Volume 15, Issue 2 - Tax Enforcement

This study explores the decision-making behaviour of economic actors in relation to transfer pricing by applying a three-layer practice theory. A critical review of the literature using snowball sampling and a thematic analysis of interview data from the Ministry of Finance, tax consultants and the Zimbabwe Revenue Authority bring to light novel conceptualisations and perspectives on the transfer pricing phenomenon. This study addresses scholarly gaps by exploring a confluence of legal, implementation and exploitative dimensions in transfer pricing regulation. The study also makes a novel contribution by proposing a model that could be useful to policymakers and tax authorities in ameliorating tax avoidance through transfer pricing.

The article is a comment to Conceptualising the behaviour of MNEs, Tax Authorities and Tax Consultants in respect of transfer pricing practices. A three-layer analysis, by Wealth, Smulders, and Mpofu (https://doi.org/10.1515/ael-2022-0036). The latter deals with transfer pricing but in the African perspective while the most part of articles frequently analyze the issue from the point of view of most developed and OECD (Organisation for Economic Co-operation and Development) countries. The paper focuses on the qualities of the commented article and proposes a resume on the state of art of the complex recent reforms of transfer pricing rules disposed by the OECD.

The problem of aggressive tax optimization and the related issue of liability of individuals who are the ultimate beneficiaries of company’s tax liabilities are becoming more and more regulatory complex. The purpose of the study, implemented using the system-functional method, is to theoretically substantiate the ways to overcome the problems that arise when collecting taxes in favor of the state from the ultimate beneficiaries. The results of the study indicate that the corporate structure cannot fully protect the beneficiary of an enterprise from property liability for committing a tax offense. The study proposes a strategy to improve the efficiency of collection of receivables from real beneficiaries. The results of this study are of great practical importance for the subjects of legislative initiative and practitioners in the field of tax legal relations. If under the conditions of the Russian legal system until 2016 it was practically impossible to prove the informal connection of a company with an actual beneficiary, then as a result of the adoption of Federal Law No. 401-FZ of November 30, 2016, the courts began to take into account any evidence that could become an argument for bringing the ultimate beneficiary to justice. This in turn led to the emergence of controversial issues. For this reason, the authors highlighted the problems arising as a result of law enforcement.

Base erosion and profit shifting activities of multinational enterprises (MNEs) have been a hot issue globally. Topical among the strategies employed by MNEs has been the issue of transfer pricing (TP). Developing countries are argued to be significantly affected by TP manipulation resulting in substantial tax revenues being lost. As a response to curb the unfavourable impacts of transfer mispricing, most developing countries have adopted the OECD TP guidelines and enacted TP legislation to regulate TP activities. The arm’s length principle is the core of TP legislation, yet it has brought challenges for tax administrators and their auditors in enforcing and assessing compliance respectively leading to disputes. In view of the ever-changing business world and continuous efforts by MNEs to minimise their tax obligations through income shifting, it was imperative to assess the factors affecting the effectiveness of TP audits and dispute resolutions as measures to enhance compliance and enforcement in developing countries, with specific reference to Zimbabwe. Findings include the lack of clarity in TP legislation, resource constraints and complexity of transactions, lack of expertise as well as the shortage of comparable data. Developing countries are encouraged to formulate clear TP regulations and invest in the capacitation of revenue authorities.

This symposium around the case of the Controlled Foreign Company (CFC) rule offers to CONVIVIUM readers a debate which saw both authors stalling in their respective positions. On the one side, the negative taxation principle under which ‘tax avoidance is acceptable under the law;’ on the other side, the positive taxation principle that ‘all and every citizens shall pay a fair share of taxation.’ Their discussion certainly raises important matters for the current state of affairs in tax law and regulation, but it does not provide any explicit solution for issues which were raised. In this context, readers may aim at learning from both authors.

Legal frameworks have an enormous influence on the concrete choice of legal form, especially in (multinational) groups of companies. For example, tax regulations and accounting standards directly influence the legal enterprise’s structure, including the shareholding structures. However, the tax burden must not be understood as a static or a fixed quantity determined in advance. This is because the design or choice of companies’ legal form can also be used as a tool to gain competitive advantages and optimise the tax burden or after-tax profit. Accordingly, the tax-optimising choice of legal form can be used as an instrument for tax planning and internal financing (reduction of tax payments and optimisation of the group tax rate). Therefore, for groups of companies and multinationals, the question that arises is how and within what limits can they make effective use of the cross-border tax rate differential, particularly through structuring their legal form. However, using cross-border tax advantages may be prevented by the controlled foreign corporation (CFC) taxation, called the Anti Tax Avoidance Directive (ATAD), which was introduced in all EU member states from 1 January 2019 onwards due to European law: Art. 7, 8 of Directive 2016/1164 to combat tax avoidance practices. In multinational companies, there is a tension between the tax-optimising choice of legal form, including the structuring of shareholdings, and CFC taxation. It is important to identify the CFC taxation requirements according to ATAD or the respective member state of residence and to avoid these requirements when structuring individual circumstances or investments. An important finding here is that the factual prerequisites for CFC taxation under ATAD are not aligned with the accounting rules, especially controlling interest and control participation. Finally, from an overall perspective, tax-optimised corporate groups’ structure or the legal architecture is not a static variable but an evolving system composed of tax-optimised sub-systems or subgroup structures. This connection between the choice of legal form, shareholding structure and the legal system, tax planning, and tax optimisation in multinational companies is analysed and evaluated based on the Austrian CFC taxation (Sec. 10a CITA) and the German CFC taxation (Sec. 7 FTTA). Furthermore, the implications for companies and society, and the legislator, are highlighted. The article also deals with the relationship between law and tax planning.

The present paper is a commentary on the article “The relationship between Taxation, Accounting and Legal Forms” https://doi.org/10.1515/ael-2019-0076. The article deals with Controlled Foreign Corporation rules (CFC rules) from a profit-seeking perspective. It develops tax schemes and assumes them to be adequate means to avoiding the Austrian or German CFC rules. This commentary argues that from the perspective of a critical rationalist methodology, the topic and the findings of the article need to be viewed with some reservation. A substantial objection applies to the article’s statement that the developed tax schemes are adequate to achieve the end of optimising the effective tax rate. However, there is the even more substantial objection that neither the developed tax schemes nor the end of optimising the effective tax rate without taking the interests of society systematically into account are legitimate. However, the article fails to address the major societal issue of how to reduce tax avoidance.

Against the background of taxation, this article critically examines Schmiel’s commentary “Why tax planning without considering societal interests is unfounded” (https://doi.org/10.1515/ael-2021-0115) and points out the overarching context. This rejoinder argues that the task and the object of my business tax research article, namely to analyse value-neutral tax regulations, in this case the ATAD CFC taxation regulations, with regard to their effectiveness and their achievement of objectives and to derive practical consequences for future tax legislation and further legislative development of the existing tax regulations. Through such an analysis, deficits in the effectiveness of the current tax regulations are revealed at an early stage and the legislator can react before tax losses occur (early information function). This is precisely how social interests are pursued and answered. Moreover, this rejoinder argues that in the area of taxation, it is exclusively the tax legislator who determines in the democratic legislative process which objectives, steering effects and (tax) burden effects it pursues with a norm and to what extent it pursues these objectives. The extent to which the legislator pursues societal or social interests with a tax norm is up to the legislator. This is the so-called assessment prerogative, i.e. the prerogative of the legislature (norm-setter) to decide on the appropriateness and necessity of a particular statutory regulation to achieve a legitimate goal in an ultimately binding manner, taking into account the interests of the state as a whole. This rejoinder rejects’ Schmiel’s claim to use critical rationalism as a methodological framework for research on tax law. From my viewpoint, only the objective will of the legislator (objective intention of the legislator, aim of the law, principle of legality) and the relevant legal principles and methodology as well as the methods of business tax research are relevant when it comes to examining the scope of application of current tax law provisions and their effectiveness, here the CFC taxation rules. Alternative theories such as critical rationalism, a philosophical view, appear to be too vague to ensure legal certainty and appropriate taxation.