By Keith Brockman
Transparency continues to be at the forefront of international tax discussions. It’s the topic of articles, the focus of speeches, and the goal of the legislation.
But those discussions are tense and very divided, even among tax administrators.
Advocates for more transparency are looking to identify and minimize a perceived tax gap, including profit shifting, paying nil taxes in low tax jurisdictions, and operating in what some call tax havens.
For all the talk, there are still fundamental outstanding questions: Is everyone starting at the same place, and what is the end game?
To really move the needle forward effectively, all stakeholders need to embrace a willingness to participate by starting from a common base of understanding, free from unintentional bias and perceptions that aren’t conducive to productive discussion.
That the common base of understanding is rooted in tax terminology. Agreeing upon the common language is of utmost importance to ensure everyone is starting the debate at the same starting point.
For example, “tax transparency,” “tax evasion,” and “aggressive tax planning,” are terms readily intermixed by stakeholders, resulting in heated debates, albeit the basis of such arguments may be very dissimilar.
While it may seem pedantic, let us start with common definitions.
Transparency vs. Evasion
Merriam-Webster defines transparent as “being free from pretense or deceit, easily detected or seen through, readily understood, and/or characterized by visibility or accessibility of information especially concerning business practices.”
Tax transparency provides a window for a high-level understanding of an MNE’s business practices via tax information. There is no inference—either implicitly or explicitly—that such information is tainted by tax evasion, which is described in the dictionary as “a willful and especially criminal attempt to evade the imposition or payment of a tax.”
Aggressive tax planning, pursuant to EU guidance, results from the mismatch of tax rules between different tax jurisdictions. As a result, non-conformity of dissimilar legislative laws for similar tax attributes will lead to a natural mismatch of tax results, resulting in tax advantages by MNEs for a relevant jurisdiction. Notably, offsetting the disadvantages arising from natural mismatches are not addressed.
With respect to aggressive tax planning and tax evasion, there are established guardrails in the international space.
Starting with the EU, the European Commission provided a recommendation in 2012 on aggressive tax planning (2012/772/EU
). The premise of the Commission’s recommendation was the Treaty on The functioning of the European Union (TFEU), based on the constitutional basis of the EU.
It cited aggressive tax planning as obtaining an advantage from the technicalities of a tax system, or of mismatches between two or more tax systems, for the purpose of reducing an MNE’s tax liability.
The Commission’s driving force for the recommendation was to implement the adoption of a common general anti-abuse rule (GAAR) by the Member States. The purpose of this common EU GAAR was to counteract aggressive tax planning practices falling outside of unilateral anti-avoidance rules.