In his article “International Tax Planning, Ethics and our New World” (Bulletin for International Taxation, 2018 (Volume 72), No. 2), Hans van den Hurk lays out his personal views on the status of international taxation, focusing on the ethical problems and dilemmas for tax specialists in a post-BEPS world. Considering that I have frequently urged tax specialists and academics to voice their concerns regarding the demonization of multinational enterprises and the demands for stricter rules and centralized enforcement, I want to seize the opportunity to comment on some of the issues raised by Mr. van den Hurk.
I want to start by admitting that I greatly enjoyed reading his article. Not only because I share many of his views, but also because he emphasizes that the concept of “fair taxation” is much more complicated than the one-sided public discourse suggests. He identifies the current perception of tax lawyers as constructing morally unacceptable structures as the main reason for tax planning being on the agenda of every country in the world. Because of the moral outrage, we witness multiple interest groups finding great support in their push for stricter legislation. As pointed out by Mr. van den Hurk: “Under pressure from politics and non-governmental organizations (NGOs), new legislation is being prepared by countries and organizations, including the European Union, to ensure that, ultimately, the world will be a more honest place.”
If those of us committed to pushing back want to have any impact, we ultimately need to change the perception of the morality (or lack thereof) in the realm of international taxation. It is time to expose the fact that the notion of “fair taxation” is abused as a weasel word by groups interested in curtailing tax competition and claiming the moral high-ground.
Tax evasion cases are being abused for the purposes of condemning tax avoidance
One crucial aspect highlighted by Van den Hurk is that the current debate is being held outside the tax world and that it is dominated by people who do not really understand what is going on in international taxation. Van den Hurk links his statement to the confusion of tax evasion (illegal) and tax avoidance (legal) displayed by policymakers. He correctly emphasizes that the BEPS reforms were in principle only targeted at tax avoidance. Some of the tax planning schemes of MNEs such as Google or Amazon doubtless can be classified as tax avoidance.
Tax evasion on the other hand, as pointed out by Van den Hurk “is not a matter of consideration for multinationals, as no CEO wants to be jailed for tax fraud.”
In this context, it is important to clearly understand that the comprehensive reforms, notably of transfer pricing guidelines, which were initiated by the OECD BEPS project were targeted at limiting the most aggressive tax avoidance schemes by facilitating closer alignment between value creation and taxation. Still, scandals of (alleged) tax evasion such as the Panama Papers are frequently used as a means for propagating “that the world needs more weapons to fight tax evasion by multinationals” (Van den Hurk refers to EU Commissioner Pierre Moscovici in this context). The confusion between tax avoidance and tax evasion is one of the main reasons that the BEPS reforms often tend to be portrayed as being insufficient, which in return results in reforms on national level that overshoot the generally sensible objective of the BEPS reforms, i.e. by introducing overly strict (unilateral) anti-avoidance rules (see “overshooting” below).
While the observation of Van den Hurk is highly relevant and accurate, my interpretation is somewhat less magnanimous. I contend that the people dominating the debate (EU, NGOs – see below) understand quite well what is going on and deliberately contribute to the confusion to castigate MNEs and to further their own agenda. This issue is closely tied to the inflated tax gap figures that are frequently propagated in an effort to dramatize the economic scale of tax avoidance (see Cayman Financial Review, Issue 47 on how tax gap estimates are abused to promote a tax-grabbing agenda).
The (unintended?) consequences of overshooting the objective of creating a fairer tax system
While one can debate whether all the items contained in the OECD BEPS project are sensible, I particularly support the effort by the OECD to modernize the arm’s length principle (see Cayman Financial Review, Issue 48). Van den Hurk seems to be, generally, on the same page, as he finds that “[t]he guidelines set out under the OECD’s BEPS plans provide a very good basis [for fair taxation]” and that “[…] the OECD has set clear boundaries within which tax planning is acceptable.” The BEPS reforms, therefore, do reflect an adequate and (for the most part) proportionate response to those instances of tax avoidance (Google or Amazon) that took advantage of an “outdated” arm’s length principle.
It is not the BEPS project which constitutes the core problem for MNEs in terms of increased compliance costs or potential double taxation, but rather the overzealous (unilateral) implementation by national tax authorities. With many countries using the BEPS reforms only as a minimum level upon which they layer ever more restrictive national rules, the boundaries set by the OECD are becoming increasingly blurred and restrictive. Van den Hurk sums it up nicely: “[BEPS] was initially instigated to create a fairer tax system. It now seems to have exceeded that objective by shifting from being unfair to countries due to tax avoidance structuring by companies in the pre-BEPS world to being unfair to companies due to divergences in implementation of new tax rules with double taxation as a consequence in the post-BEPS era.”
What bothers me most in my day-to-day transfer pricing practice, are 1) cases in which tax auditors attempt to make transfer pricing on formal grounds (i.e., referring to some idiosyncratic national regulation while ignoring the OECD Guidelines that are based on economic substance) and 2) having to waste my clients’ time to ensure compliance with excessive documentation requirements that bear no sensible relation to any potential scale of tax avoidance (Poland and Romania easily feature some of the most business unfriendly national regulations in this respect).
Especially when dealing with SMEs where tax avoidance is almost a non-issue, tax authorities should refrain from imposing strict national regulations. I would suggest that below a transaction volume of €10 million, there is no requirement for any specific national regulations. Integrating a general reference to the applicability of the OECD Guidelines into national law and the obligation for taxpayers to demonstrate compliance with these guidelines upon request (without requiring formal documentation) would be sufficient to safeguard the national tax base. Hence, I wholeheartedly agree with the demand of Mr. van den Hurk that national tax authorities should interpret BEPS not merely as a minimum level and refrain from creating new rules, “[…] all kinds of new rules which lead to double taxation, should be a ‘no go.’”
The questionable morality of NGOs and the EU – what about competitiveness?
NGOs such as Oxfam or the TJN are the forefront of those ostracizing tax competition and tax planning of MNEs for being “inherently evil.” Based on inflated tax gap figures they demand stricter rules and more (maximum) transparency (i.e., public country-by-country reporting). I am often baffled by the political impact of their shoddy research on policymakers and was relieved that Van den Hurk did not pull his punches in this respect. On the issue of tax transparency, he highlights the implausibility of Oxfam’s ranking of tax havens that ranks the Netherlands in third place while featuring neither the United States nor the U.K.: “When asked how this was possible, the head of Oxfam’s research team replied that all countries in the world known for their tax planning strategies had received an enquiry, which was then responded to by some countries, such as the Netherlands, but not by others, including the United Kingdom and United States. In other words, transparent countries are included on the list, whereas the non-transparent ones are not. From a research perspective, this is the worst possible approach to take. And although, in the author’s opinion, Oxfam has instantly disqualified itself as a result, the report is considered proof of the fact that the rules should be changed more rapidly.”
The respective NGOs believe that the (separate entity-based) tax system is custom made to be exploited by MNEs and, more generally, tax competition facilitates poverty. While they naturally claim to be acting in the best interest of humanity, it would certainly not hurt to take their research with a grain of salt. Even those who share some of the ideals and goals of these NGOs should question the morality in this “whatever-it-takes” attitude and furthering their cause with such one-sided research. Also, as pointed out by Van den Hurk “[n]o NGO has mentioned the difficulties companies have in facing new rules with double taxation as the main consequence.” I would venture to suggest that this is because they never cared all that much about an efficient or at least sensible tax system to begin with, but rather with a more equitable (equal) distribution of income.
While publishing shoddy research to save humanity can arguably be forgiven, deliberately utilizing such obviously misleading research in a strive for political power, i.e., to advance a centralist agenda, seems at least morally questionable. The European Commission has long been propagating formulary apportionment (i.e., the Common Consolidated Corporate Tax Base) as a “fair alternative” to the arm’s length principle. It would be just plain naïve to disregard the political agenda, i.e., creating additional competencies and an increased EU budget (see Cayman Financial Review, Issue 50).
In this context, Van den Hurk, hailing from the Netherlands, enriches the discussion by directing the focus on the issue on the lack of competitiveness. As I will voice some disagreement with respect to his interpretation of this issue, I want to quote Mr. van den Hurk in full: “[…] why do French and German politicians have such a strong focus on the full harmonization of direct taxes? Is it because they wish to create a better world? No, their aim is to generate more taxable income within the European Union, perhaps even within their own Member State’s territory. […] Why does Germany mind the fact that so many German companies have their headquarters in the Netherlands? It is simply because Germany misses out on a significant amount of revenue. As a result, through harmonization of the tax rules, the future roles of Ireland and the Netherlands (and other small countries that are characterized by the provision of services) will be limited. […] Many believe that this is a fair approach. However, the author is of the opinion that there are many reasons why a small economy is unable to compete with large economies. Competition between countries is not just about taxes. It is about all kinds of factors, such as education, infrastructure, culture, prices and salaries […] Therefore, comparing Member States based on their tax systems only, and concluding that Ireland, the Netherlands, etc. have unfair systems, is only one part of the process.”
From my point of view, Mr. van den Hurk is 100 percent correct in emphasizing that the only aim of the proponents of full harmonization is the elimination of tax competition. He is also correct in highlighting that countries compete not just about taxes. At the end of the day, these people do not care about taxation. What they primarily care about is increasing their national tax base to secure sufficient financing for keeping their welfare states afloat. If overshooting BEPS or even adopting formulary apportionment helps, they do not care about collateral damage such as increasing the compliance burden for MNEs or changing the very paradigm of international taxation. I would, however, suggest that Mr. van den Hurk’s notion that “there are many reasons why a small economy is unable to compete with large economies” misses a crucial point. It seems rather to be precisely because of the capability of these small economies to compete not just about tax, but rather about productivity in general that the big economies feel the need to throw their political weight around. Taxation just happens to be a policy area in which they can score some easy points. Pursuant to the composite Global Competitiveness Index of 2017 – 2018 (World Economic Forum) the Netherlands are ranked 4th, while Germany is ranked 5th and France 22nd. Especially France, whose competitive ranking deteriorated rather drastically during the last two decades (down from the 9th place – ahead of Hong Kong – in 1999), has a pronounced interest in curtailing competition – and not just competition about tax, but also in other dimensions of competitiveness. As highlighted by the World Economic Forum with respect to France: of “particular concern are a weak macroeconomic environment (63rd) and historically fairly rigid labor markets (56th). In a continuation of last year’s trend, the country’s perceived capacity to attract talent falls 10 spots to 61st.” So, if France (or President Emmanuel Macron) champions the CCCTB and a minimal tax rate, you may naturally wish to the believe that his mind is set on “fair taxation,” but you may just as well wonder whether his intentions are really that pure. The EU acting as a guardian of fair taxation? Well, maybe somewhere along the lines of “the less the people know about how the sausage and laws are made, the better they sleep in the night.”
Time to push back
BEPS is obviously not the last word on international taxation. The next big issue will be finding sensible rules for the digital economy. As discussed by Van den Hurk, much will depend on finding consensus on technical issues, i.e., on whether the OECD proposal will contain sensible provisions for issues, such as a significant economic presence and effective ways for profit allocation. If we want to prevent further overzealous policies, it might, however, be just as important to prevent the proponents of tax harmonization from continuing to capture the moral high-ground. So, to conclude with a final citation of Mr. van den Hurk: “Fair taxation has two sides. While companies should pay their fair share, it is clearly unfair when they are required to pay more than is necessary based on new international concepts. The author is concerned that such unfairness will outweigh the fair share part, which, in his opinion, is unacceptable.”