1. Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Auditing Multinational Enterprises 3 Taxation of Multinational Enterprises

2. Tax planning using havens or preferential regimes  Advantages of havens for tax planners Low or no tax for international companies (deferral) No transparency No exchange of information  Characteristics of preferential regimes low tax by sector (financial/distribution/communication) low structural costs - premises, staff etc. special incentives 2

3. International Tax Planning MNEs may seek to move income from normal/high tax countries to low tax or tax sheltered countries. How?  What types of income may be easily moved between jurisdictions?  What income-producing assets can easily be relocated? 3

4. Internationally mobile income  Interest  Royalty or similar income from the ownership of intellectual property  Income from investments  Income from capital assets  Income from treasury operations  The return to some risks

5. Discussion Point Give an example (from your own or your country experience if possible) of an MNE moving income to a low tax or tax-sheltered jurisdiction.

6. Key tools of international taxation

7. Country Taxing Rights  Countries may tax on a residence basis or a source basis  Residence = tax all income of a resident wherever earned  Source = tax all income sourced in the country (interest, rent, dividends etc) irrespective of residence of owner of income  Many countries tax on both bases  Tax Treaties exist to ensure that the same income is not taxed twice 7

8. Taxing income recognised in accounts of a company registered in another country 8 How could: a) parent seek to tax income that has been recognised in the accounts of the subsidiary, or b) subsidiary seek to tax income recognised in the accounts of the parent? Parent registered In Country A Subsidiary registered In Country B

9. Key tools  Residence rules - discuss now  Permanent establishment rules – discuss now  Controlled foreign companies rules - discuss now  Transfer pricing –discuss briefly now, but look at in more depth later 9

10. Company residence  Countries normally determine where a company is resident according to: - formal criteria e.g. place of incorporation, registration etc - factual criteria e.g. place of effective management, principal business location  If a company is potentially resident in more than one country, then, if a treaty is in place, it may specify residence to be the “place of effective management”

11. Permanent Establishments

12. Introduction Two key issues: - Is there a permanent establishment of a resident of one country in another? (Article 5 of MTC) - If there is a such a permanent establishment, how much profit should be attributed to it and thus be subject to host-country taxation? (Article 7 of MTC) 12

13. Types of Permanent establishment  Fixed place of business PE  Construction PE  Dependent agent PE

14. 1. Fixed place of business PE  Does the non-resident have a place of place of business in the host country?  Is it fixed, in both geographical and time senses?  Does the non-resident carry out its business through the fixed place?

15. Fixed place of business PE  A company, A Co, resident in Country A, carries out maintenance work in apartments in a city in Country B  It has carried on this business over a period of over 5 years  It spends about three weeks on each job in each apartment  The work is carried out in different apartments in the same city  A Co has an office in one apartment block where it stores records, tools and marketing materials and holds sales meetings with potential customers. Do you think there may be a fixed place of business PE of A Co in Country B?

16. Construction PE  A building site, construction or installation project constitutes a PE only if it lasts for more than 12 months

17. 2. Dependent agent PE A resident of Country A will have a permanent establishment in country B where :  … a person in country B  … acts on behalf of the enterprise  …and has, and habitually exercises, authority to conclude contracts in the name of the enterprise .. and is not an independent agent

18. Dependent agent permanent establishment  Insurco (A), a company resident in country A, issues and underwrites motor insurance policies to individuals  Insurco (B), a subsidiary of Insurco A and a resident of Country B, sells and markets those policies to individuals in Country B  Insurco (B) organises advertising, it meets with potential customers and sells insurance policies to customers on behalf of Insurco (A)  The insurance contracts are between Insurco (A) and individuals residing in Country B  Insurco (B) does not sell insurance policies on behalf of any other insurance providers

19. Attribution of profit to a permanent establishment  Follows the arm’s length principle  But special consideration needs to be given to: - attribution of capital to the PE - attribution of risk to the PE - attribution of assets to the PE

20. Controlled foreign companies  Country CFC rules seek to attribute some or all of the profit of a company to its shareholders  The effect is that CFC rules allow countries to tax the profit of a subsidiary in a parent company  Anti – avoidance rules, normally restricted to subsidiaries in a tax haven and to geographically mobile passive income

21. Transfer Pricing  Transfer pricing concerns the pricing (and other terms) that companies use when carrying out transactions with members of the same group.  This pricing will influence where profit or loss will be recognised.  Tax authorities have introduced legislation to regulate transfer pricing for taxation purposes.

22. Anti- avoidance rules  Many states have general anti-avoidance rules that allow them to disregard or recharacterise transactions that are primarily tax motivated  Approaches vary between countries

23. Thin capitalisation  Many countries have “thin capitalisation” rules that typically restrict the interest payable by a company on loans from, or guaranteed by, a shareholders.  They are normally based on “debt to equity” or similar financial ratios.  Approaches vary between countries.