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INTERNATIONAL TAX PLANNING CONTROL I. Introduction I.1.The

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INTERNATIONAL TAX PLANNING CONTROL I. Introduction I.1.The CHAPTER I INTERNATIONAL TAX PLANNING CONTROL I. Introduction I.1.The importance of controlling the international abusive tax planning in a globalized world. Advances in the worldwide economic relationships and the rapid development reached by the process of globalization and computerization; as they bring important advances to the countries set in this context, they caused new challenges to the tax administrations regarding controls for the fulfilment of tax liabilities; including also the achievement of a more favourable environment for not only the performance of evasion acts, but also a wide variety of schemes and manoeuvres of international tax planning. This process of worldwide economy development leads us to a state in which tax administrations cannot deal with the common concept of the taxpayer. This economic reality brought about the beginning of another type of taxable person, the worldwide taxpayer, without origin, to whom what really matters is the economic group’s profit as a whole, instead of a single company or Headquarters’ profit. Taxes are considered as a cost for them, and therefore must be reduced to a global level, maximizing the earnings of the company group. What follows presents a brief evolution of the worldwide trade development and the multinational companies presence in the economies, which are decisive factors for the international tax planning improvement. I.2 International trade and multinational companies flows. International trade is still growing faster than world production, showing an increasing opening and interdependence of the national economies. In this process, it is worth mentioning the growing role of export trade flows of multinational companies, which explains why the fight against schemes and manoeuvres used for tax planning is increasingly attracting the attention of tax administrations and taxpayers. Statistics of the World Trade Organization (WTO) for the year 2000 shows that foreign subsidiaries exports of multinational companies represents 45% of worldwide exports. A large extent of these exports are destined to other subsidiaries of the same group that, certainly, favours the adoption of international 1 tax planning schemes among these economic groups. Besides, we must consider that global exports of multinational companies, including subsidiaries and headquarters, represents 60% of worldwide trade, which proves the strong control of these companies over the transactions of the goods and services worldwide trade. It is worth noting that, 53% of the total transactions of this trade comes from the trade flows of the 8 (eight) following countries: USA (16%); Germany (8%); Japan (7%); United Kingdom (5%); France (5%); Canada (4%); Italy (3,5%) and China (4,5%). It is also shown that international trade is made up of 80% of goods trade and 20% of services trade, even though services trade are growing much faster than goods trade. Undoubtedly, there was a diversification in export guidelines of developing countries which leads to an important advance in manufactured products as a result of the globalisation process. A key point that must be taken into account and observed, though controlled as regards legal standards, is that trade among companies and carried out by multinational groups, plays an important role in the strategic planning of such organizations owing to the fact that its management at a worldwide level may help them to lower costs, to maximize the use of its productive units and to stimulate the integration of its productive processes worldwide. It is important to highlight that trade among those related companies differs from trade among not associated companies because it can, within a short time, neutralize changes on relative prices, on exchange rates or on general economic conditions. Furthermore, prices charged by these companies in theirs transactions within the group may show specific determinants and characteristics, turning into transfer pricing which may affect tax bases in countries where these companies are located as well as distort financial flows worldwide. Statistically, the data available shows that in 2001 there was approximately 65.000 multinational companies -at the same time distributed in another 850.000 subsidiaries abroad- responsible for 90 millions of direct jobs and, as it was aforementioned, controlling 60% of worldwide trade of goods and services. Available information on the Atlas of the Multinational Corporation published by Dobla Inc. shows that in a list including the Gross Domestic Product (GDP) of all the countries of the world and the Gross Earnings of the Companies, from the first hundred (100), 53 of which are multinational companies (12 companies are in the first 50 from the list), which means that they are larger –regarding production- than over 130 countries in the world, since the main oil company in the world, positioned 21st in the list, has a level of earnings higher than the product of 180 countries. What is certain is that as regards the current reality of the multinational groups, we can say that these companies – centralizing almost 30% of the worldwide production and covering 60% of the worldwide trade, with representations in almost all the countries – are empowered to dominate the worldwide trade. 2 Considering that the reduction of tax pressure worldwide may be one of key factors for these companies - together with the development of those countries which adopt preferential tax systems, and the advances in the financial system worldwide and the communication facilities - it may be worth noting that all the elements are together to foster international financial planning, that many times are abusive and malicious. A key point to be considered in this global scenario, is related to flight of capitals from countries towards tax havens. Studies of “Tax Justice Network” pointed out that 11,5 trillions of American dollars of personal wealth are controlled offshore. Operations of capital transfers towards tax havens are real, which is more and more intensified. Such operations are specially appointed to those countries with favoured taxation. Economic estimates show that if this tax were subject to taxes on its place of origin (considering an annual average growth of 7% for this fixed wealth), the volume of the collection, considering an average tax rate of 30%, would be approximately of 241 millions of American dollars annually. It should be bear in mind that this value does not include tax elusion, which is annually practiced in transactions that derives from abusive tax planning performed by multinational companies. In this context, academic studies show that approximately 500 millions of American dollars flight annually from underdeveloped or developing countries as flight of capitals by means of corruption practices, commercial investigation of the weaknesses of tax systems of such countries and other means of flight of capitals in general. It can be noticed that tax evasion, in all forms, means the loss of due tax incomes, attempts against equity in the distribution of the worldwide tax pressure, distorts the allocation of resources and involves a disloyal practice regarding legal conditions of competition in markets. On the other hand, it becomes one of the most serious cases of unfair competition because, not only it is in non-compliance with legal standards, but also makes who practices it to take unfair, unjustified and illegal advantage comparing to other taxpayers who does not deal with this kind of operation. In this context, strengthening international tax coordination among nations has become a basic element to reduce international tax evasion. Furthermore, efficient operation of tax cooperation contributes to guarantee that taxpayers who have access to international transactions may have not access to major possibilities of tax evasion and elision than of those taxpayers who only operate in their local markets. I.3 General Objectives International tax planning is a difficult issue for Tax Administrations, and must be approached by identifying the implications of the world economic situation today in each specific area of competence. 3 In effect, while international operations are not limited nor bound by borders, taxable events resulting from them must be controlled and verified by National Tax Administrations with national competence only. Evidently this places before National Tax Authorities a great challenge as, in order to defend and protect the taxation interests of their jurisdictions, they must enforce, receive and audit tax payments that come under their area of responsibility in matters of international taxation. As mentioned in the 2003 CIAT Technical Conference in Lisbon, “The speed and complexity with which world transactions are carried out have allowed taxpayers the use of a fiscal planning mechanism which, from the standpoint of this analysis, has favored the drainage of the tax base, either in favor of countries with low or no taxation or else, toward jurisdictions where tax advantages involve privileged tax regimes or, even, inaction on the part of the Tax Authority with regard to appropriate control of international operations.” Awareness of this international problem led to great efforts on the part of certain International Organizations for providing mechanisms and recommendations to deter the creation and use of harmful tax planning practices. This work does not seek to discredit those efforts, and addresses the issue from the perspective of the CIAT. Its aim is to directly favour
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