Kap. 04

-> tax avoidance nur, wenn non-tax costs (cost of tax avoidance) < tax savings ist

1. compelxity

2. reputation

3. ESG

4. business model

5. legal risk -> potential law changes

1. financing structures -> shift debt to high tax countries

2. transfer pricing

3. shifting of real activities (z.B. production, functions etc.)

1. directive shopping -> holding in EU in a country where is a DTT with country of origin (no wht), all dividends within EU are transferred to this holding company

2. trety shopping -> usage of intermediary company with favorable taxes through DTT (no wht)

typical vehicles

1. hybrid financial instruments -> one country recognizes financial instrument as debt (tax-deductible), the other country recognizes instrument as equity (tax exemption because it’s a dividend)

   -> convertible bond

2. double dip lease (double depreciation of assets)-> one country allows the legal owner (lessor) to depreciate the asset, the other country allows the economic owner (lessee) to depreciate the asset

Transfer prices between group companies must be the same as those agreed between independent third parties

2 step approach:

1. Functional analysis -> classification of affilated companies -> TP should reflect economic reality and be aligned with the value-creating activities (substance over form)

   -> routine company vs. entreprenuer

2. select appropriate TP method

• function performed

• risks borne

• tangible & intangible assets used

• strategic decision making competence

• substantive tangible and intangible assets

• essential value creating functions

• takes major business risks

-> shall receive residual results

• strong dependency on entrepreneur

• low use of assets

• limited risks

• regularly no losses and rather low and stable profits

• financing the acquisition -> maximizing interest deduction (interest limitation rules)

• location of acquisition vehicle (participation exemption, DTT)

• post acquisition tax position -> preserve targets loss carryforwards, group consolidation, compliant transfer pricing strategy

1. Step 1: set up acquisition vehicle

2. step 2: acquisition vehicle borrows fund and acquires target company

3. step 3: acquisition vehicle and target either form a tax group or merge -> interest is tax deductible (targets operating profit is reduced)

• MNEs locate real activities (jobs) in country

• business shall increse R&D expenses

• innovation triggers positive effects on productivity and growth

• state support of R&D leads to pos. spillovers from R&D

1. tax credit

2. super/accelerated depreciation

3. patent box

1. customer (via higher retail prices)

2. downstream business (via higher input product prices)

3. foreign exporters (via lower prices -> reduced sales and profits)

1. interest limitation rules

2. controlled foreign companies (CFC) legislation

1. thin capitalization rule

   -> company is thinly capitalized if ratio of equity to debt is under minimum threshold

   -> max ratio of equity to debt is allowed -> costs of excess debt is not tax-deductible

2. earnings stripping rule

   -> restrict interest deduction to a set percentage of profits

   -> max 30% EBITDA (de minimis 3 million threshold)

attribution of foreign subsidiary’s income to parent company, if subsidiary is in low tax country (tax rate < 15%) and generates predominantly passive income (such as interest, dividends, rental income, royalty income etc.)

1. domestic corporation needs control over foreign subsidiary -> ownership threshold ≥ 50%

2. foreign tax jurisdiction is considered as low-tax country (tax-rate < 15%)

3. foreign subsidiary generates predominantly passive income

1. provide necessary info to conduct transfer price risk assessment (tax authorities)

2. ensure tax payers give appropriate consideration to TP requirements establishing prices (corporations)

3. provide required info to conduct an appropriate audit of transer pricing practices (tax authorities)

+shed more light on MNEs value chain

-danger of double taxation

-reputational concerns (public CbCR)

-competive disadvantage

-detection and enforcement risks by tax authorities

Pillar 1: profit allocation and Nexus approach -> portions of group’s residual profit should be tacedn in the end-market of countries where goods/services are consumed

Pillar 2: global anti base erosion model rules (GloBE) -> global minimum tax rate to stop the rate to the bottom

-> global anti-basi erosion model rules

1. step 1: constituent entities within scope

2. step 2: GloBE income

3. step 3: covered tax

4. step 4: ETR and Top-up tax

5. step 5: allocation Top-up tax (1. Income Inclusion Rule; 2. Undertaxed payments rules)

BEPS 1.0 -> avoiding tax avoidance strategies that exploit and mismatch tax rules to shift profits to low or no-tax locations where no or little economic activity is

-> z.B. CFC rules, limit interest deduction, aligning transfer pricing outcomes with value creation, transfer pricing documentation and CbCR