THE CHANGING INTERNATIONAL TAX LANDSCAPE: CAUSES AND EFFECTS Aldo Farrugia: DG, Legal & International Office of the Commissioner for Revenue

The Causes  Three Issues -  Tax Sovereignty  Human Rights and Developing Countries  Increased General Awareness on Tax Matters

First Issue Tax Sovereignty

Tax legislation is always changing  Jurisdictions continue to rely on taxation to raise revenue and redistribute social income  Governments effect changes to their tax laws in order to reflect the socio-economic circumstances of their jurisdiction  Jurisdictions continue to assert as much sovereignty in tax policy as possible

Tax Sovereignty is not Absolute  Jurisdictions limit their tax sovereignty owing to a number of factors –  Market forces  Pragmatic concerns  External influences  Regulatory emulation  Tax treaty negotiations

The Role of Tax Treaties  The interaction of domestic tax systems can lead to double taxation  Jurisdictions attempt to eliminate double taxation through international tax instruments  Such instruments -  minimise trade distortions and impediments to sustainable economic growth  have been critical in promoting cross border investments and competitive tax systems

Changes in Business Patterns  A shift from country-specific operating models to global models  The growing importance of the service component of the economy  The increasing centrality of intellectual property to value creation  Businesses locate both productive activities and legal rights in geographic locations that are distant from the physical location of their customers

Tax Authorities in Difficulty  National governments are not in a position to adequately monitor intra-firm transactions  MNEs operate on a global basis whereas Tax Authorities operate on a national basis  Tax services providers have become more sophisticated  Tax treaties began to facilitate not only the elimination of double taxation but also to facilitate double non-taxation

Tax Sovereignty is Undermined  Tensions emerged in the international framework  The objective of allocating taxing rights between countries where companies operate is seen to be undermined  Increased tax controversy and litigation between businesses and tax administrations as well as between tax administrations  The sovereign right of countries to set tax policy is seen to be undermined

Second Issue Human Rights And Developing Countries

Question of Human Rights  The modern international consensus about the definition and content of human rights began with the Universal Declaration of Human Rights that was adopted by the United Nations in 1948  The UN Human Rights Council adopted the UN Guiding Principles on Extreme Poverty and Human Rights in 2012

UN Guiding Principles on Extreme Poverty and Human Rights  According to these Guiding Principles eradicating extreme poverty is not only a moral duty but also a legal obligation under existing international human rights law  There is a connection between taxation and human rights  Tax abuses deprive governments of the resources required to respect, promote and fulfil human rights

Impact of Tax Abuses on Developing Countries  Actions of states that either –  encourage or facilitate tax abuses, or  deliberately frustrate the efforts of other states to counter tax abuses could constitute a violation of their international human rights obligations, particularly with respect to economic, social and cultural rights

Greatest Concerns for Developing Countries  Transfer pricing and other cross-border intra- group transactions  The negotiation of tax holidays and incentives  The taxation of natural resources  The use of offshore investment accounts  Secrecy jurisdictions because of their role in facilitating tax abuses

Questions for States to Consider  Obligation to ensure coherence between fiscal, tax and human rights laws and policies, both at the domestic and international levels  Obligation to assess and address the domestic and international impacts of fiscal and tax policies on human rights  Obligation of international cooperation and technical assistance to support the realisation of human rights (including international cooperation in the field of taxation)

Questions for Business Enterprises to Consider  The tax planning strategies of MNEs, as well as their advisers and financiers, could have potential negative impacts on human rights  According to the International Bar Association -  Merely complying with tax law is not enough when this results in the violation of human rights. Responsibility for human rights includes situations where lawyers are associated with third parties’ actions that violate human rights − including by their clients

Third Issue Greater General Awareness On Tax Matters

Greater Scrutiny  The tax practices of multinational enterprises and wealthy individuals are being increasingly questioned and scrutinised  Politicians, advocacy groups and prominent individuals are questioning the fairness and morality of sophisticated tax planning strategies that result in individuals and corporations not paying a fair share of tax  The perception of the magnitude of the issue of tax abuse has caught the attention of the media

The Role of the Media  Investigative journalists are joining forces to share and coordinate work  Exposing MNEs tax planning strategies  Exposing Tax Authorities’ practices  Making the general public more conscious of a sense of tax fairness

The Reaction  Unilateral Actions  Coordinated Actions  Tax Transparency (Global Forum)  OECD BEPS Project  EU and BEPS

Unilateral vs Coordinated Measures  Many countries have considered taking action to protect their tax bases (CFC, TP and Thin Cap)  Unilateral action by countries on an uncoordinated basis could lead to –  excessive compliance costs for MNEs  the potential for double or multiple taxation  protectionist measures that would be detrimental to international trade  The Solution: Coordination Action through G20/OECD

First Step: Tax Transparency  Exchange of Information on Request  EOIR Standard  Peer Reviews (more than 150 Reviews)  Updates being discussed  Automatic Exchange of Information  US FATCA  CRS  AEOI Standard on basis of CRS  Peer Reviews (expected to start in 2016)

Next: The BEPS Action Plan  The Action Plan –  15 key elements to be addressed  is designed to take a principled, holistic approach to addressing BEPS  focuses not only on closing gaps that have led to tax avoidance, but also on improving dispute resolution  Aims to deliver on the Actions within a two- year time frame

BEPS Project Results  Recommendations on 7 elements (September 2014)  Agreement reached on three key elements (February 2015) -  A mandate to launch negotiations on a multilateral instrument to streamline implementation of tax treaty-related BEPS measures  An implementation package for country-by-country reporting in 2016 and a related government-to-government exchange mechanism to start in 2017  The criteria to assess whether preferential treatment regimes for intellectual property (patent boxes) are harmful or not

EU and the BEPS Project  Work is being carried out within the EU to concretise BEPS conclusions into European law (including soft law) -  Transparency of Tax Rulings  Code of Conduct Group IP regimes Hybrid Permanent Establishments  Parent Subsidiary Directive  Interest and Royalties Directive  CCCTB (international anti-BEPS aspects)

Some Reflections to Conclude What will be the effect on Small Jurisdictions?

Two Important Facts  Fact No.1: Large jurisdictions have a disproportionate influence in the construction of global tax rules  Fact No. 2: The economic situation of small jurisdictions is different  less customers, smaller available pool of labour, smaller network of providers of capital, greater transportation costs etc.

BEPS and Small Jurisdictions  Question of Sovereignty: How will the Sovereignty of Small Jurisdictions be affected by the BEPS project?  Question of Tax Revenues: Will the BEPS project have a detrimental effect on the tax revenues of Small Jurisdictions?  Question of Awareness: To date very little attention has been given to the potential effect of the BEPS project on Small Jurisdictions  Question of Fairness: Will the BEPS project discriminate unfairly against Small Jurisdictions?

Thank You for Your Attention