ICC COMMISSION ON TAXATION

Transcription

1 ICC COMMISSION ON TAXATION

2 ICC Commission on Taxation sponsor Mason Hayes & Curran, Solicitors South Bank House Barrow Street Dublin 4 Ireland Contact: John Gulliver, Head of Tax jgulliver@mhc.ie

3 ICC COMMISSION ON TAXATION PROMOTING TRADE FACILITATION THROUGH TAX EXPERTISE The ICC Commission on Taxation expresses its sincere gratitude to our sponsors who made the printing of this publication possible. Copyright 2012 International Chamber of Commerce All rights reserved. This collective work was initiated by ICC which holds all rights as defined by the French Code of Intellectual Property. No part of this work may be reproduced or copied in any form or by any means graphic, electronic, or mechanical, including photocopying, scanning, recording, taping, or information retrieval systems without written permission of ICC Services, Publications Department. 2

4 THE INTERNATIONAL CHAMBER OF COMMERCE ICC is the world business organization, a representative body that speaks with authority on behalf of enterprises from all sectors in every part of the world. The fundamental mission of ICC is to promote open international trade and investment and help business meet the challenges and opportunities of globalization. Its conviction that trade is a powerful force for peace and prosperity dates from the organization s origins early in the 20th century. The small group of far-sighted business leaders who founded ICC called themselves the merchants of peace. ICC has three main activities: rule setting, dispute resolution, and policy advocacy. Because its member companies and associations are themselves engaged in international business, ICC has unrivalled authority in making rules that govern the conduct of business across borders. Although these rules are voluntary, they are observed in countless thousands of transactions every day and have become part of the fabric of international trade. ICC also provides essential services, foremost among them the ICC International Court of Arbitration, the world s leading arbitral institution. Another service is the World Chambers Federation, ICC s worldwide network of chambers of commerce, fostering interaction and exchange of chamber best practice. ICC also offers specialized training and seminars and is an industry-leading publisher of practical and educational reference tools for international business, banking and arbitration. Business leaders and experts drawn from the ICC membership establish the business stance on broad issues of trade and investment policy as well as on vital technical and sectoral subjects. These include anti-corruption, banking, the digital economy, telecommunications, marketing ethics, environment and energy, competition policy and intellectual property, among others. ICC works closely with the United Nations, the World Trade Organization and other intergovernmental forums, including the G20. ICC was founded in Today it groups hundreds of thousands of member companies and associations from over 120 countries. National committees work with ICC members in their countries to address their concerns and convey to their governments the business views formulated by ICC. 3

5 THE COMMISSION ON TAXATION The ICC Commission on Taxation has over 130 members comprising taxation specialists from ICC member companies from all sectors of business and private practice, including representatives from some of the world's leading companies and tax consultancy firms. The commission examines major policy issues of interest to world business. It analyses developments in international fiscal policy and legislation and puts forward business views on government and intergovernmental projects affecting taxation. MANDATE To promote transparent and non-discriminatory treatment of foreign investment and earnings that eliminates tax obstacles to cross-border business transactions. ACHIEVEMENTS FOR 2012 Produced recommendations on deductions for interest payments where countries have conflicting rules. Finalized the revision of the ICC policy statement on anti-abuse measures Issued a policy statement on transfer pricing and customs value together with the Committee on Customs and Trade Regulations Established, working together with the ICC Commission on Environment and Energy, a set of principles of Environmental Taxation OBJECTIVES FOR 2013 Lead business input into the work of the United Nations Committee of Experts on International Cooperation in Tax Matters, including on the UN Model Convention and the UN Practical Manual on Transfer Pricing for developing countries. Contribute business views to the work of the Organization for Economic Co-operation and Development (OECD) on topics with global reach, including on the transfer pricing of intangibles for income tax purposes, in cooperation with the Business and Industry Advisory Committee to the OECD Pursue the issue of transfer pricing with relevant intergovernmental organizations with a focus on simplifying administrative and documentary requirements. Work with the ICC Commission on Environment and Energy to develop a general policy response to the use of tax-related climate change measures Addressing the problem of tax transparency, as well as domestic resource mechanisms 4

6 ADVOCACY & GLOBAL INFLUENCE Providing international business input to the work of the United Nations Committee of Experts on International Cooperation in Tax Matters Contributing business views to the work of the Organisation for Economic Co-operation and Development (OECD) on value-added tax on services and intangibles, together with the Business and Industry Advisory Committee to the OECD (BIAC) Promoting ICC policy on anti-avoidance measures and limitations of deductions of interests payments Working relationship with influential independent organization: International Fiscal Association (IFA), International Bar Association (IBA), the International Stock Exchange Federation (FIBV), the Business and Industry Advisory Committee to the OECD (BIAC) and the Union of Industries of the European Community (UNICE). GLOBAL NETWORK With hundreds of thousands of member companies and associations in over 120 countries, ICC is the only business organization that so broadly representatives every facet of business. With unrivalled access to national governments and top international officials who make decisions affecting corporate performance, ICC opens the door to the corridors of power and can be relied upon to present the business case on a wide range of issues from trade and investment to business ethics and globalization. ICC's global network of national committees ensures influence at the national level while ICC s privileged links with major intergovernmental organizations, including the World Trade Organization, enable the voice of business to be heard at the international level. EVENTS AND MEETINGS 20 October 2011 Meeting of the Commission Rio de Janeiro 22 March 2012 Meeting of the Commission Paris 25 October 2012 Seminar on Transfer Pricing and Customs Valuation Montreal 22 November 2012 Meeting of the Commission New Delhi 5

7 WORD FROM THE CHAIR Taxation has shown a steep rise in relevance for companies. Not only in the bottom line, how much tax is paid, but during recent past also as an element drawing attention by stakeholders in wider sense. Today, countries are showing increased competition for investment but at same time create more friction and double taxation for the international taxpayer. Companies around the world are increasingly faced with countries disagreeing amongst themselves about the allocation of profits by the taxpayer. There is no magic cure to resolve these disputes. The ICC taxation Commission is taking its role in the global tax landscape to eliminate these frictions, tax barriers to doing business. Quite a daunting task is still ahead of us but by outreaching to countries we play a role as responsible representative of the global business community. This is recognized by countries involved. The Taxation Commission looks forward to work its agenda and reduce global tax barriers in the years ahead. Theo Keijzer VP Tax Policy 6

8 LEADERSHIP CHAIR Theo KEIJZER Chair of the ICC Commission on Taxation Theo Keijzer was a Vice President Tax Policy at Shell International B.V. in The Hague. In 1975 he obtained his Master s degree in Business Economics at the Erasmus University in Rotterdam. VICE-CHAIRS Mukesh BUTANI Partner, BMR Legal Mukesh Butani has advised several fortune 500 multinationals and large Indian business houses on a range of cross border tax issues, transaction structuring, transfer pricing and dispute resolution matters. Barbara KESSLER Group Head of Tax and Insurance, Novartis Barbara Kessler graduated with degrees in economics from the University of St. Gallen and the Vienna University of Economics. She is a Swiss Certified Tax Expert. Cym LOWELL Private Lawyer in International Taxation, McDermott Will & Emery LLP Mr. Lowell is an experienced international tax lawyer who has specialized in transfer pricing and related qualified authority matters for a career spanning almost 40 years. Jean-Marc TIRARD Partner, Tirard Naudin Jean-Marc Tirard began his career with the French tax administration before moving into an advisory role. He has more than 30 years experience as an advisor on domestic and international corporate tax issues, negotiating with tax authorities and handling tax litigation. 7

9 BECOMING A MEMBER Joining ICC makes good business sense and is simple to do through one of two ways: Through affiliation with an ICC national committee or group in your country. Through direct membership with the ICC International Secretariat when a national committee/group has not yet been established in your country/territory. Direct membership fees are also proportionate to the economy of the country. BENEFITS OF MEMBERSHIP The International Chamber of Commerce speaks on behalf of enterprises from all over the world, grouping hundreds of thousands of member companies and associations in more than 120 countries. There are many benefits to being a member of the world business organization, including: ICC members get access to the corridors of power. As ICC members, company executives are in contact with ministers and international officials at the heart of intergovernmental groups such as the G20 and the United Nations. ICC members gain influence at the international and national level through ICC s network of national committees and groups. ICC members stay connected to a network of the world s most influential and dynamic companies of all sizes and in all sectors forging high-level business relationships at exclusive events. ICC members get news of developments in policy, law and regulation at an early stage, winning time to make the right decisions for their business. ICC members help write the rules that business uses every day to reduce costs and uncertainties in areas from arbitration to banking and commercial contracts. ICC members regularly build skills and receive discounts on ICC publications, trainings and conferences around the world. You can contact Catherine Foster for more information about becoming a member of ICC Catherine FOSTER Project Manager National Committees and Membership International Chamber of Commerce 38, cours Albert 1er Paris, France Tel: catherine.foster@iccwbo.org 8

10 POLICY STATEMENTS PROCESS & PURPOSE The ICC Commission on Taxation is a specialized working body composed of business experts who examine major fiscal issues of interest to the business world. They prepare policy products, including statements to contribute to intergovernmental discussions, as well as rules and codes to facilitate international business transactions. Policy statements are the result of extensive work by our experts. After a policy statement has been drafted by the ICC Commission on Taxation, the ICC International Secretariat compiles comments from hundreds of national committees, international organization with which we have a working relationship, and other experts. The finalized documents therefore reflects a consensual position within the Commission, one that was enriched by external and internal contributions and heavily debated amongst experts from around the world, representing a wide array of company and sectors. The strength and legitimacy of ICC policy statements and rules are derived from the fact that they are developed through extensive consultation with member companies. ICC s normal consultative procedure requires policy documents first to be adopted by one or more commissions, in consultation with national committees, and then approved by the Executive Board, before they can be regarded as official and public ICC positions. LIST OF POLICY STATEMENTS ICC environmental taxation principles 14 Limitations of deductions of interests payments 18 Application of Anti-Avoidance Rules in the field of taxation 22 Transfer pricing and customs value 24 Tax treatment of international takeovers/mergers 30 Transfer pricing documentation model 36 An optional Common Consolidated Corporate Tax Base in Europe: implications for businesses worldwide Exit taxes: serious obstacles for international business restructurings and movements of capital Improving tax efficiency: the responsibilities of tax administrations and taxpayers 40 9

11 ICC ENVIRONMENTAL TAXATION PRINCIPLES Fiscal instruments and environmental policy-making ICC Commission on Taxation in collaboration with the ICC Environment and Energy Commission Document No / (June 2012) Introduction There are many different economic instruments that can be used for environmental policy-making, including fiscal instruments and tradable permits, which aim to promote the production and use of environmentally sound products and processes within a market framework. By enabling industry and consumers to adapt to market signals, such instruments provide greater economic flexibility and efficiency over traditional command and control regulations. This paper represents a first comprehensive ICC effort across the environment and taxation disciplines to help clarify and frame environmental taxation for non-experts on taxation. Whether taxes, subsidies or other policy instrument are employed, they need to be based on cost-benefit analysis, transparent and economically, environmentally, and socially effective. Definition and terminology Environmental externalities refers to the economic concept of uncompensated environmental effects of production and consumption that affect consumer utility and enterprise cost outside the market mechanism. Negative externalities lead to private costs of production to be lower than the social costs. It is the aim of the polluter/user-pays principle to prompt households and enterprises to internalise externalities in their plans and budgets (OECD Glossary). While the concepts may be clear and understood, the indicators and methodologies to evaluate such externalities still need to be developed. As outlined in the ICC Green Economy Roadmap, for a green economy to become operational, indicators, metrics, accounting measures and better disclosure and reporting must be developed that make sense in economic terms while ultimately including the cost for externalities. Externalities associated with long-term concerns such as climate change, resource depletion, longterm wastes, biodiversity reduction, may develop over time. It should be noted that, under the environmental taxation umbrella, there are different issues associated with, for example carbon emissions, use of toxic products in farming activities as well as taxes to support recycling/treatment activities. Policy approaches designed today will need to be flexible both to account for new knowledge as well as national circumstances and priorities. This should be balanced within the need for a long term stable policy framework. 10

12 Definitions Taxation: The purpose of taxation is to raise funds to meet the expenditure plans of government. Taxation policy should seek to do this in the most economically efficient manner, consistent with the macroeconomic policies of the government. Environmental taxation: The primary purpose of Environmental taxation is not to raise revenue but to change behaviour by accounting for environmental externalities. Scope of the policy statement: Environmental taxation includes taxes and other imposts on environmental externalities and tax reliefs or exemptions provided to incentivise environmentally positive behaviours. Environmental taxation issues and incentives Given its purpose to incentivise behavioural change, environmental taxation should not increase the overall tax burden. It is important to note that using taxation for pursuing environmental policies is an interference with markets and must thus be used with caution. This is even more important when taxation is levied on a country basis, and not levied on a co-ordinated and worldwide (or large regional) basis, requiring to take into account cross-border trade issues and their pricing effects caused by such domestic tax rules. The design parameters for environmental taxation should provide a framework that underpins environmental policies in the most economically efficient manner as to affect behaviours for specific environmental goals in the most economically efficient manner. Such a framework has to be designed within and be consistent with the overall context of the total fiscal framework. Otherwise, environmental taxes may increase the economic costs of taxation while providing only a limited environmental benefit. Tax is one of a number of policy instruments (market mechanisms are another possible instrument, for example) and policy-makers should seek to utilise the most appropriate policy instrument to achieve environmental goals. The scale of technological change and development for example needed to meet the environmental targets of governments is significant. Also, potential timescales for change could be very demanding. Together they provide a major challenge in terms of research, development and the initial deployment of commercial scale technology required to green economies. Policies should thus seek to deliver environmental objectives at the lowest overall cost to society. For that reason in the case of quotas mechanisms, provision should be made to allow the use of lower cost offsets with environmental integrity wherever they are located. Differing environmental policies between nations have consequences in terms of impact leakage, which may lead to economic competitiveness distortions. For climate change, this is especially true for energy intense industries that produce globally competitive commodity goods. ICC believes that any policies aimed to redress such concerns should be consistent with existing agreements on trade and investment. Environmental taxation principles a) The following overarching taxation principles should be followed in designing a framework for environmental taxation: Simplicity and cost effectiveness should be primary objectives. The environmental objective should be clearly stated and measurable, taking into account the competitive impact on affected businesses. Prices imposed for environmental externalities should be economy-wide, covering all relevant sectors without exception in the context of a global policy framework. If various sectors have different abatement costs for changing behaviour, they may require different pricing, which should be temporary. The competitive position of trade exposed industries needs to be addressed until consistent environmental taxation applies globally. 11

13 Potential social implications of environmental taxation should be addressed through integrated policy approaches. There may be social implications in establishing a price for externalities, as poorer members of society may be more affected than others. Given the principle of simplicity and clarity, it is not advisable to use tax exemptions as the means of addressing the social impact of environmental taxation. In pricing externalities, there should be no overlap of different mechanisms pricing the same externality (avoid double taxation ), either directly or indirectly. The secondary tax consequences of pricing need to be consistent with the primary environmental policy. For example, the provision of allowances within an emission trading system will affect actual prices differently depending on whether they are deemed taxable or not. New taxes, and changes to existing taxes, must be introduced with sufficient lead-intimes to avoid disruption to investment plans. Rates should be set as far in advance as possible, or an end outcome should be specified, to provide the certainty needed to underpin new business investment. Tax and legal certainty are essential for market players decisions and this is therefore of utmost relevance. b) The following guidelines and design principles should be followed in developing specific environmental taxation measures: Establish stable and predictable tax laws that provide business with a foundation to design long-term economically and environmentally effective strategies; such laws typically use following design elements: - Allow for use of offsets, with environmental integrity, from foreign sources. - Be economy-wide, covering all elements without exception but taking into account other (potentially non-fiscal) drivers for behaviour/pricing externalities either explicitly or implicitly. - Provide for credits of taxes imposed abroad on same object of tax domestically (no double taxation) or other factors mitigating the externality. Ensure a predictable price for externalities 1 and revenue neutrality. Minimize complexity to reduce administrative costs: provide businesses with flexibility to utilise whichever mechanism is most efficient to achieve the objective and reduce compliance costs. Maximize transparency for companies and consumers. Assure that provisions for treatment of import and exports are consistent with existing trade agreements: be as global as possible, for example being applicable to all jurisdictions at similar levels, so as to avoid creating inequalities that may affect a country s competitiveness. Ensure flexibility to adjust to future developments in environmental science as well as evaluate the economic impacts of environmental policies over the longer term: provide a framework which allows the efficient development of investment to achieve the environmental objectives. Provide for a tax rate commensurate with environmental change at an adequate rate: ensure that environmental effects are measured and monitored and that competitiveness concerns are assessed. 1 Such externalities include for example carbon emissions across the economy. Global externalities should eventually be priced in a uniform way. However, in the short term different abatement costs (to change behaviour) may require different pricing. Implementation should aim to take place in all economies in the same manner in order to avoid tax leakage effects. 12

14 LIMITATIONS OF DEDUCTIONS OF INTERESTS PAYMENTS Document No (February 2012) Highlights ICC notes that differences in the tax treatment of equity and debt financing have a potentially significant impact on investment decisions This may have been a contributory factor to overleveraging in some economies. In order to remove this distortion, ICC recommends that Governments consider introducing Allowance for Corporate Equity - an approach which has already been adopted by a small number of countries. An alternative theoretical approach is to eliminate tax deductions for interest expense. Given the preponderance of countries that allow a level of deduction for interest expense this would be a radical move and would be unlikely in practice to stimulate growth and international development. In making any changes Governments should be careful not to artificially restrict the deductibility of debt interest. This is especially important given the potential impact on existing business models and long-term investments. 1. Background The cost of capital is a key factor in investment decisions and tax has an impact on the cost of capital. Ideally, there should be neutrality between equity and debt financing from a tax point of view and investment decisions should be taken on the basis of economic facts and circumstances not influenced by tax systems. However, in reality the tax systems of most countries in the world: i) have an effect on the cost of capital, and ii) create distortions between debt and equity financing. To the extent there are limitations on deductions of interest payments, it is important to have a well-targeted system in harmony with a well-functioning international tax environment. The principle of net taxation and the avoidance of international double taxation must be upheld with a minimum of deviation, if any at all. 2. Systems that remove distortions between debt and equity financing In theory there are two methods, within an income tax system, to eliminate distortions between equity and debt financing: the Allowance for Corporate Equity (ACE) and the Comprehensive Business Income Tax (CBIT) 2. 2 The systems and their impact on the welfare of states in the European Union are described in Taxation Paper No. 17, Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms, written by Ruud A. de Mooij and Michael P. Devereux 13

15 2.1 Allowance for corporate equity (ACE) The ACE system provides for tax deductibility of actual interest payments and, in addition, a notional interest on equity is deductible from corporate profits. As the deduction of the notional return on equity is certain, a risk free nominal interest rate is applied, for example a government bond rate. An ACE system can achieve neutrality between debt and equity financing. The narrowing of the tax base through the deduction of actual and notional interest generally requires increased statutory tax rates or other base-broadening measures to achieve equal tax revenue from corporations. The international allocation of assets, functions and risks with the associated profit potential is incentivized by differences in statutory tax rates. In reality, ACE or ACE-like systems are rare and are only applied in a few countries, such as Brazil and Belgium. Since some corporate shareholders are presently tax-exempt or taxed at a preferential tax rate, the introduction of an ACE system will tend to change the ownership structure. The part owned by tax exempt entities will decrease. The same applies for shareholders residing in low tax jurisdictions. The increased ownership by those shareholders presently having a high tax rate may mitigate the overall revenue loss. In fact, these shareholders often reside in the country and they will often incur other taxes on their increased received income, like consumption taxes or other levies. 2.2 Comprehensive Business Income Tax (CBIT) The CBIT system aspires to eliminate the favourable fiscal treatment of debt-financed investments by disallowing a deduction for interest paid. In order to avoid double taxation of interest, the disallowance needs to be combined with a tax exemption or credit system for interest received from CBIT entities. The broad corporate tax base of the system allows for low statutory tax rates which could attract mobile and highly profitable equity investments. However pure CBIT system has not been introduced in reality so far. The transition to a CBIT system could, even if the statutory corporate tax rate is reduced, result in an increase in the cost of capital for many businesses. The effect could be particularly pronounced for highly-leveraged entities, like banks. There is, of course, a risk that these entities in general, and banks in particular, would try to increase their profitability by increasing their margins. Private equity firms are also likely to face a substantial increase in their financing costs. 2.3 Combining ACE and CBIT In the search for a more efficient approach to the treatment of interest deductibility, the idea of combining ACE and CBIT has been examined in a study by the Oxford University Centre for Business Taxation and prepared for the European Commission. This study concludes that such a revenueneutral combination of ACE and CBIT improves efficiency as it reduces distortions in debt-equity choices. Welfare is found to expand slightly on account of this more efficient financial structure. Combinations of ACE and CBIT may reflect a simultaneous movement towards limitations of the deductibility of interest payments and reductions in the tax burden on the return on equity. 3. Tax reforms towards a CBIT system 3.1 General Tax reforms which move in the direction of a CBIT system are often justified by the tax avoidance argument. These reforms usually aim at limiting tax deduction for interest paid by introducing debt-toequity rules and/or earnings-stripping rules. If these base-broadening measures are not combined with a reduction of statutory tax rates, then they are harmful to international business development because they increase the cost of capital. 14

16 3.2. Limitation of interest deduction The debt-to-equity or thin capitalization rules imply that interest is not deductible if debt in relation to equity exceeds a certain threshold. In addition to (or instead of) thin capitalization rules, some countries apply earnings-stripping rules. These rules limit the deduction of otherwise tax deductible interest to a certain percentage of (adjusted) taxable income. 4. Impact of limiting interest deductions on international business The limitation of interest deductions with the tax avoidance argument leads to a broadening of the tax base and, consequently, an increase in the cost of capital. In addition, a double taxation of the interest may occur if the country of the interest-receiving entity does not provide for an exemption or a tax credit with respect to the interest not deductible at the level of the paying entity. Such double taxation is particularly harmful to international investment and should be avoided. International business recognizes that under the currently prevailing tax systems, it is legitimate to limit the deduction of interest in abusive cases with wholly artificial arrangements. Any debt which is obtained within the arm s length principle of a company should not be reclassified with the abuse argument. For administrative simplification, tax laws may provide for safe harbour rules, for instance, by stipulating thin capitalization rules. 5. Conclusions and recommendations The international business community would welcome a more favourable tax treatment of equity financing, thus reducing or eliminating the difference in the tax treatment of debt and equity-financed investments. However, the trend that is experienced by international business so far is that tax deductibility of interest is limited, but at the same time does not provide relief for equity financing or interest received. With the tax avoidance argument, an increasing number of countries have introduced restrictive limitations of interest deductions without providing any relief for equity financed investments. This has resulted in an increase of the cost of capital for investments. Furthermore, adequate income tax relief for non-deductible interest received from local and/or foreign affiliates has not been granted. It is of utmost importance to ensure that such legislative measures are targeted to not infringe upon conventional business transactions, which would ultimately result in double taxation. Consequently, ICC strongly recommends that the limitations of interest deductions be applied only to truly abusive cases. Legislative changes towards a CBIT system lead to double taxation if not properly combined with tax relief at the level of the recipients of the interest and dividends. On the international level, the risk of double taxation increases substantially by legislative actions that limit tax deductibility of interest. Therefore, ICC urges legislators to avoid taking actions which are detrimental to international business and the free movement of capital. 15

17 APPLICATION OF ANTI-AVOIDANCE RULES IN THE FIELD OF TAXATION Document No. 180/519 (rev. January 2012) ICC is the world business organization, a representative body which speaks with authority on behalf of enterprises from all sectors in every part of the world. ICC's purpose is to promote international trade, investment, and to facilitate the market economy system. In the field of international taxation, ICC seeks the elimination of double taxation and other obstacles which impede international business transactions by imposing unnecessary tax burdens on business or creating business uncertainty. Issue 1. There is a growing tendency for the tax authorities in many countries to re-characterize or disregard transactions in tax assessments based on interpretations of their Anti- Avoidance Rules which are, at times, particularly extensive. These re-characterizations are also increasingly accompanied by penalties provided for in cases of bad faith or tax evasion. 2. ICC considers that it is essential for tax authorities to understand the need for companies, in order to be competitive, to seek out the most efficient means of carrying out legitimate business transactions. This is more critical than ever because of the globalisation of business and economies. Consequently, ICC considers that the use of anti-avoidance rules of taxation that establishes barriers to cross-border business is counterproductive and should be stopped. 3. Although tax avoidance (unlike tax evasion) is within the law, ICC recognises that tax authorities are entitled to curtail the deliberate avoidance of tax and to take the measures they consider appropriate within the applicable legal systems. However, the enforcement of these specific and/or general rules with respect to abuse of law or its equivalent must be reasonable and equitable. Such rules should also respect, at all times, the fundamental dogma of legal certainty essential for businesses. Recommendations Accordingly, ICC urges governments to respect the following principles: a) Tax authorities should respect the form of a legitimate business transaction even when such a form allows a reduction of overall tax costs. What qualifies as a legitimate business decision should be broadly defined in this rapidly changing and technologically driven global market place. b) Specific Anti-Avoidance Rules must be sufficiently clear and precise, so that the taxpayer may be certain that a transaction which is in strict accordance with the law will not be put into question. Tax law must be fully respected with no exceptions. It is unacceptable that tax authorities, or the services responsible for tax investigations, take it upon themselves to interpret and/or to apply a clear law according to their expectations. This is particularly evident when the administrative interpretation of the law is not published. c) To the extent that General Anti-Avoidance Rules are adapted (to deal with abuse of law or its equivalent), the same need for legal certainty requires the observance of a number of principles: 16

18 i. The application of such rules should be limited to exceptional cases in which there is no economic substance and no fundamental business reason for a transaction. Economic substance is a business test based on all facts, and circumstances of a transaction and mechanical tests should be avoided. As long as a transaction is not artificial, reorganizations based on the goal of saving taxes or obtaining tax benefits should not be challenged by the Tax Authorities. 3 ii. iii. iv. Tax procedure rules should be equitably and consistently applied and arbitrary shifting of the burden of proof must not be allowed. In any case in which tax avoidance is alleged, the Tax Authorities must, before issuing the reassessment notice, call a meeting with the taxpayer and ask for a justification of the transaction. Should such a justification not be considered satisfactory by the Tax Authorities, the reassessment notice must specify the reasons why it was not deemed satisfactory. It is unacceptable that specifically legislated or regulated tax incentive measures be questioned by means of anti-abuse" rules. While the legislator clearly has the right to withdraw such measures, this should never be done retroactively. A transaction which is specifically excluded from a Specific Anti-Avoidance Rule should not be punished by any general rules, otherwise, the principle of legal certainty would be seriously jeopardized (example: "thin capitalization rules"). v. Countries having adopted General Anti-Avoidance Rules should also provide a system allowing the taxpayer to verify in advance, within a reasonable period, that a proposed transaction will not be subject to such rules (referred to as advance rulings ). However, tax regulations should be sufficiently clear so that cost and time constraints of advance rulings are only necessary in exceptional cases. vi. vii. In the event that States, which are parties to tax treaties, authorize each other to apply their Anti-Avoidance Rules, these standards should be clearly set out, and should respect the principle of equal treatment. Tax avoidance is not tax evasion. Tax avoidance should not result in any criminal punishment, or in any excessive administrative and/or civil penalties. Tax avoidance should simply lead to the reassessment of the taxes due, according to the correct and ordinary provisions that were circumvented by the taxpayer for the sole purpose of reducing its tax burden. 4 3 See the European Court of Justice decision in Cadbury Schweppes, C-196/04, and chapter IX on Business Restructurings of the newly issued OECD, Transfer Pricing Guidelines, Paris, 2010, paragraph C.5. 4 As also confirmed by the European Court of Justice decision in Halifax, C-255/02, paragraph 93 17

19 TRANSFER PRICING AND CUSTOMS VALUE ICC Commission on Taxation in collaboration with the ICC Committee on Customs and Trade Regulations Document No. 180/ (February 2012) i. Highlights Concerning related parties, formal recognition by the customs administration of the arm s length principle (as per Article 9 OECD Model Tax Convention) in order to determine the customs value Recognition by the customs administration of post-transaction transfer pricing adjustments (upward or downward). This recognition should be applicable for adjustments made either as a result of a voluntary compensating adjustment as agreed upon by the two related parties or as a result of a tax audit It is recommended that in the event of post transaction transfer pricing adjustments (upward or downward); customs administrations accede to review the customs value according to one of the following methods as selected by the importer. It is recommended that in the case of post-transaction transfer pricing adjustments (upward or downward), companies be relieved from: a) The obligation to submit an amended declaration for each initial customs declaration b) The payment of penalties, as variations of the transfer price It is recommended that OECD methods be acceptable to customs administrations with an accommodation of the following elements: a) Identical or similar goods b) Recognition of corporate legal entities (performing specific functions and adding value within a group) Recognition of the acceptability of transfer pricing documentation by the customs administration Transfer pricing and customs value Introduction As the world business organization, the International Chamber of Commerce (ICC) confirms that multinational companies, from all sectors and in every part of the world, face difficulties with respect to the valuation of goods. These difficulties arise because transactions between related parties are subject to both customs and fiscal examinations and are thereby bound by differing rules and contradictory interests. We believe these examinations should yield the same value and that a resolution to the problem is in the interests of all concerned. There are two reasons for this problem: 1. Tax and customs administrations, even within one country and sometimes within the same government department, have different approaches: tax administration focuses on intra-group sales prices that may be perceived as higher than they should be; whereas customs authorities control imported goods for which prices may be perceived as lower than the market price. While both administrations seek to achieve the same goal, which is arm s length pricing, revenue interests in the transaction still remain at odds with each other. 18

20 2. Tax and customs administrations often set rules independently for the same transaction/good. Tax authorities seek conformity with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines which have been largely codified in many countries. This set of rules provides guidance on the application of the arm's length principle for the valuation of cross-border transactions between associated enterprises, whereas customs authorities conform to Article VII of the General Agreement on Tariffs and Trade (GATT) Valuation Code. This dichotomy, present in both developed and developing countries, creates a climate of uncertainty and complexity compounded by economic globalization. It also leads to increases in compliance and implementation costs, absence of flexibility in the conduct of business operations, and furthermore creates a significant risk of penalties. Indeed, even when a company complies with both the OECD guidelines/principles and the World Trade Organization (WTO) Valuation Agreement, there is no guarantee that there will not be a dispute between two countries or two administrations in the same country on the determination of the arm s length price. This means that valuation conflicts can arise not only prior to but also after an audit. Given that intercompany transactions account for more than 60% of global trade in terms of value, the divergence of customs and transfer pricing valuation presents an obstacle to the liberalization of trade and inhibits international development for companies of all sizes. Key features Although numerous points of divergence can be listed between customs and tax approaches, it is important to stress that points of convergence also exist. Therefore, while it may not be necessary to change WTO rules or the OECD guidelines we believe that the two can and should be aligned by finding a common way of interpreting the arm s length principle. As a basic principle, we recommend that tax administrations assess and appreciate how the enterprise has arrived at the declared customs value (and vice versa as the case may be - the customs administration assess and appreciate how the enterprise has arrived at the transfer price) prior to issuing a formal tax or duty assessment. In case the conflict between the enterprise and the relevant fiscal administration cannot be resolved, then the tax administration and the customs administration of the respective country should work in concert and attempt to harmonize valuation determinations. A recommended method of accomplishing this is to incorporate into the transfer pricing studies those elements additionally needed by customs administrations to determine acceptable customs valuation. Indeed, ICC notes that the World Customs Organization (WCO) has already considered the appropriateness of transfer pricing documentation in Commentary 23.1 of the Technical Committee on Customs Valuation (TCCV). This approach considers that it is not currently conceivable to try to find solutions outside existing and well-recognized principles, nor is it realistic to seek a total harmonization of customs and tax rules or even to impose one s view onto another. Furthermore, the business community believes that creating yet another set of rules will not solve these problems. ICC therefore recommends a focus on how these principles can be more closely aligned and made acceptable to both governmental authorities and the private sector. This document is offered as an input from the business sector to international organizations working on these issues. The goals of the proposals that follow are to: Secure harmonized tax and customs valuation of transactions between related parties in an international context Clarify rules for both companies and administrations Suppress or at least reduce financial impact linked to divergent valuation Simplify regulations 19

21 And thereby: Reduce compliance costs to companies Eliminate the risk of penalties resulting from disputes arising from divergent views taken by customs and tax authorities Streamline intercompany operations and facilitate international business Proposals Although Advance Pricing Agreements (APAs) can resolve tax valuation concerns, APAs are often very rigid, time- and cost-consuming, and not appropriate for businesses that continually evolve. Often, APA s are also not a viable option for small and medium sized enterprises or for transactions that are not material in size. Accordingly, in order to enable more documentation supportive of valuation validation, ICC proposes the following additional options to derive customs value: Proposal 1 Concerning related parties, formal recognition by the customs administration of the arm s length principle (as per Article 9 OECD Model Tax Convention) in order to determine the customs value. The customs value is normally based on Article VII of the GATT agreement 1994 which states that, in article I, Rules on Customs Valuation: 1. The customs value of imported goods shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation adjusted in accordance with the provisions of Article 8 ( ) Thus, customs authorities prefer to determine customs duties on the sales price of imported goods, which is deemed to represent an arm s length value. When the seller and the buyer are related, and arm s length pricing comes into question, transaction value can still be used for customs valuation purposes if the importer can demonstrate that the declared transaction value: 1) meets the circumstances of sale test or 2) by comparison with test values. As explained below in article I, Rules on Customs Valuation of GATT Article VII: 1. The customs value of imported goods shall be the transaction value ( ) provided ( ) 3 (d) that the buyer and seller are not related, or where the buyer and seller are related, that the transaction value is acceptable for customs purposes under the provisions of paragraph (a) In determining whether the transaction value is acceptable for the purposes of paragraph 1, the fact that the buyer and the seller are related within the meaning of Article 15 shall not in itself be grounds for regarding the transaction value as unacceptable. In such a case the circumstances surrounding the sale shall be examined and the transaction value shall be accepted provided that the relationship did not influence the price. If, in the light of information provided by the importer or otherwise, the customs administration has grounds for considering that the relationship influenced the price, it shall communicate its grounds to the importer and the importer shall be given a reasonable opportunity to respond. If the importer so requests, the communication of the grounds shall be in writing. 20

22 (b) In a sale between related persons, the transaction value shall be accepted and the goods valued in accordance with the provisions of paragraph 1 whenever the importer demonstrates that such value closely approximates to one of the following occurring at or about the same time: (i) the transaction value in sales to unrelated buyers of identical or similar goods for export to the same country of importation; (ii) the customs value of identical or similar goods as determined under the provisions of Article 5; (iii) the customs value of identical or similar goods as determined under the provisions of Article 6; With regard to 2(b), customs administrations require that the test values must be previously determined, pursuant to an actual appraisement of imported merchandise. If there are no previous importations of identical or similar merchandise that were appraised by customs authorities under the transaction, deductive or computed value methods, there may not exist any test values that will be accepted by the customs administration. Therefore, it is common practice to evaluate the circumstances surrounding the sale in relation to the above 2(a). The Interpretative Notes to 2(a) provide examples of how to evaluate the circumstances of sales in order to satisfy the customs administrations that the relationship of the parties did not influence the transaction value. The Interpretive Note to Article 1, 2(a) of GATT Article VII reads as follows: 1. Paragraph 2(a) provides that where the buyer and the seller are related, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted as the customs value provided that the relationship did not influence the price. It is not intended that there should be an examination of the circumstances in all cases where the buyer and the seller are related. Such examination will only be required where there are doubts about the acceptability of the price. Where the customs administration has no doubts about the acceptability of the price, it should be accepted without requesting further information from the importer. For example, the customs administration may have previously examined the relationship, or it may already have detailed information concerning the buyer and the seller, and may already be satisfied from such examination or information that the relationship did not influence the price. 2. Where the customs administration is unable to accept the transaction value without further inquiry, it should give the importer an opportunity to supply such further detailed information as may be necessary to enable it to examine the circumstances surrounding the sale. In this context, the customs administration should be prepared to examine relevant aspects of the transaction, including the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at, in order to determine whether the relationship influenced the price. Where it can be shown that the buyer and seller, although related under the provisions of Article 15, buy from and sell to each other as if they were not related, this would demonstrate that the price had not been influenced by the relationship. As an example of this, if the price had been settled in a manner consistent with the normal pricing practices of the industry in question or with the way the seller settles prices for sales to buyers who are not related to the seller, this would demonstrate that the price had not been influenced by the relationship. As a further example, where it is shown that the price is adequate to ensure recovery of all costs plus a profit which is representative of the firm's overall profit realized over a representative period of time (e.g. on an annual basis) in sales of goods of the same class or kind, this would demonstrate that the price had not been influenced. Consistent with Commentary 23.1 of the WCO Technical Committee on Customs Valuation (TCCV), for importers that establish related party pricing policies in accordance with the OECD Transfer Pricing Guidelines and provide the necessary transfer price documentation, such documentation 21