The Present Affected by the Past
By Prof Robert Anthony, Anthony & Cie
With all the evolution of legislation in jurisdictions to collect more taxation, this can affect transactions of the past. In addition, international treaties on exchange of information laws on Base erosion profit sharing as well as the transfer pricing interpretation and case laws, make taxpayers lives more and more complicated.
When I first became a professional, laws changed once a year. With international pressure this has now become more frequent. In addition, the use of artificial intelligence has simplified the research of data. The result of this has strengthened the ability of tax offces to carry out forensic research to collect taxes. Simply, the exchange of information agreements have resulted in countries collecting billions of euros/dollars in undeclared taxes. This has a positive effect in helping fund countries’ tax deficits with these windfalls of additional tax revenues.
In the past, tax advisors created offshore companies to carry out transactions in order to avoid their clients’ tax resident’s jurisdiction taxation. The definition of a permanent establishment with the changes in contractual agreement has evolved. The OECD took into account what is substance today. BEPS (Action 7) proposed several changes for the definition of a permanent establishment. These changes were to ensure that where there are activities that an intermediary exercises in a jurisdiction and that it is intended to result in the regular conclusion of contracts to be performed by a foreign company, the enterprise will be considered to have a taxable presence in that jurisdiction unless the intermediary is performing these activities in the course of an independent business. It also identifies changes to restrict the application of a number of exceptions to the definition of permanent establishment to activities that are preparatory or auxiliary nature and will thereby ensure that it is not possible to take advantage of these exceptions by the fragmentation of a cohesive operation of business into several small operations. In addition, there are changes which address situations where the exception applicable to a construction site is circumvented through the splitting-up of contracts between closely related enterprises.
To foster the implementation of these changes in the global treaty network, jurisdictions negotiated a Multilateral Instrument (the “MLI”) to modify existing bilateral tax treaties in 2016.
This all means that existing companies that were set up with a view to circumvent domestic taxation have to be restructured to comply with the current rules. Letter box companies which were set up with no real personnel will be considered as transparent.
One will need real effective salaried employees and an offce in order to show a real presence. In addition, the materiality of the activity also relates to the size of the personnel and activity. Simply signing low taxed contracts will no longer be considered from a low tax jurisdiction as being taxed there. One has recently seen the issues raised on taxation applicable to Amazon, Google, Apple, and Starbucks. These tax strategies will be considered tax planning of the past. Having considered the issues above, there are other aspects that need consideration. Many commercial transactions in the past were established before exchange of information became in force due to Tracfin and the responsibility on professionals has become important, with criminal implications. This especially applies where fiscal representatives are needed where there are non-resident owners in certain cases. The problem arises in proving the provenance of funds used to acquire assets. In the USA there are the American sanctions against Russia: in France the obligations of a fiscal representative for non- European residents selling property. These representatives have criminal responsibility for their actions. This means forensic accounting is required in order to trace the flow of funds originating from transactions. Problems are often encountered in finding records that can substantiate these. There can be banks as well as financial institutions that no longer exist. Tax fraud in some countries is statute barred after ten years, although not criminal activities. Some countries have no statute of limitations. This does not help just to find the original funds. This all means that there is real work for us professionals needed on old files to prove the provenance of funds and to educate our clients as to this need accordingly to justify the origin of funds.
Over USD 240 bn is lost annually by multinationals carrying out tax avoidance. France is installing GAFA to collect taxes on digital transactions. Other countries are following their example and whilst President Trump initially did not agree he has understood and accepted the need for this tax.
With artificial intelligence and social media, the world is smaller. Don’t let clients take the risk of being part of a tax headache today; help resolve the past and everyone is a winner with peace of mind.
Prof Robert AnthonyGGI member firm
Anthony & Cie
Fiduciary and Estate Planning, Tax
Sophia Antipolis, France
T: +33 4 93 65 32 23
As a Multi-Family Office (MFO),Anthony & Cie supports its wealthy clients in the management of their assets, in France and worldwide. In the past 40+ years, they have expanded into an international consultancy of tax analysts, financial advisors, wealth managers, and consultants. They specialise in advising on cross-border tax matters as well as on financial, real estate, financing, investment, and inheritance needs, and they act as an MFO for international clients.
Professor Robert Anthony is the Founder and Principal Partner of Anthony & Cie. He was formerly professor of international tax law at the Thomas Jefferson School of Law, California. He is a chartered certified accountant (UK) and certified financial planner (France).
Published: GGI Insider, No. 105, January 2020 l Photo: bbsferrari - stock.adobe.com