International tax avoidance is nothing new, especially not in the era of the “global” economy, which is now, more accurately, the digital economy, which has perhaps come to be synonymous with the economy (1).
But the consolidation of this definition doesn’t mean its component parts have merged. International tax law, in particular, is more form than substance, despite strategies to minimize corporate tax burdens—and contesting these practices—having been in the works for years.
To begin with, “By definition, there is no such thing as international tax,” says Joan C. Arnold, partner at Pepper Hamilton, Philadelphia. “There is just the taxation of each government around the world.” Right out of the gate, it becomes obvious that there are particular challenges to working strictly in theory.
Add to the abstract definition that, like every facet of the law, “tax law…has a hard time keeping pace with technological developments, as well as the changing fads in how technology is used,” says Howard M. Liebman, partner at Jones Day in Brussels, Belgium.
The global economy has also buttressed executives’ abilities to ditch the bricks and mortar. “The mobile nature of executives and the mobile nature of functions have put a lot of stress on our historic tax concepts,” Arnold says.
“As usual, the U.S. is the ‘elephant in the room….’ Word on the street is that the U.S. seems to feel that its rules already embody what is necessary.”
Public opinion and events have ripple effects, too, such as “the banking crisis in 2008-2009…[when] taxpayers became more attuned to and concerned with the issue of corporations being able to minimize their taxes,” Liebman says. And the negative spotlight influenced other countries, including “a lot of the developing countries trying to understand how they get their piece of the economic pie,” Arnold says.
“I find the biggest risks in international tax law to be the overall increasing uncertainty and the evaluation of form and contract in comparison to economic substance,” says partner at Borenius Attorneys in Helsinki, Finland, Janne Juusela. Substance over form is an accounting principle that favors financial reality over legal transaction, but substance doesn’t win out in every country. This lacuna illustrates how cultural ideologies create loopholes in the first place—laws are interpreted country by country.
In response to the confluence of attitudes and public opinion, starting in 2013, the Organization for Economic Cooperation and Development (OECD) went to work on eradicating questionable international tax structures. In October 2015, the OECD rolled out its recommendations for Base Erosion and Profit Shifting (BEPS). The publication premiered amid headlines calling out Starbucks, Etsy, and Fiat for aggressive tax plays—though, it is of note that none of the limelight loopholers have been accused of actually breaking any laws.
“U.S. companies that operate outside of the U.S. have every incentive to structure their transactions in the way that Starbucks and others have done,” Arnold says. BEPS’s purpose is to build a dam, to plug the holes.
“Project BEPS aims at preventing the exploitation of the differences between different national laws and tax systems, for example, by limiting the deduction of interest expenses and neutralizing the effects of hybrid instruments,” said Juusela.
Defining international tax law is probably still a ways off. “The OECD has made great strides. But it has to always be borne in mind that whatever the OECD devises are guidelines only. Countries can take them in whole or in part or not at all,” adds Liebman. Countries can claim to honor both the substance and the form of BEPS and yet still come up with wildly different practices. And, “As usual, the U.S. is the ‘elephant in the room….’ Word on the street is that the U.S. seems to feel that its rules already embody what is necessary.” And even as it resolves some issues, BEPS might create new problems. “Possible increases in international tax disputes, the elimination of double taxation, and the increased discretion of tax authorities,” are some such concerns to which Juusela points.
Plus, an indirect result from BEPS is the European Union adopting the spontaneous exchange of tax rulings. “For example,” Arnold said, “in the Starbucks case, the Dutch ruling, if it were going to be obtained now, would also be spontaneously delivered to the Swiss tax authorities. The two tax authorities could piece together better what the taxpayer is attempting to do, which is a very big change.” Arnold emphasized her biggest trepidation is about how new reporting obligations affect privacy.
Despite the law playing catch-up and the global and digital economies becoming synonymous, current legal attitudes are not sounding alarm bells—so far, there doesn’t seem to be cause for creating an entirely new system. “One need not overstate this case. Technological advances, from e-mails to texting, do not always require a change in tax law,” said Liebman. Arnold adds that when OECD asked itself this question in BEPS, the ultimate answer was no.
The changes are not going to occur overnight, in any case. “It is not at all clear to me that we can expect to see major international tax reform measures coming out of the U.S. when we are heading into an election year,” said Liebman. And that goes for both the elephant, and the donkey, in the room. For now, some countries are shifting toward compliance, while much of BEPS will begin to take effect around the world in 2016.
(1) OECD BEPS executive summary from 2014
Best Lawyers Winter Business Edition 2015 / Laura Standley
