusing the requirement for UTP disclosures or assessing

economic substance penalties in a reckless manner," says Ditkoff, adding that as a result both of these changes



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seem to be beneficial for both the IRS and the taxpayer.

"They are beneficial to the IRS because it does not need to expend resources looking for UTPs. Instead, it can

focus on what has already been disclosed by the taxpayer," he says. "And the new rules are of benefit to the

taxpayer in that it can ignore the crazy schemes hatched by tax planning boutiques and concentrate on tax

planning that is consistent with its business objectives."

Others have had slightly different experiences of tax planning in the context of IRS interpretations of the codified

economic substance doctrine, with Aksakal saying it is throwing up some issues by "creating an uncertain

environment for taxpayers and practitioners to engage in tax planning".

"In the BNY Mellon case, for example, there was surprise at the way the doctrine was applied. Taxpayers are

faced with considerable uncertainty about the range of the doctrine," she says. "The courts and authorities have

sometimes gone beyond the economic substance test of seeing if the structure changes the taxpayer's

economic position in a meaningful way, and have sought to assess whether there is a tax benefit at all. This has

added to taxpayer uncertainty and made tax planning work harder."

Obama budget proposals

While he views UTP developments as the most important change affecting US tax planning, that's not to say

Ditkoff is unconcerned about potential changes to the tax code; quite the opposite.

"That's [UTP developments] the good news for US tax planners," says Ditkoff. "The bad news is that corporate

tax reform is still on the Congressional agenda."

Ditkoff has previously expressed views on the Republican proposals to increase the federal deficit and reduce

US unemployment by lowering the corporate tax rate through base broadening and enacting a territorial tax

system financed by a retroactive tax on pre-enactment foreign earnings and profits (a move he describes as

"unconstitutional"). But he says the Obama Administration "has some pretty bad tax reform proposals of its

own".

"The first would disallow US interest deductions to the extent they are allocated to foreign income that is not

taxed in the US. That sounds pretty reasonable when you are only looking at third party interest. After all,

individual taxpayers in the US can't deduct interest on loans used to purchase tax-free municipal bonds," says

Ditkoff.

However, he says a problem arises because this would also apply to inter-company interest.

"For example, when a US company borrows from a foreign subsidiary, the foreign subsidiary's interest income

is taxable in the US under Subpart F. So the US company's interest deduction and its foreign subsidiary's

Subpart F income offset each other. However, if the foreign subsidiary's Subpart F income remains fully taxable,

while a portion of the US parent's interest deduction is disallowed, there is a mismatch that can be solved only

by repaying the debt to the foreign subsidiary."

Another Obama proposal causing some concern is the mooted change to foreign tax credits. The Obamabudget outlines a plan to create a single pool for determining foreign tax credits on distributed foreign earnings.

"At the present time, US corporations generally repatriate earnings from high tax foreign subsidiaries and use

low tax foreign earnings for foreign investments," says Ditkoff. "But if all dividends from foreign subsidiaries are

deemed to come from a single blended pool, there can be no foreign dividends without a residual US tax."

A third proposal Ditkoff takes issue with is the move to impose a tax on the repatriation of foreign capital.

"Sometimes when a US corporation wants to acquire a foreign business, but has insufficient foreign cash for

that purpose, it will inject cash into a foreign holding company, which then makes the acquisition," he says.

"Then when its foreign operations do accumulate some excess cash, they will loan it to the foreign holding

company, which will redeem some of its shares. As long as the foreign holding company has no earnings and

profits, its distribution to its US parent, which simply returns some of the US parent's initial investment in that

company, will not be subject to US tax. But the Obama Administration wants to tax those distributions."

Taken together, the three proposals identified would have a significant impact on US tax planning. Ditkoff



29/32

believes the combination of these, if enacted, would effectively shut down all three tax-efficient methods by

which US companies repatriate cash from their foreign subsidiaries - loans, dividends and returns of capital. He

says this would remove ambiguity, but not in any positive way.

"This would convey a single unambiguous message to US multinationals: Use your foreign cash and profits to

expand your business and create new jobs anywhere you want as long as it's not in the US," says Ditkoff.

BEPS

A dominant theme globally is the concept of base erosion and profit shifting (BEPS). In the US, Zimmerman

says the OECD report has "had a lot of attention" but that many taxpayers are unsure what to make of it.

"US multinationals do feel targeted by the language used in the report, though, and there is a feeling of being

regarded with a jaundiced eye," says Zimmerman.

"From our viewpoint, though, nothing has really changed despite the new "base erosion" buzzword," adds

Aksakal. "We have always been very careful in advising clients anyway, and encouraged them not to take

shortcuts or skirt boundaries. This is clearly an area of extra focus now, though, and the US authorities are

increasing their staffing in the international area."

Jim Fuller, partner at Fenwick &West in California, has also seen the effects of increased IRS resources.

"The IRS has become more aggressive in transfer pricing, and there would seem to be an rise in the number of

companies in tax court over transfer pricing issues," says Fuller. "This is unfortunate. Transfer pricing is

complicated enough without these additional pressures from the IRS. But I suppose that's the purpose of the

IRS' new transfer pricing office. Some IRS audits have involved 10 or more IRS examiners, attorneys and

economists at meetings."

US officials want the OECD to go further in terms of clarifying the international tax planning environment.

"The OECD could do more in looking at overvaluation of risk or undervaluation of assets. As these are two

instances that give rise to BEPS," says Chung.

Carol Tello, partner at Sutherland Asbill &Brennan, echoes Chung's sentiments regarding the updating of

international tax planning rules.

"Current international norms date back to the 1920s when the League of Nations formed the permanent

establishment (PE) concept," says Tello, adding that the digital economy challenges the principles embodied in

the PE concept.

In Canada, the BEPS concept has already manifested itself in a variety of recent developments, says Jeffrey

Trossman, leader of the Blake, Cassels &Graydon tax practice.

"The theme of much of the recent legislative activity in Canada has been the protection of the "integrity" of the

tax base," he says. "In the 2013 federal budget, the government proposed several such "integrity" measures.

These include a new synthetic disposition rule (which frustrates common asset monetisation transactions) as

well as a character conversion rule (aimed at shutting down widely-used structures that effectively convertordinary income into capital gain). Also, previously existing opportunities to avoid the thin cap rules, where

businesses are conducted by branches or trusts, were eliminated."

These measures reinforce a trend seen over the last seven years, beginning with the 2006 announcement of

SIFT rules that shut down income trusts, and continued with, among other measures, the 2012 foreign affiliate

dumping rules which Trossman says "frustrated plans widely employed by foreign controlled Canadian

companies".

"The overall effect of this trend is to limit the menu of available strategies for corporate tax minimisation," says

Trossman. "Perhaps more significantly for taxpayers and advisers involved in tax planning in the context of

transactional work is that these rules, while typically aimed at a fairly well-understood mischief, invariably are

drafted very broadly, creating the prospect of potentially applying in seemingly benign situations."

As a result, he says, an increasing amount of time and energy must be spent in structuring ordinary commercial

transactions to ensure they do not inadvertently engage this array of new anti-avoidance rules, some of which



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have punitive consequences.

"Put another way, many tax executives and advisers are expending more and more resources on sidestepping

potholes, as opposed to exploiting loopholes," says Trossman.

Of particular interest is the fact this network of new specific anti-avoidance rules (SAARs) has emerged around

the 25th anniversary of Canada enacting a general anti-avoidance rule (GAAR).

"Perhaps ironically, the original GAAR enactment was coupled with the repeal of a number of SAARs - the

theory being that GAAR would be a sufficient deterrent to abusive transactions, and therefore that complicated

SAARs would no longer be needed," says Trossman. "The actual GAAR experience here in Canada has been

that the abusive tax avoidance test has been construed in a sufficiently narrow way that there are more SAARs

than ever in the Income Tax Act."

Many tax executives and advisers are expending more and more resources on sidestepping potholes, as

opposed to exploiting loopholes

Treaty developments

Tax treaty network developments have created more tax planning work in the past 12 months, too. Kristin

Konschnik of Withers Worldwide says that though US treaties are broadly similar, there are numerous small

(and not so small) differences between them. For example, US treaties contain a limitation-on-benefits (LOB)

provision that determines whether a treaty resident is entitled to claim treaty benefits, and these provisions

include a number of tests designed to ensure the treaty claimant has sufficient nexus to the treaty jurisdiction to

justify availing itself of the benefits.

While these tests are broadly the same, says Konschnik, there are various nuances which lead to differing

results.

"For example, a classic LOB test is the base erosion test, which generally requires both that the company

claiming benefits is owned as to a certain percentage by certain treaty residents and that non-treaty residents

don't receive more than a certain percentage of the company's gross income in deductible, non-arm's-

length'ordinary course of business' payments," she says. "However, under some treaties the ownership test can

be met only by residents of the same jurisdiction in which the company is resident. Other treaties are more

permissive and allow the ownership test to be met by a combination of residents in both the US and the other

jurisdiction; and some treaties allow US and treaty jurisdiction residents and US citizens to meet the ownership

test. Similarly, some treaties require "more than 50% ownership" and some only require "50% or more

ownership"."

Konschnik says the differences may appear small, but they can have a significant impact on tax planning. For

instance she references the US-Luxembourg treaty.

"One reason why US companies use Luxembourg as a structuring jurisdiction - in addition to the generally good

Luxembourg tax regime - is that it has a favourable treaty with the US," she says.David Forst, of Fenwick &West, agrees that treaties have been an area of some recent changes and said that

binding mandatory arbitration in unsettled competent authority proceedings, which is in an increasing number of

US treaties now, is a good development.

He says the US modifications to LOB provisions need "careful reading" in order to take advantage of the

nuanced tax planning opportunities Konschnik refers to, and to avoid pitfalls.

But while treaty inconsistencies provide a little room for manoeuvre when it comes to structuring tax affairs,

there is no doubt the big-ticket issue that is holding everybody's attention is impending US tax reform. How

these developments play out - and when - will determine the ways in which taxpayers and advisers must adapt

in their tax planning activities in the next 12 months. Over to you, Congress.

Canada

Tier 1

Blake Cassels &Graydon



31/32

Davies Ward Phillips &Vineberg

Ernst &Young

Osler Hoskin &Harcourt

PwC

Stikeman Elliott

Tier 2

Deloitte

Goodmans

KPMG

McCarthy Tetrault

US

Tier 1

Akin Gump

Baker Botts

Baker &McKenzie

Cleary Gottlieb Steen &Hamilton

Davis Polk &Wardwell

Deloitte

DLA Piper

Ernst &Young

Fenwick &West

Fulbright &Jaworski

Kirkland &Ellis

Mayer Brown

McDermott Will &Emery

PwC

Skadden Arps Slate Meagher &Flom

Sullivan &Cromwell

Vinson &Elkins

Wachtell Lipton Rosen &Katz

Tier 2

Bingham McCutchen

Caplin &Drysdale

Cravath Swaine &MooreDebevoise &Plimpton

Gibson Dunn &Crutcher

KPMG

Latham &Watkins

Miller &Chevalier Chartered

Morgan Lewis &Bockius

Paul Hastings

Paul Weiss Rifkind &Garrison

Shearman &Sterling

Sidley Austin

Steptoe &Johnson

Sutherland Asbill &Brennan



32/32

Thompson &Knight

Weil Gotshal &Manges

Subject International taxation; Tax reform; Manycountries; Tax planning;

Location Europe, United States--US, Asia, Latin America

Classification 9175: Western Europe; 9190: United States; 9179: Asia & the Pacific; 9173: Latin America;

4200: Taxation; 4310: Regulation

Publication title International Tax Review

Pages n/a

Publication year 2013

Publication date May 2013

Year 2013

Publisher Euromoney Trading Limited

Place of publication London

Country of publication United Kingdom

Publication subject Business And Economics, Business And Economics--Public Finance, Taxation

ISSN 09587594

Source type Scholarly Journals

Language of publication English

Document type Feature

ProQuest document ID 1354430743

Document URL http://search.proquest.com.proxy1.ncu.edu/docview/1354430743?accountid=28180

Copyright ( (c) Euromoney Institutional Investor PLC May 2013)

Last updated 2013-06-04

Database Accounting & Tax,ABI/INFORM Global

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