It’s known as “treaty shopping.” This is the practice of structuring a multinational business to take advantage of the most favorable tax treaties between the company’s “home” country and other foreign countries in an effort to minimize tax liability.
At this point, seeking a preferred tax situation is perfectly legal if it’s done according to all the rules. But if the G20 has its way, multinationals’ treaty shopping days may be numbered.
What’s the Problem?
It all comes down to money, of course. Every country is desperate for tax dollars, and wants to do whatever it can to prevent “leakage” of the tax revenues it believes it is due.
The G20 — a group of finance ministers and central bankers from 19 countries and the European Union — tackled the issue of international taxation at its meeting, held in St. Petersburg in September 2013. At that gathering, the G20 leaders released an action plan designed by the Organization for Economic Co-operation and Development (OECD) to address tax loopholes.
The G20’s goal on this topic is to minimize base erosion and profit shifting (BEPS) in situations where the interaction of different countries’ tax rules result in multinationals artificially shifting profits out of the countries where they are earned, resulting in very low taxes or even double non-taxation.
Google and Apple are often cited as examples of multinationals that use the current international tax rules to their advantage. Ireland, Switzerland and The Netherlands are popular tax havens for these companies.
The Action Plan
The OECD’s action plan sets forth several key ideas to change fundamental aspects of international tax rules. Among the most interesting:
Address the tax challenges of the digital economy. In today’s world, it’s easy for a company to have a significant presence in a foreign country without having a physical presence that would establish nexus there.
Neutralize the effects of “hybrid mismatch arrangements.” Develop model treaty provisions that would ensure that the various countries’ tax laws don’t provide unintended benefits to multinationals looking for tax breaks.
Strengthen controlled foreign corporation (CFC) rules. CFC rules are designed to address tax breaks artificially gained by using offshore entities.
Limit base erosion via interest deductions and other financial payments. Using excessive interest deductions is a relatively common practice to diminish taxable income.
Counter harmful tax practices more effectively, taking into account transparency and substance. The idea here is to improve the way preferential tax regimes are handled.
Prevent treaty abuse. Develop model treaty provisions and recommendations to prevent inappropriate treaty benefits.
Prevent the artificial avoidance of permanent establishment (PE) status.
Re-examine transfer pricing documentation.
In light of these proposals, it’s imperative that you talk with your tax advisor if your company is considering an international expansion. You’ll want to be sure that your overseas venture is structured in the most tax-effective manner as the international tax treaties evolve.
Have questions about international tax treaties and treaty shopping? Your DJB Taxation professional will be glad to answer them for you.