The following points highlight the top six anti-avoidance measures for taxation. The measures are: 1. Exchange of Information 2. Transfer of Tax Residence and Exit Taxes 3. Exchange Controls 4. Branch Profits Tax 5. Use of Tax Havens 6. Anti-EC Directive Shopping Legislation.
1. Exchange of Information:
The controls over international tax avoidance and evasion suffer from inadequate information on taxable cross-border transactions. Several countries compel their taxpayers to provide information on certain international transactions under their tax laws or under exchange controls (Examples: Brazil, France, Germany, South Korea, Norway, and United States).
The exchange of information under tax treaties and various conventions is a further measure to ensure domestic and international tax compliance.
The double tax treaties include an “Exchange of Information” Article (OECD MC Article 26). Under this Article, the tax authorities may exchange information that is necessary for the compliance with the treaty provisions and domestic taxes, except when they contravene the treaty provisions.
The tax authorities may share the tax information on residents and nonresidents, provided it does not conflict with their own national laws and administrative policies, and the disclosure is not against public policy.
As an anti- avoidance measure, the OECD MC also now contains a new Article 27 for Contracting States to provide comprehensive assistance to each other in the collection of taxes.
The OECD Commentary clarifies that the information under such arrangements may be supplied in a number of ways:
i. Under a routine exchange, information is supplied to a treaty partner automatically without any prior request, as the information comes to the attention of the relevant taxing authority (e.g. documents which reflect payments made in one country to a resident of the treaty partner).
ii. A specific exchange is initiated by a request from the treaty partner for specific information about a particular taxpayer.
iii. A spontaneous exchange is generated when one taxing authority discovers, during the course of an examination or investigation, non-compliance with the treaty partner’s tax laws.
iv. In a simultaneous audit the tax authorities in both treaty countries independently examine affiliated taxpayers in their respective jurisdictions. The tax officials meet periodically to evaluate the progress of the case and to exchange information in accordance with the treaty provisions. The information obtained during such exchanges is used to supplement information supplied by the taxpayer.
The information may also be communicated to the taxpayer, but he has no right either to object or to be informed about such disclosures to the tax officials. Moreover, the authorities are not required to provide any information not normally obtainable under the taxing powers of either country or to divulge any commercially sensitive data.
Several international documents also contain clauses for mutual administrative assistance in tax matters.
(i) The 1977 EU Mutual Assistance Directive;
(ii) The 1981 OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims;
(iii) The 1984 United Nations Department of International Economic and Social Affairs Guidelines for International Cooperation against the Evasion and Avoidance of Taxes; and
(iv) The 1988 OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters.
Other efforts at the regional level include the 1989 Nordic Convention on Mutual Assistance in Tax Matters among Scandinavian countries, and the agreement to avoid double taxation between member countries in Latin America under the Cartagena Agreement. The multilateral conventions on information exchange tend to be more comprehensive than the treaty provisions.
The EU Mutual Assistance Directive 77/779/EEC (as amended) provides for mutual assistance on tax matters among tax authorities of the Member States of the European Union.
It permits spontaneous exchange of information within the European Union, but any request must relate to a specific case. It also permits response to mutual tax enquiries and presence of a tax agent to monitor taxation of multinationals. Its primary objective is to strengthen the co-operation among the tax authorities within the European Union to combat tax avoidance and evasion.
The OECD Convention on Mutual Administrative Assistance in Tax Matters of 1988 provides wide powers for the assessment and collection of tax and the recovery and enforcement of mutual tax claims.
Besides the exchange of information, a State may request the assistance from another State to recover tax claims, as if they were its own claims. It may also request measures to protect its fiscal interests through the seizure or freezing of assets.
It may request the serving of documents to the taxpayer in another State. Moreover, the two tax authorities may conduct simultaneous tax examinations or “joint fiscal audits” of taxpayers.
Recent developments include the Model Agreement on Exchange of Information on Tax Matters issued by the OECD in 2002 under its Harmful Tax Project initiative. The Agreement binds the competent authorities of Contracting States to provide assistance through exchange of information relevant for the administration and enforcement of their respective tax laws.
The Agreement contains models for both bilateral and multilateral agreements. There are 16 Articles with detailed Commentary.
Some of its salient features include:
i. It has a wide scope and includes all direct taxes, including taxes on income, capital, wealth and estate, inheritance or gift taxes, and any other taxes listed in the Agreement (Article 3).
ii. Information must be provided on request by the competent authority of the applicant party (Article 5).
iii. The requested State must make best endeavours to meet the request, even if not needed for its own tax purposes.
iv. The competent authorities of the two States must have the necessary authority to obtain and provide upon request the tax information held by third parties, such as banks, trusts, etc.
v. With few exceptions, they must have access to provide ownership information (legal and beneficiary) of taxable entities.
There are, however, certain circumstances when the request for tax information may be declined by the requesting party (Article 6).
i. The information is not obtainable under its own laws by the applicant party.
ii. Information is not relevant to the tax affairs of a given taxpayer. Fishing expeditions are discouraged.
iii. Information that would disclose any trade, business, industrial, commercial or professional secret or trade process, or against public policy.
iv. Confidential communications between a client and his lawyers when provided as legal advice or for use in legal proceedings.
v. Information that discriminates against a national of the requested party when compared with a national of the other party under similar circumstance.
vi. Information not in the possession or control of the authorities or any person within their jurisdiction.
The Agreement ensures that the information is treated as confidential and used only for tax purposes (Article 8). There is an Article to provide for a mutual agreement procedure to resolve difficulties or doubts between the Contracting States (Article 13).
The Model also mentions time deadlines within which the requested competent authority must inform the applicant competent authority (Article 6). Other articles are primarily of an administrative nature.
The new Model Agreement goes significantly beyond the scope of the OECD MC Article 26 or the OECD and EU Conventions. For example, there is no dual criminality principle. The information has to be provided if it conforms to the laws and practices of the applicant party. The competent authorities are also obliged to have the authority to obtain and to provide information on beneficial ownership of entities upon request.
In late 2001, the United States launched its own tax information exchange programme with offshore financial centres with provision for exchange of information on civil and criminal tax matters affecting US federal tax laws. Several countries have so far signed this agreement.
2. Transfer of Tax Residence and Exit Taxes:
Certain countries regard a transfer of residence as a form of tax avoidance and have enacted specific anti-avoidance measures to prevent tax avoidance through emigration. In jurisdictions with a worldwide tax regime, the taxpayers when they become nonresidents are no longer liable to pay taxes on their foreign source income.
Moreover, the gains on movable property accrued during the period of residence but not realized at the time of departure also escape taxation.
Some examples include:
(a) Transfer of residence:
Many countries require their residents to pay domestic taxes on their worldwide income for a specified period after their departure from the country on the future income.
Germany subjects its long-term resident nationals to extended unlimited taxation if they immigrate to a low-tax country (defined as less than two-thirds of the German tax rate) but maintain their essential economic ties with the country.
These economic ties are presumed, if:
(i) The person holds a substantial shareholding in a German resident company (any activities as an entrepreneur/sole trader, any participation as unlimited partner in a partnership, a more than 25% interest of a limited partner in a partnership, at least a 1% shareholding in a corporation), or
(ii) The receives income from Germany in excess of either 30% of his worldwide income or EUR 62,000, or
(iii) If the total assets producing German taxable income exceed either 30% of the total amount of assets or EUR 154,000. He remains taxable for ten years on all German source income without any credit for foreign taxes paid.
In addition, an individual who holds 1% or more of the shares in a corporation and transfers tax residence out of Germany is subject to tax on any built-in gain in the investment upon transfer of residence.
However, in response to an ECJ decision on the French exit taxation rules (see below) the tax now no longer becomes due upon transfer of residence to another EU Member State. The individual is obliged to inform the tax authorities once he disposes of the shares.
If an individual gives up his or her US citizenship or long-term permanent US residence, the United States continues to tax the individual as a US citizen or resident for ten years on his or her US source and effectively connected foreign income if:
i. The person’s “average annual net income tax” exceeds USD 124,000 for the five taxable years ending most recently before he or she lost US citizenship;
ii. His or her “net worth” was at least USD 2 million when he or she lost US citizenship; or
iii. He or she “fails to certify under penalty of perjury that he has met the requirements of” the Code for the five preceding taxable years or “fails to submit such evidence of such compliance as the (IRS) may require”.
In specific circumstances, exemptions from this tax regime may be granted to certain persons with dual citizenship and persons whose parents are not US citizens.
Individual taxpayers retain their tax residency for a specified period if they continue to maintain their economic and family ties after their transfer of residence from the country. The period varies from three years in Finland to four years in Portugal and five years in Spain and Sweden.
Italians emigrating to low or nil tax jurisdictions remain tax residents unless they can prove that they are living and working in that country. In Mexico and Switzerland, the residence status is lost only if an individual acquires tax residency or domicile in another country.
Portugal deems an individual as tax resident for four years if he emigrates to a low-tax jurisdiction listed as a tax haven under a government Decree. This provision does not apply if the taxpayer can demonstrate that the transfer of residence was not tax-motivated.
(b) Exit taxes:
Most countries take the historic cost as the base for tax purposes for individuals and do not tax them on unrealized capital gains prior to emigration. However, there are a few countries that apply an exit tax on the latent capital gains earned on movable property owned by emigrant individuals.
Australia and Canada:
Australia and Canada impose an exit or “departure tax” on capital gains when an individual emigrates and ceases to be a tax resident. He is deemed to have disposed of the whole of his assets (other than assets with the necessary connection with Australia or Canada) at the fair market value at the time of emigration.
The payment of this tax may in certain cases be deferred until the actual disposal of the assets.In both countries, an immigrant is deemed to have acquired his assets at the market value on his arrival and taxed only on the gain prior to departure.
Therefore, the capital gains tax is only imposed on the latent gains during the period of residence. In Canada, the taxpayer can elect to unwind the deemed disposition if the person re-establishes residence.
Special exemption provisions exist for individuals whose stay does not exceed five years. In Australia, an individual is not liable to departure tax on assets owned prior to immigration, if he has resided for less than five years out of the ten years before departure. Canada allows the immigrant to set up a trust for five years on assets brought on immigration into Canada.
Subsequent to the ECJ decision in Hughes de Lasteyrie du Saillant (see below), an application to defer the taxation of unrealized gains may be made where an Austrian tax resident transfers either the assets of its domestic permanent establishment or its permanent establishment from Austria to another Member State.
This rule also applies in specified circumstances to transfers to a country that is a member of the European Economic Area (EEA). Unrealized gains are taxable (retrospectively) only upon sale of the relevant assets or on a subsequent transfer to a non-EU/EEA country.
A step-up in the tax basis of the assets is granted if a business (or part of a business) is transferred to Austria. Therefore, only unrealized capital gains relating to the period after the transfer to Austria are taxable upon realization.
France introduced an exit tax for emigrating French tax residents in 1999 under section 167 of the French Tax Code. They are taxable on the latent capital gains derived from participations of 25% or more that are held directly or indirectly through family members.
The European Court of Justice held in Hughes de Lasteyrie du Saillant v Minister de I’Economie des Finances et de I’Industrie (case C-9/020) that the French exit tax was incompatible with the provisions under the EC Treaty. In its view, the exit tax provisions were disproportionate to the need to prevent tax evasion.
In 2002, Ireland introduced an exit tax on individuals who move overseas for tax reasons. Shareholdings worth more than EUR 500,000 or 5% of total equity are subject to capital gains tax as deemed disposal in the final year of residence if they return within five years of their departure.
Israel imposed an exit (or emigration) tax under its 2002 tax reforms as from the year 2003. On emigration, the capital assets are deemed to be sold the day before the cessation of residence and are subject to capital gains tax.
If the tax is not paid on the deemed sale, the tax is presumed to be deferred until the asset is actually sold by the taxpayer. The tax is levied on the excess of the fair market value over the acquisition value pro rated to the period of tax residence. No relief is given for any actual loss on the ultimate disposal of the asset.
Israel provides an exemption for ten years from capital gains tax on any value appreciation on assets acquired abroad and brought into Israel by an immigrant or a returning resident. If the asset is sold after ten years, only the gain derived after the exempt period is taxable.
Denmark, France, Germany, Luxembourg, the Netherlands and Sweden also apply a limited exit tax on the unrealized gains from substantial shareholdings held by emigrants. In Denmark, the tax on the deemed gain only applies to individuals, who were resident in at least five out of ten years prior to departure.
The transfer of corporate residence or migration may lead to tax and commercial or civil issues.
(a) Transfer of residence:
The transfer may either require the company to be wound up or deemed as liquidated in several civil law jurisdictions (Examples: Australia, Belgium, France, Denmark, Germany, Italy, Luxembourg, Mexico, Netherlands, Norway, Sweden).
The legal status in Germany depends on the place of its head office. If a German company transfers its head office abroad, the law will dissolve it. A foreign company cannot transfer its registered office to Germany.
Similarly, if a Dutch company moves its effective management abroad, it ceases to exist under the Dutch civil law. In some countries, it may also lead to the taxation of hidden reserves (Examples: Austria, Germany).
(b) Exit taxes:
Certain countries impose an “exit tax” when a company ceases to be resident in their jurisdiction. The company is subject to a capital gain on its deemed sale (Examples: Austria,Canada, France, Ireland, Netherlands, Spain, United Kingdom, and United States).
In Ireland, an exit charge is imposed as capital gains tax if a company ceases to be tax resident. All the assets are deemed to be sold at the market value and reacquired on the same date, unless the assets are used to carry on business through a taxable branch in Ireland.
This exit charge does not apply if 90% of its share capital is held by a foreign company resident in a treaty country. Similar exit tax applies in the United Kingdom. Canada levies a 25% exit tax on the undistributed surplus if a company ceases to be resident. In Spain, the exit tax applies unless the company retains a permanent establishment in the country.
(c) European Union:
Article 34 of the French Tax Code provides that when the French head office of a company is transferred to another Member State of the European Union, the provisions usually applicable to the cessation of activity no longer apply.
This amendment was made to ensure compatibility with the principle of freedom of establishment of the European Union, as well as, among others, Article 8 of the 2001 Regulation of the European Council on the statute for a European company. When the transfer is accompanied with the sale or the transfer of assets to the recipient country, the gains of such sale or transfer nevertheless remain taxable.
The European Union has also introduced provisions for an EU-wide corporate entity called Societas Europeae or SE and tax-free corporate restructuring without liquidation under the EC Merger Directive.
3. Exchange Controls:
Exchange controls and tax clearances may be used by countries as anti-avoidance measures on cross-border transactions. These transactions are subject either to prior government approvals or to post-transaction reporting of income or capital flows.
For example, Canada requires its residents to report all foreign investments in excess of Can. Dollar 100,000 to the tax authorities, even if not taxable. Certain direct investments must be reported in France.
Israel requires reporting of transactions over USD 5 million involving residents. In Italy, transfer of securities and money over EUR 10,329 must be reported to the Italian Exchange Office. In Sweden, all payments within and outside Sweden over a specified amount must be reported to the Swedish Tax Agency.
Several other countries with liberal or no exchange controls still require regular reporting of transactions with nonresidents for statistical purposes (Examples: Australia, Austria, Belgium, France, Hungary, Japan, Spain).
Many countries (mostly developing countries) still have partial or full exchange controls on current and/or capital account that monitor tax issues on cross-border transactions. For example, foreign outbound investments may require the domestic undertakings to repatriate profits and to comply with regular reporting requirements.
Foreign exchange earned may have to be surrendered to the exchange control authorities or at least reported to them. The payment of dividends, interest and royalties to foreign investors may be subject to exchange control approval.
The authorities may question the transfer pricing on such transactions. Moreover, the information obtained for exchange control compliance may be provided to the tax authorities.
Besides conserving foreign exchange, they may be used to counter tax avoidance. Due to their impact on international trade and commerce, exchange controls are not deemed a desirable anti-avoidance measure for tax purposes.
A review of a list of countries suggests that a large number of countries still impose full or partial exchange controls over their residents. In recent years, many of them have liberalised their rules, particularly on current account transactions.
4. Branch Profits Tax:
Under the classical system of taxation, the host country taxes the corporate profits twice. The profits are taxed at the company level and then again when the company pays a dividend to the shareholders. Most countries do not tax the remittances of after-tax branch profits to nonresidents.
A branch entity, therefore, avoids this economic double taxation. Several jurisdictions regard the use of a branch as an unjustified loss of the tax revenue that would have been due to them as dividend withholding taxes from a subsidiary. Therefore, they levy an additional tax either on the branch profits or on remittances to the head office. The form of the tax varies.
i. Some countries impose a higher corporate tax rate on the branches of nonresident companies than on resident companies (Examples: Bangladesh, Fiji, India, Kenya, Paraguay, and South Africa).
ii. Certain countries charge an additional tax on the remittances made by permanent establishments to the head office (Examples: Canada, Chile, Costa Rica, Guyana, Hungary, Lesotho, Morocco, Philippines, South Korea, Spain, Sri Lanka, Thailand, Uganda, Uruguay, United States, US Virgin Islands, Yugoslavia).
iii. Several countries subject branch profits to a final remittance tax (Examples: Bangladesh, Barbados, Bolivia, France, Guinea, Indonesia, Ivory Coast, Lebanon, Panama, Philippines, Puerto Rico, Senegal, Turkey).
iv. A few countries impose an additional tax on the branch when the head office makes a dividend distribution out of profits earned by the branch (“secondary withholding tax”) (Examples: Australia, Congo, Namibia, United States).
A branch tax is imposed in Canada on all corporations, except Canadian corporations, carrying on business in Canada. The branch is liable to pay a 25% tax (or treaty rate) on any after-tax earnings that are not reinvested in the Canadian business.
In France, the after-tax income of a branch is subject to 25% (or treaty rate) substitute dividend withholding tax (branch remittance tax). As from 1998, this tax is not imposed on the branches of companies that are resident and taxable in other European Union countries.
Permanent establishments of branches of nonresident entities are subject to 15% branch remittance tax, unless an exception applies. Branches of EU resident entities are exempt from this tax.
In Sri Lanka, a 10% remittance tax is levied on nonresident companies as from April 2003.
A 15% final withholding tax is applicable on the profit remitted to head office, as a branch tax.
The remitted branch profits are taxed at 30% (or treaty rate) on the dividend equivalent amount, which is defined as the “effectively connected” earnings and profits of a US branch. The United States also imposes a special branch interest charge at 30% (or treaty rate) on the interest claimed for tax deduction in excess of the interest paid by the branch.
Net book income of a branch is subject to an additional tax of 34% if it exceeds the branch–‘s after-tax net taxable income. However, no additional tax is imposed on that excess to the extent the branch’s net book income is exempt from Venezuelan income tax.
The additional 34% tax, if applicable, is payable by the branch at the end of the taxable year, irrespective of whether the branch has made a remittance to its home office.
5. Use of Tax Havens:
Several countries have specific anti-avoidance legislation to limit the deductions of tax expense or grant of tax benefits to entities located in certain blacklisted countries.
Besides low or nil taxation, the blacklists generally include jurisdictions with financial secrecy, minimum reporting requirements, ring fencing, discretionary tax privileges, allowing ownership to be held in trust, no registry of companies and partnerships, no taxes on dividends and interest payments to nonresidents, etc.
Argentina lists approximately 88 jurisdictions as low or no-tax jurisdictions. The list is used primarily for inter-company pricing and treats transactions with persons in these jurisdictions as non-arm’s length transactions.
All transactions with them are regarded as between related parties, unless proven otherwise. Argentina also disallows any foreign credits on transactions with companies in the listed jurisdictions. Countries with tax information exchange agreements are delisted.
Royalties, management fees and interest charges paid to a person or entity in a listed tax haven are disallowed, unless they are justified payments and reasonable. The tax authorities give advance rulings.
In addition, foreign dividends received directly or indirectly by a Belgian company from tax havens do not qualify for the participation exemption. The Belgian list, issued in February 2003, contains 53 jurisdictions.
The transfer pricing rules apply to transactions with companies resident in nil or low-tax havens, whether or not related. In addition, they are subject to a higher withholding rate (usually 25%) on all taxable payments. Brazil has issued an official list of nil or low-tax countries. Low tax is defined as tax rates below 20%.
Therefore, the tax authorities also include under this provision transactions in unlisted countries that benefit from tax reductions or tax incentives to; reduce the tax level below the 20% threshold. In 2002, these transfer- pricing rules were extended to countries that provided for secrecy of ownership.
Tax deductions for interest payments to a foreign related party in a listed tax haven or under a contract not registered with the Brazilian central bank cannot exceed the LIBOR rate for six months’ US Dollars plus an annual spread of 3% for the loan period.
Under Article 238A CGI, a French taxpayer cannot deduct certain payments made to a person resident in a privileged tax regime, unless it relates to a commercially bona fide transaction and the payments are neither excessive nor abnormal.
As a general rule, a privileged tax regime is a jurisdiction with an effective tax less than two-thirds of the comparable French corporate tax on the same income. The tax authorities have also issued a non-exhaustive and unofficial “blacklist” of tax haven countries.
Italian resident companies may not deduct expenses relating to transactions with an enterprise, which is resident in a non-EU country with a preferential tax regime, unless it is engaged mainly in an industrial or commercial activity in its local market, or unless the transactions have been effectively realized and are connected with the company business.
A preferential tax regime is any country:
(i) With an effective tax rate less than 30% of the Italian rate on similar income, or
(ii) Without an exchange of information agreement with Italy.
The tax authorities have published a blacklist of such countries. This provision applies also to services rendered by independent professionals resident in a non-EU country with a preferential tax regime.
Under LCITA, if a Korean resident has, directly or directly, a 20% or more equity in a tax haven entity, the Korean entity is deemed to have received a dividend on a pro rata basis even if no dividend has been declared.
This rule does not apply if the entity has a fixed place of business and is engaged in an active business, provided it is not wholesale, finance, insurance, real estate, rental or service businesses.
As from 2006, any investment income paid to a foreign corporation resident in a specified tax haven is subject to a special withholding tax, unless it is made with the prior approval of the tax authorities.
The tax is refundable if proof of beneficial ownership is provided within three years. Currently, the jurisdictions specified are Labuan (Malaysia), Liberia, Liechtenstein, Marshall Islands, Monaco and Andorra.
Lithuania has anti-haven legislation under an official blacklist. Payment to such havens are not tax deductible unless the taxpayer can prove that they are bona fide business expenses of both parties, the foreign company has relevant business assets and the payments can be economically justified.
Mexico has an official list of 90 jurisdictions considered as preferential tax regimes (1996 list, as modified in 2005). Taxpayers must identify income from them separately and file an annual declaration reporting investments with relevant bank information.
Failure to do so within three months of due date is a criminal offence. Payments to entities in such jurisdictions are not tax-deductible and losses cannot be amortized unless proved to be arm’s length.
Expenses incurred by taxpayers on transactions with listed tax havens are not deductible, with certain exceptions.
The disallowance also applies to low-tax jurisdictions with an effective tax rate of either nil or less than half the rate in Peru, provided they meet one of the following additional conditions:
i. The jurisdiction does not provide tax information on its local companies;
ii. A tax benefit regime applies for nonresidents only;
iii. Beneficiaries of the tax benefit are not permitted to do business in the jurisdiction; and
iv. The jurisdiction promotes itself as a jurisdiction that can assist in reducing taxes in the home countries.
Peru has 43 countries or territories with low or no tax in its list.
Portugal has a specific provision (Article 59 CIRC) to disallow payments to nonresidents based in a blacklisted low-tax jurisdiction, unless the payments are reasonable and made for bona fide arm’s-length transactions.
Moreover, the payers may be subject to a penalty tax at 35% rate. The blacklist also applies to controlled foreign corporation rules and denies tax exemptions on capital gains and interest derived by nonresident entities located in such jurisdictions.
Spain has a well-developed and comprehensive set of rules in its domestic tax law to counter real or perceived loss of tax revenues through the use of certain tax havens by residents.
The anti-tax haven rules include:
(i) Expense disallowance of payments for expenses incurred,
(ii) The application of transfer pricing rules on transactions,
(iii) The disallowance of tax exemptions on income receipts,
(iv) Deemed income under CFC rules, and
(v) Deemed tax residency for emigrating citizens.
Moreover, under the recent Law 36/2006 on the prevention of tax fraud, foreign companies established in blacklisted tax havens and zero-tax territories can be deemed as Spanish tax residents under certain circumstances if the majority of their assets consist of Spanish property or shares.
Participation exemption on dividends and capital gains as well as expense deduction for services provided by residents of listed jurisdictions are disallowed, unless made for valid economic reasons. Dividends from a Spanish holding company paid to residents in listed jurisdictions or the sale of shares to them are subject to a special withholding tax.
Turkey enacted new anti-haven provisions in 2006. Payments made to corporations (including branches of resident corporations) in countries that are considered as promoting unfair tax competition are subject to taxation in Turkey irrespective of the fact that the payments are subject to tax or the receiving company is a taxpayer.
A 30% withholding tax is levied on such payments. However, no withholding tax is applied if the principal, interest and dividend payments over the loans are obtained from foreign financial institutions, and insurance and reinsurance companies. In cases where the profits are taxed under the CFC rules, the withholding taxes paid are offset against the corporate income tax payable currently in Turkey.
Payments made by a Venezuelan resident to low-tax jurisdictions are not deductible, unless the taxpayer can prove that they are made on an arm’s-length basis.
Costs and expenses incurred on investments made in low-tax jurisdictions are only deductible if:
(a) The taxpayer keeps its books and records in Venezuela in local currency under its accounting rules;
(b) The books and records are kept in Spanish, and
(c) Strict requirements regarding documentation are met.
Taxpayers with investments in low-tax jurisdictions are required to keep an account in their books of the gross income, dividends and other profits from all their investments in low-tax jurisdictions during the tax year.
They must also file an information return with their annual income tax return reporting details of these investments, and attach supporting documentation. These requirements must be met even if an investment in a low-tax jurisdiction is not subject to the tax transparency regime.
Some of the other countries with anti-haven legislation include Colombia, Greece, Hungary, Latvia, Poland, Slovenia and Ukraine.
6. Anti-EC Directive Shopping Legislation:
The EC Parent-Subsidiary Directive provides for tax concessions on dividends within the European Union. Several EU countries have enacted anti-abuse provisions to limit Directive shopping by non-EU residents.
Austria does not allow the benefits of the P-S Directive to non-EU residents under its anti-abuse regulations. The exemption depends on the written evidence of tax residence of the investor from the tax authorities in the other EU member State.
In France, the parent company must prove that the structure was not adopted primarily to obtain the dividend withholding benefit under the P-S Directive.
As an exception, it allows the Directive benefit if:
(i) The withholding tax on any direct dividend payable from the source country to the final non-EU shareholder is at least equal to the dividend withholding payment made by the French shareholder, or
(ii) The ownership structure was established before July 23, 1990.
Germany denies the benefits under the P-S Directive (and tax treaties) if:
(i) The shareholders in a foreign corporation would not be entitled to the benefits or relief had they received the income themselves,
(ii) The foreign corporation has no business activities, and
(iii) There are no economic or other material reasons for interposing it as a conduit.
Ireland denies the benefits under the P-S Directive to an Irish holding company if its voting rights are controlled, directly or indirectly, by persons not resident in an EU or a tax treaty country, unless it can prove that it exists for bona fide commercial reasons and does not form part of a tax avoidance scheme.
Italy denies the benefit if a company controlled, directly or indirectly, by non-EU residents maintains a participation in an Italian subsidiary with the mere purpose of benefiting from the P-S Directive.
The domestic law does not allow the P-S Directive benefits to parent companies controlled by non-EU residents or if they are resident in a blacklisted tax haven.
The provision does not apply if the parent company carries out a business activity that is directly connected with the activity of the Spanish subsidiary, or directs and manages the subsidiary with adequate organization of human and material resources, or proves it has been set up for valid economic purposes and not just to claim the tax exemptions under the Directive.