Oct 24, 2018
Is it the End of International Tax Planning
Keeping up with the continuous changes in tax environment has become a priority to most professionals in financial sector worldwide, as the landscape is rapidly changing and is significantly affecting the business operations of most of the international groups and/or companies. It is important to address the inevitable issues and challenges arising from the implementation of these changes, as well as to discuss the strategies on how to mitigate the risks and how to ensure the smooth transition to the New Tax Era.
When elaborating on these issues and challenges, we definitely must give mention to the changes in the Base Erosion and Profit Shifting (BEPS) and how these changes are directly impacting countries’ respective taxation of the revenues, i.e. taxing the income which is being generated in that specific country. It’s important to understand that the main purpose of these BEPS changes is to reduce the tax evasion – to minimize the profit shifting between companies which have no substance and are registered in jurisdictions with low taxation rates.
When it comes to financial institutions, the banks are becoming more and more strict with their existing clients when it comes to e.g. fund transfers, requesting to identify the source of funds, the purpose of the transfer, etc. As regards opening of the new accounts, the banks are increasing due diligence procedures, the Know Your Customer (KYC) requirements, etc, following the changes in Anti-Money Laundering and Counter-Terrorism Financing laws globally. What this means is that a bank will no longer open an account without a serious reason or a purpose. For example, if a company in Cyprus wishes to open an account in a local bank, the bank will request further information proving that the company actually has substance in the country – that it is doing legitimate business and has physical presence on the island.
Equally important changes in the tax environment are concerning the development in the Arm’s Length Pricing, which are directly affecting the intragroup transactions between related parties. For example, since 1st July 2017, companies in Cyprus are now required to justify the margin and the prices charged on intragroup transactions by preparing Transfer Pricing studies, which are subsequently submitted to the Tax Authorities for review.
Hence, the conclusion: international groups and/or companies can operate globally and have presence in multiple jurisdictions, provided that they have actual substance in those jurisdictions – genuine, operational businesses with offices, bank accounts, utility subscriptions and competent employees. The point here is that the relevant authorities in most of the developed world are determined to succeed in their joint efforts to eradicate complicated corporate structures with layers and layers of companies in multiple jurisdictions, created with a sole purpose to minimize their tax dues.
We are seeing the aftermath of these changes on a daily basis – in the last year, major restructuring is happening in international groups. The number of companies within a group is being reduced, extinguishing the companies registered in known tax havens, whereas the remaining companies in the corporate structure are given substance. Both the plan and the strategy are based on justifying the purpose of each and every company remaining in the structure, in order to avoid any potential issues that might occur, either with the relevant tax authorities or with the banks, where as previously mentioned, the bank might not accept the application to open a new bank account, or a transaction to and from an existing account might be put on hold which will most certainly raise more new issues. Tax liabilities are also worthy a mention, as e.g. the tax authorities in a relevant jurisdiction might not accept that a certain type of income and/or a certain type of expense is valid and/or in accordance with the applicable rules and regulations, resulting in tax adjustments and hence increased taxation in that specific jurisdiction.
The obvious questions to arise from this discussion are: What should I do with my company? What should be assessed? What actions to take for an international group, not only to comply with the current regulations, but also to remain within the future framework of the operations in an international group and/or company? We welcome you to contact us for more information.
Managing Director at FinExpertiza Cyprus