Tax Planning of International Enterprises Dimensions of tax planning Assistant professor Tomi Viitala

COMPANY PERSPECTIVES 2

3 Tax management and stakeholders in tax Tax planning Tax compliance Tax risk management Tax reporting Low ETR No surprises Shareholders Correct amount of tax Full and timely compliance Tax Authorities / Governments Headline stories Media Lower prices but ethical behaviour Customers Companies to pay fair contribution Campaign against tax avoidance Civil Society Organisations, NGOs © Nina Leväjärvi, Kone Oyj

4 Tax planning considerations © Nina Leväjärvi, Kone Oyj

GOVERNMENT PERSPECTIVES 5

6 What is BEPS? Tax planning strategies that exploit gaps and mismatches in tax rules and tax treaties in different countries –Make profits to ”disappear” for tax purposes (even so called “stateless income”) –Shift profits to locations with little or no real activity but low taxation –Results in little (low taxation) or no overall corporate tax being paid (double non-taxation) Earlier emphasis in the OECD tax work has been on eliminating double taxation in cross- border situations due to overlapping taxing right of several jurisdictions

Domestic rules for international taxation and internationally agreed standards (tax treaties)… E.g –Corporation and permanent establishment (PE) –Residence and source state taxation –Separate entity and arm’s lenght principle …are still grounded in an economic environment characterised by a lower degree of economic integration across borders, rather than today’s environment of global taxpayers (multinational enterprises, MNE). 7 Why is BEPS?

Broadly speaking corporate tax planning strategies typically ensure: –minimisation of taxation in a foreign operating or source country –low or no withholding tax at source –low or no taxation at the level of the recipient –no current taxation of the low taxed profits (achieved via the first three steps) at the level of the ultimate parent. While these corporate tax planning strategies may be technically legal and rely on carefully planned interactions of a variety of tax rules and principles, the overall effect of this type of tax planning is to erode the corporate tax base of many countries in a manner that is not intended by domestic policy. 8 Why is BEPS?

On the other hand, variety of anti-avoidance rules… E.g. –Interest deduction limitations and thin capitalization provisions –CFC (controlled foreign company) rules –Transfer pricing adjustments –GAAR (general anti-avoidance rule) –Tax treaty abuse rules Beneficial owner requirement Subject to tax requirement LOB (limitation on benefits) …are uncoordinated between countries and aimed at protecting the national tax base of a country (and not tax bases of all countries). 9 Why is BEPS?

10 What is BEPS…traditional views?

11 What is BEPS…modern view?

12 Consequences of BEPS Distortion of competition –cross-border activities compared to domestic activities –large vs small companies Inefficient allocation of resources and distortion of investment decisions Low pre-tax rate of return and high after-tax return Fairness between taxpayers –Undermines compliance by all taxpayers

13 Cost of BEPS Estimated annual global revenue loss 4-10 percent of global corporate tax revenues i.e. between USD 100 billion and 240 billion at 2014 levels Finland: no reliable estimate.

OECD AND EU DEVELOPMENTS 14

15 BEPS Action Plan 1.Digital economy 2.Hybrid mismatch arrangement (*) 3.CFC (controlled foreign companies) 4.Interest deduction limitations (*) 5.Harmful tax practices 6.Treaty abuse 7.Permanent establishments (PE) 8-10 & 13. Transfer pricing (*) Transparency (*) 14. Dispute resolution15. Multilateral treaty * Topic covered by our course

16 Changing tax environment OECD BEPS (base erosion and profit shifting) changes Domestic tax law changes –E.g. interest deduction limitation rules, hybrid rules, CFC rules Tax treaty changes –E.g. treaty anti-abuse rules, definition of permanent establishment (PE), development of mutual agreement procedure (MAP) Transfer pricing (TP) guidelines changes –E.g. valuation of intangibles EU action plan for fair and efficient corporate taxation and anti-tax avoidance package (ATAP)

17 Changing tax environment Increased transparency –Voluntary disclosure of tax footprint –Country-by-country reporting as of 2016 –Public country-by-country reporting (EU directive proposal, April 2016) Media attention –Luxleaks –Panama papers More tax disputes, but also collaboration, between national tax authorities But tax competition between states still alive –Reduction of corporate tax rates –Introduction of tax incentives (e.g. patent boxes)

18 EU Action Plan Commissions Action Plan on Corporate Taxation for fair and efficient corporate taxation in the EU (June 2015) Five Key Areas for Action have been identified (Anti Tax Avoidance Package, ATAP) –1.Re-launching the Common Consolidated Corporate Tax Base (CCCTB) –2.Ensuring fair taxation where profits are generated –3.Creating a better business environment –4.Increasing transparency –5.Improving EU coordination

19 EU Anti Tax Avoidance Directive 2016 the EU Commission proposed the Anti Tax Avoidance Directive to counteract some of the most common types of aggressive tax planning…

20 EU Anti Tax Avoidance Directive

21 EU Anti Tax Avoidance Directive

22 EU Anti Tax Avoidance Directive

23 EU Anti Tax Avoidance Directive

24 EU Anti Tax Avoidance Directive