How to achieve fairer tax rules?

The European Commission has recently decided to open up a new chapter in its campaign for fair, efficient and growth-friendly taxation in the European Union with new proposals to tackle corporate tax avoidance. The Anti-Tax Avoidance Package (ATA) tells Member States to take a stronger and more coordinated position against companies that seek to avoid paying their fair share of tax and to implement the international standards against base erosion and profit shifting.

The European Commission, on 28 January this year, produced as a key part of its anti-tax avoidance package, a proposal for a directive laying down rules against tax avoidance practices. This proposal mostly draws on measures contained in the OECD/G20 base erosion profit shifting (BEPS) final reports, as well as in the Commission’s 2011 proposal for a common consolidated corporate tax base (CCCTB).

The importance of these instruments comes basically from the idea that corporate tax avoidance deprives public budgets of billions of euros a year, creates a heavier tax burden for citizens and causes competitive distortions for businesses that pay their (allegedly) fair share of taxes.

As Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Billions of tax euros are lost every year to tax avoidance – money that could be used for public services like schools and hospitals or to boost jobs and growth. Europeans and businesses that play fair end up paying higher taxes as a result. This is unacceptable and we are acting to tackle it. Today we are taking a major step towards creating a level-playing field for all our businesses, for fair and effective taxation for all Europeans.”

The proposal contains anti-tax avoidance suggestions in six specific fields:

• Interest limitation: The Member State will put a fixed limit on the amount of interest that the company can deduct and will tax the excess. This should discourage companies from shifting their debts to a certain location purely to reduce their tax bills.
• Exit taxation: The Member State where the product was originally developed can tax the company on the value of this product before it is moved abroad. As such, taxation better reflects where the economic activity takes place.
•  A switch-over clause: The EU Member State will tax the inbound dividends that company X receives, if they are not effectively taxed where company Y is based. As such, the income is effectively taxed, on the same basis as it would have been had company X invested in a company in its own Member State.
• A general anti-abuse rule (GAAR): It would allow tax authorities to ignore wholly artificial tax arrangements and tax on the basis of the real economic substance.  
• Controlled foreign company (CFC) rules: The EU Member State can tax the insurance company’s profits as though they had not been shifted to the no-tax country, thereby ensuring effective taxation at the tax rate of the Member State concerned.
• A framework to tackle hybrid mismatches: The Directive proposes that in the event of such a mismatch, the legal characterization given to a hybrid instrument or entity by the Member State where a payment originates shall be followed by the Member State of destination

The European Commission also released a recommendation that member states should include a principal purpose test in their Double Taxation Treaties in order to avoid creating opportunities for treaty shopping.

In addition, the EU Commissioner has stated that the Commission supports that multinationals should have to publicly disclose certain information on a country-by-country basis following an additional impact assessment.

Taking into account the new tax age, Telefonica has expressed its will to contribute to improve the tax transparency and introduce “the Fair Tax Level”. A first step to achieve this was our collaboration with the Commission showing them our practical point of view about this issue in a document.

To sum it up, we believe that encouraging companies to duly comply with any and all tax obligations should be enforced by tax law and the relevant tax authorities and also by rewarding tax behaviours that prove valuable for the countries and societies where the relevant companies operate.

In this sense, a Fair Tax Label should be created in order to recognize companies that prove that a both certain level of tax indicators are met and a certain Tax Control framework is in place.

Some of this indicators are, for example:

• Existence of a tax strategy approved by the Board of Directors and of a tax code of conduct.
• Appropriate corporate governance arrangements in place to manage tax responsibilities.
• Existence of a tax control framework approved and monitored by the Board of Directors.
• Adhesion to voluntary tax governance programs with the tax authorities.

If we speak about the Tax Control Framework, we have some indicators to be sure that the demanded requests of efficiency and transparency are met:

• Key people within the business should ensure that governance arrangements are being met by means of appropriate oversight, sound systems, clear accountabilities, strong controls, ethical behaviours and highly skilled people supported by robust processes and procedures.
• Processes in place to identify and detect tax risks and tax risk factors; internal control systems to handle any risks discovered; management of tax-related information, and existence of tax information databases for information and data sharing to be in place

Should the above described indicators be accomplished, companies could in return of their proved enhance tax behaviour be eligible for certain recognition, which could be somehow pictured as follows:

1)            In terms of benefits on public tendering and exposure.

a)            Disclosure of taxpayer risk qualification should be compulsory.  This will highly improve tax-related corporate social responsibility reputation relevance.

b)           Unavoidable requirement before obtaining any public aid.

c)            Special treatment for public tenders.

2)            In terms of tax audits.

a)            Limited tax audit i.e. focused on covering tax risk areas. Fewer and faster interventions both saving resources for the related tax administration and the tax payer.

b)           Reduced penalty regime and concessional treatment of interest

c)            Binding criteria determined during tax audit procedures and observed by the tax authorities in subsequent tax audits

d)           An agreed plan outlining specific processes and timelines for tax audit

e)           Speed up open audits process to move to a “current tax audit system” and current audit working under a defined review process: move from transaction review to process audit specifically designed for the company.

3)            In terms of agreements and resolution disputes

a)            Prioritized APA’s access and resolution of mutual agreement procedures.

b)           Faster resolution of technical questions by means of a centralized office.

c)            Ongoing dialogue on technical matters – real-time discussions binding the audit team with a wider access to senior tax officers. Wider transparency of the tax authorities regarding the definition of forbidden tax schemes.

d)           In-advance disclosure of the criteria to be applied in tax audit procedures and extension of thresholds for correcting errors without interest or surcharges

Therefore, we fully share Commission´s plans in order to get an appropriate regulation to avoid the erosion and profit shifting in multinationals. We strongly support the proper use of international treaties to get a common tax environment. And finally, we are working actively to achieve a good & fair tax system which is crucial for growth and poverty reduction.

We hope that such good example and responsible behavior will show the way for other multinationals and thereby help to create a better and fairer international tax system.