ICC COMMISSION ON

TAXATION

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 +353 1 614 5007

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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.

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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 1919. 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.

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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

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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

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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

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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.

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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 overthe 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 75008 Paris, France Tel: +33 1 49 53 29 59 catherine.foster@iccwbo.org

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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

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Exit taxes: serious obstacles for international business restructurings and movements of capital

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Improving tax efficiency: the responsibilities of tax administrations and taxpayers 40

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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. 213-98 / 180-521 – (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, long-term 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.

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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.

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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-in-times 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 externalities1 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.

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LIMITATIONS OF DEDUCTIONS OF INTERESTS PAYMENTS

Document No. 180-520 – (February 2012)

HighlightsICC 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

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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 revenue-neutral 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-to-equity 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.

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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.

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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.

Issue1. 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:

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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. 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.

iii. 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.

iv. 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. 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.

vii. 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

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TRANSFER PRICING AND CUSTOMS VALUE

ICC Commission on Taxation in collaboration with the ICC Committee on Customs and Trade Regulations

Document No. 180/103-6-521 (February 2012)

i. HighlightsConcerning 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.

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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

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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 2.

2.

(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.

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(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 theprice 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

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should be considered a solid basis on which customs administrations can evaluate the circumstances surrounding the sale. The OECD Guidelines are based on sound underlying economic principles designed to result in arm’s length prices being charged – the same result sought by customs administrations when determining that prices have not been influenced by the relationship.

Consequently, consistent with Commentary 23.1, in certain instances ICC recommends that importers who set prices in accordance with the OECD Transfer Pricing Guidelines demonstrate that the relationship between the buyer and the seller did not influence the price.

Accordingly, the arm’s length principle (Article 9 OECD Model Tax Convention) may be directly aligned with the rules for determining the acceptability of transaction value under either the circumstances of sale test or test values. This should be formally recognized by customs administrations and doing so will set up a formal link between the OECD and WTO rules with regard to the value of transactions between related parties.

Moreover, there are many situations where voluntary or a fortiori imposed adjustments were not foreseeable at the time the import declaration had been made. The propositions 2 and 3 concern cases where the customs implications of any such transfer pricing adjustment need to be duly dealt with.

Proposal 2

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.

Post-transactions adjustments are permitted by both the OECD guidelines and WTO customs valuation rules. These post-transaction adjustments can be done for a variety of reasons, including voluntary adjustments, but also for year-end adjustments when trying to get within a pre-agreed range or price at the end of a year or period. However, such adjustments are subject to separate sets of rules, and often disregarded by customs when the adjustments are downward.

Should companies be permitted to perform customs value adjustments without being required to set up a provisional valuation procedure or being subject to penalties due to valuation adjustments.

Proposal 3

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. These methods being applicable to the value of the goods impacted by the adjustment:

Application of the weighted average customs duty rate: the weighted average customs duty rate is calculated by dividing the customs duties’ total amount for the year by the respective customs value total amount for the same year. This may include the possibility of a lump-sum adjustment at the end of the year. For example, if at the end of the year, the transfer price adjustments result in an additional payment to the seller, then we recommend that the importer be able to report this lump-sum amount. That way customs will be able to allocate this to all entries declared within the year and the duty adjustment will be the weighted average duty rate.

Allocation of the transfer pricing adjustment, according to the nomenclature code, and to information provided by the importer or customs authorities disclosing all commodity codes and all relevant import data available in their national statistics.

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Proposal 4

It is recommended that in the case of post-transaction transfer pricing adjustments (upward or downward), companies be relieved from:

The obligation to submit an amended declaration for each initial customs declaration.Instead, a single recapitulative return referring to all the initial customs declarations would be lodged.

The payment of penalties, as variations of the transfer price. In fact, these variations depend on various factors which have absolutely nothing to do with an intention to evade customs duties.

Proposal 5

It is recommended that OECD methods be acceptable to customs administrations with an accommodation of the following elements:

Identical or similar goods: recognition of the geographical and temporal circumstances of the market to enable a simplification in the level of requirements according to the needs of the country of import and to permit an approach based on market segment / regional area / comparable market conditions.

Recognition of corporate legal entities (performing specific functions and adding value within a group) in order to enable customs authorities to acknowledge transfer pricing documentation and functional analysis in the broad economic context, and not narrowly according to the chronology of transactions.

Proposal 6

Recognition of the acceptability of transfer pricing documentation by the customs administration.

Tax transfer pricing documentation is a tax legal requirement almost all over the world. Its content is largely aligned across the countries and can hence be considered fairly standard. It normally includes all of the information required to analyse the circumstances of sale, the parties involved, the added value, and the functions performed by each party. It is recommended that customs requirements, in addition to those of tax authorities, be defined so as to enable incorporation of those requirements into transfer pricing documentation to serve both purposes.

Conclusion This policy statement breaks new ground in a highly complex and contentious area within the global tax and customs world. It is to be expected that many around the world will contribute to this topic in the foreseeable future.

ICC will continue to monitor developments in this important area and will issue an update of this policy statement if needed.

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TAX TREATMENT OF INTERNATIONAL TAKEOVERS/MERGERS

Document No. 180-507 (14 January 2010)

Introduction As the world business organization, and a representative body that speaks on behalf of enterprises from all sectors in every part of the world, the International Chamber of Commerce (“ICC”) has noted with concern a recent trend in some jurisdictions towards the taxation of international takeovers and mergers.

In particular, a number of jurisdictions have asserted that they may impose capital gains taxes and withholding tax obligations in circumstances in which some portion of the transactional value derives from underlying assets in its jurisdiction even though the transaction has taken place entirely outside that jurisdiction. For example if a company in Country A takes over a company in Country B, which directly or indirectly owns a subsidiary in Country C, or indeed in Country D, E or F, Country C, D E or F may seek to impose such taxes.

Separately, ICC notes that such recent changes are introduced by means of retrospective changes in law or policies. Such retroactivity undermines the stability of the tax regime of a country. ICC is concerned that this approach extends the scope of taxation outside commonly applied international taxation principles, and can create a significant barrier to international trade and investment.

Background Over the past few years, a number of states have put forward the view that they are entitled to capital gains tax on mergers and acquisitions taking place outside their jurisdictions, involving transfers of shares in overseas companies that have no personal or proprietary link with that state. Further, in some cases, it may be suggested that the buyer is subject to obligations for deducting withholding tax from the seller’s proceeds, even if the buyer and seller have no connection with that particular jurisdiction.

As a logical consequence of this position, the sale and acquisition of a global corporation with significant international operations could be subject to capital gains taxes and withholding tax obligations in numerous jurisdictions beyond those with which the parties to the transaction and the assets or shares directly transferred had any material direct connection. Such a situation would create a significant barrier to international trade, merger and acquisition activity and foreign direct investment flows— thereby undermining the efforts of many governments to attract businesses by expanding investment opportunities.

ICC recommends that governments:Review their tax policies to ensure that the tax treatment of global acquisitions is consistent with generally applied principles of territorial taxation;

Avoid retrospective changes in tax laws or policy; and

Develop tax regimes that are supportive of other policies to promote business investment, noting that this will result in increased employment and tax revenues in the long term.

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International taxation and extra-territoriality Whilst ICC fully recognises that countries may need provisions in their tax law to prevent conduct involving artificial arrangements—designed to circumvent a country’s tax laws—ICC is concerned that this treatment of international takeovers and mergers, imposing taxation based on the location of underlying assets, is not in conformity with generally accepted international tax practices. The tax treaty network has been established on the basis of these international tax practices.

In this connection, it is a widely accepted general principle of international tax law that a state may exercise its fiscal jurisdiction with respect to persons who have a personal link with that state, or to assets with which it has a real or proprietary link. The basis of tax jurisdiction linked to residence or “local source” also underlies numerous tax treaties, the vast majority of which are concluded on the basis of models published by the Organisation for Economic Co-operation and Development or the United Nations. These models proceed on the assumption that states will exercise their jurisdiction in accordance with the general principles of international tax law and will either tax persons who are residents of that state, or income having its source in that state.

Applying these concepts to capital gains on the sale of corporate shares, such a capital gain may be taxed either in the state of residence of the person disposing of the asset on which the gain arose, or in the state where the asset is situated. The only exception to this principle that is often accepted in tax treaties is where there is a disposal of shares in a company and the value of those shares is substantially derived from the ownership, directly or indirectly, of immovable property situated in a state. In those circumstances the state where the immovable property is situated may choose to preserve its jurisdiction to tax the gain, even though that gain is realised by a person who is not resident in that state on the disposal of shares not situated in that state.

The approach to the taxation of mergers and takeovers outlined above—that capital gains taxes and withholding tax obligations may be imposed by a state on transactions which have no direct link with that state—creates considerable uncertainty and indeed real costs to international businesses, many of which are ultimately born by consumers (through higher prices), workers (through reducedemployment opportunities and lower wages), and governments (through decreased tax revenues in the long-run).

Retrospective amendments to tax law and regulations ICC is particularly concerned to note the use of retrospective changes in law. Moreover, we also note a development regarding the reinterpretation of long established existing laws and tax treaty provisions to justify these changes to the tax treatment of international transactions. The legal and commercial aspects of such exercise of extra-territorial jurisdiction create additional uncertainty.

From a business perspective, such an approach is liable to expose many previous buyers and sellers of shares in global corporations to significant tax liabilities, and create further uncertainty for such transactions going forward. This position greatly amplifies the likely adverse impact of these measures on international trade and investment.

The use of retrospective amendments to tax laws and regulations by jurisdictions is a deterrent for businesses which consider future investments in those jurisdictions.

Recommendations to policy-makers In light of the potential impact on international trade and investment, ICC stresses the need for governments to undertake a review of their approach to the taxation of international takeovers and mergers.

As a guiding principle, this should seek to ensure that domestic policies and administrative practices are aligned with reasonable and generally accepted international tax principles as described above.

This is particularly true in an ever accelerating globalised world where differences in tax regimes create barriers to the efficient conduct of a business operation. The use of retrospective changes in law creates great uncertainty and concern for investors and should be avoided.

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TRANSFER PRICING DOCUMENTATION MODEL

Document 180-498 final (13 February 2008)

The ICC Statement entitled “Transfer Pricing Documentation: A Case for International Cooperation” was released in 2003 (“the 2003 ICC policy statement”). In that paper the Commission expressed its concern that multinational enterprises (MNE’s) were being punished with multiple and conflicting transfer pricing documentation policies of many countries. Meeting these compliance requirements is complex, costly and time-consuming, all done under threat of draconian non-deductible penalties. The situation is getting out of hand from a practical standpoint.

Transfer pricing documentation requirements continue to spread from country to country. These requirements reflect the anxiety of tax administrations over the protection of their tax bases and the common perception of tax administrations that MNEs minimize local income taxation through transfer pricing manipulation. Tax authorities should reasonably expect MNEs to pay a fair share of tax in each country in which they carry on business. MNEs, on the other hand, should reasonably anticipate that tax authorities will strive to deal with the issue in a uniform manner that will prevent international double taxation. Unfortunately, the natural result of separate and uncoordinated national policies is ever-increasing and divergent documentation requirements and, in consequence, an inappropriate and unnecessary compliance burden on MNEs.

This ICC policy statement proposes a set of rules allowing MNEs to prepare a single uniform package of documentation that would be considered reasonable by all involved tax authorities. Implementation of such rules would not mean that tax authorities would be forced to accept the position documented by the MNE. In some countries, the burden of proof falls on the tax administration. Even in those countries where it does not, the ICC believes that the tax administration should bear that burden of proof if the proposed standard of documentation is met.

Where a tax administration challenges a position documented under the proposed rules, domestic controversy and tax treaty mutual agreement procedures may apply but, in all cases, the case should ultimately be subject to a binding arbitration regime, either within the specific regional grouping (e.g., the European Union), or under a bilateral (or multilateral) arrangement similar to that recommended by the Organisation for Economic Co-operation and Development (OECD).

The proposed set of transfer pricing documentation rules contains three key principles.

First, the documentation package should be based upon information that is readily available in the bookkeeping and management reports of the MNE concerned. External assistance to provide documentation should not be necessary. Second, common documentation rules should not merely cumulate all requirements of all countries.

Rather, a reasonable and balanced reflection of the various national approaches should be taken into account. For example, while the work of the Pacific Association of Tax

Administration (PATA) is a welcome initiative; ICC does not regard the PATA proposal as consistent with the criteria of the 2003 ICC policy statement. Third, once a MNE fulfills the proposed documentation requirements, it should be relieved of any liability for penalties.

The ICC documentation package outlined below is intended to address each stage of tax authority review, and is based upon the actual experience of our Members. In particular, the documentation approach first provides a check that the administrative guidance requirements have been met and, second, a technical review of data and systems.

ICC recognizes that other bodies, such as the European Union Transfer Pricing Forum and the OECD, have indicated interest in addressing standardized transfer pricing documentation packages that will be deemed to satisfy individual country documentation requirements. ICC hopes that its contribution will serve as a focal point to foster a further positive development of simple and practical

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documentation requirements. ICC believes that, under current conditions, the optimal location for such a specific package is the OECD Transfer Pricing Guidelines, which have wide acceptance among Member and non-Member states alike.

This policy statement is specifically addressed to the situation of large MNEs. The principles and the proposed documentation rules are also beneficial to small and medium-sized enterprises engaged in international transactions by reducing their costs and time effort required; countries may determine that cross border activities need to be encouraged by providing even less stringent requirements applicable to those enterprises.

Specific Documentation Parameters The experience of actual transfer pricing case resolution in Competent Authority procedures, Advance Pricing Agreements, rulings, litigation etc., guides the ICC philosophy of documentation. This is in contrast to the common documentation model that has evolved in some countries, which is based on utilization of: (i) re-formatted financial information (i.e., internal financial data converted to a format appropriate for transfer pricing purposes); (ii) economic models; (iii) extensive functional analysis; and (iv) lengthy documentation packages.

An appropriate transfer pricing documentation package should relieve MNEs of the increasingly burdensome documentation requirements proliferating like weeds in a garden. Such a package could be straightforward in nature. It should be structured so that it can, in typical situations, be completed internally by a MNE without need for external consulting assistance (consultants, software packages, or otherwise).

The elements envisioned in the 2003 ICC policy statement can be implemented in a documentation package containing the following elements:

1. Mapping: Business, Industry and Markets A short description of the business, industry, and relevant markets. This information is typically available in the public security market disclosure reports, financial documents, and other sources within the MNE. Industry data, to the extent required, is typically available through securities or other firms.

2. Business Segments In major MNEs, there are inevitably multiple product lines or businesses. To the extent that the Transfer Pricing arrangements vary from segment to segment, the documentation should provide appropriate description of the segments. Again, such segment information is typically included in public security market disclosure reports or other internal sources.

3. Jurisdictions and Parties of Principal Interest Compliance with the spreading range of transfer pricing documentation and penalty regimes require that a standard documentation package address parent company as well as foreign subsidiary matters. It will normally be appropriate to prepare a comprehensive report for the parent company in its home jurisdiction. This report can be adapted for the foreign subsidiaries. It is typically appropriate to prepare a separate report for each pertinent jurisdiction in which the MNE does business or has a foreign subsidiary or permanent establishment.

4. Intangible Property Development History, Financing and Facilities In any situation, the underlying intangibles of the business need to be plainly understood from the standpoint of the parties that developed the intangibles and hold legal ownership (if relevant in the situation at hand).

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5. Functional Analysis: Risk-Function Matrix Transfer pricing analysis inevitably focuses upon the allocation of risks and functions between the controlled entities involved in the transactional patterns in question. This is a process that can be readily accomplished by a team knowledgeable about the business units in question with appropriate transfer pricing guidance. In the early days of developing transfer pricing documentation, it seemed to be an article of faith that such a project required a team of people and development of detailed explanation. Experience over the years suggests that such a project design often seems to cause more problems than it resolves. Rather, in most typical situations a simple one or two page matrix is sufficient, even in contexts where bilateral agreement will be sought once the documentation is formulated.

6. Financial Results The financial results of the pertinent business segments should be presented on an aggregate and segmented basis. This information is normally available for internal management review purposes. Typically, the information simply needs to be adapted to present the appropriate information utilized for transfer pricing analysis or documentation purposes. There should be no requirement to re-format internal data, unless or until there is a serious challenge. This was a critical design element referred to in the 2003 ICC policy statement.

7. Transfer Pricing Methodologies The various transfer pricing methodologies adopted for respective tangible, intangible, services, capital or other transfer should be identified and explained for each pertinent segment.

In circumstances where multilateral methodologies are utilized, this description would be common for the documentation prepared for each country. Where variations exist, appropriate description will be included.

8. Report The documentation report should be prepared in a common language. Where the group carries on its activities in a dominant language, that language may be adopted. Otherwise, an English language report should be acceptable to the tax administrations. In each case, local language translation should not be routinely required but only as necessary for the work of the tax administration.

9. Advance Agreements, Rulings or Resolutions To the extent that the pertinent methodologies have been approved in APAs, binding rulings, Competent Authority agreements or other arrangements with tax authorities in the base country, these, should be appropriately referenced. This is especially helpful in situations where there is a treaty relationship between that country and other countries in respect of which the documentation is being prepared. To avoid an unnecessary administrative burden, only documents relevant for the specific case or countries should be referenced; it is not required to provide information about all APAs etc. in all countries if not relevant.

10. Country Specific Documentation Packages The basic information from each of these categories should be pertinent for each country where there are common segments or risk-function factors. Country-specific variations can be documented separately as appropriate. The EU TP Documentation Code of Conduct5 provides a potential model for what should be included in the country specific file.

11. Collectivity and Consistency Use of the proposed documentation rules is optional for MNEs. MNEs opting for the proposed documentation rules should generally apply this approach collectively to all associated enterprises to which transfer pricing rules apply. However, some MNE groups have a decentralized organizational, legal or operational structure, or consist of several large divisions with completely different product

5 http://eur-lex.europa.eu/LexUriServ/site/en/oj/2006/c_176/c_17620060728en00010007.pdf

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lines and transfer pricing policies. In other cases the divisions of a MNE group have no inter-company transactions. Also, implementing the proposed documentation rules in the group or in a recently acquired company may take some time. In well justified cases, a MNE group should, therefore, be allowed to produce more than one documentation package or to exempt specific group members from the documentation package.

A MNE group should not arbitrarily opt in and out of the proposed documentation approach but should retain consistency and continuity in its documentation policy.

Documentation Package Specifically, the ICC proposes that the documentation package consist of a single report for the group parent company which is then adapted to local country requirements, taking into account the actual cross-border transactional flows of such local country entities. The elements of the package could be as follows:

1. Opinion The report concludes that the transfer pricing is compliant with the applicable TP law or administrative guidance, as well as any pertinent penalty provisions.

2. Factual Representation Statement The report would include a factual explanation. This would generally comprise a description of the industry, the company, inter-company transactions, risks and functions (in a simple chart), and pertinent financial information.

a. The format of this statement should be the same as used in APA or ruling applications, and should not need to be more than about 20 double-spaced pages, including exhibits.

b. The critical elements of this statement are a single risk-function chart and segmented financial information. As noted above, a key design criterion of the ICC 2003 policy statement is the ability to use financial data provided by a MNE’s internal systems without having to reformat or otherwise re-shape such data for transfer pricing documentation purposes.

c. A format of presenting such transfer pricing information for a group (regardless of size) on a single spreadsheet, with supporting schedules that address the local unit results (by product line and reporting unit, whether legal entity or otherwise) that is appropriate for transfer pricing analysis purposes is available.

3. Economic Data Economic support for the transfer pricing methodologies can be developed from internal sources (transactions with unrelated parties, joint ventures, in-out licensing arrangements, or external databases maintained by the group), and confirmed, as appropriate, with external data. Where external data is required, the nature of such data is by now largely generic in nature (i.e., the margins for manufacturers, distributors, services providers and so on are well known; formal studies are often not needed in CA and APA matters).

4. Technical Memorandum This would set out compliance with the various technical requirements of the local country and OECD Guidelines.

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SAMPLE DOCUMENTATION PACKAGE

A sample documentation package embracing these principles is attached to this policy statement. It could easily be adapted to home and local country requirement.

The ICC observes that transfer pricing is a dynamic field. The comments in this statement shall be reviewed at least bi-annually in light of further developments.

TABLE OF CONTENTS

Page

I. OECD Transfer Pricing Requirements .......................................................................... 33

A. Purpose of the Report ....................................................................................... 33

B. Business Description. ........................................................................................ 33

1. General Corporate Background ............................................................. 33

2. General Business Activity ...................................................................... 33

C. Financial Results ............................................................................................... 33

1. Related Party Transactions ................................................................... 33

D. Functional Analysis ........................................................................................... 34

E. Transfer Pricing Analysis Under the OECD Guidelines. .................................... 34

1. Background ........................................................................................... 34

2. Transfer Pricing Method Selection ......................................................... 34

3. Review of Other Transfer Pricing Methods ............................................ 35

F. Economic Analysis ............................................................................................ 36

G. CONCLUSION .................................................................................................. 36

II. Local Country Transfer Pricing Requirements ............................................................... 36

A. Local Country Transfer Pricing Legislation ........................................................ 36

1. Transfer Pricing Law and Administrative Guidelines .............................. 36

2. Documentation Requirements ............................................................... 37

3. Transfer Pricing Penalties ........................................................................ 5

4. Analysis and Conclusions ........................................................................ 5

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INDEX OF ANNEXES

Annex 1 The Company’s Annual Report/Public Security Market

Disclosure Reports

Annex 2 Legal Organizational Structure of the Company

Annex 3 The Company’s Financial Information by Business

Segment and Country for the Year Ended December 31, 20XX

Annex 4 The Company’s Related Party Transactions for the Year

Ended December 31, 20XX

Annex 5 The Company’s Risk and Function Summary Chart

Annex 6 The Company’s Risk and Function Description

Annex 7 The Company’s Transfer Pricing Analysis Report

Annex 8 Local Country Financial Statement Information for the Year Ended December 31, 20XX

Annex 9 Local Country Audited Financial Statements for the Year Ended December 31, 20XX

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I. OECD Transfer Pricing RequirementsA) Purpose of the Report. This report compiles the transfer pricing documentation in support of the related party transactions between Parent Company and its subsidiaries (collectively the “Company”) for the taxable year ended December 31, 20XX. This report was prepared with respect to the application of the arm’s length

principle pursuant to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the Organization for Economic Cooperation and Development (the OECD Guidelines).

B) Business Description. 1. General Corporate Background.

The Company was incorporated on January 1, 19XX in country. It is publicly traded on the exchange. The Company is a leading provider of products and services. It offers its products and services through four business segments: Segment #1, Segment #2, Segment #3 and Segment #4. Attached hereto as Annex 1 is a copy of the Company’s Annual Report/Public Security Market Disclosure

Reports which provides additional information about the Company’s business.

An organizational chart for the Company and its subsidiaries is attached hereto as Annex 2. The Company has a network of offices extending across more than 50 countries and had more than 50,000 employees by the end of 20XX.

2. General Business Activity

Brief description of the Company’s business activities. For additional information, see pages x-xx of Annex 1.

Segment #1. Brief description of the Company’s segment #1 activities. For additional information,

see pages x-xx of Annex 1.

Additional Segments. Add similar descriptions and references for additional business segments.

C) Financial Results

Included in the Company’s Annual Report/Public Security Market Disclosure Reports for the tax year

ended December 31, 20XX, a copy of which is attached as Annex 1, are audited financial statements. During 20XX, the Company generated approximately 46% from American operations, 33% from European, Middle East and African Operations, and 21% from Asian and Pacific operations. The Company generated approximately 40% from Segment #1, 30% from Segment #2, 20% from Segment #3 and 10% from Segment #4. The Company’s 20XX financial results are also

summarized, by business segment and country, in a chart attached as Annex 3.

1. Related Party Transactions

During 20XX, the Company had related party transactions of approximately XXX million. summary schedule showing the related party transaction is attached hereto as Annex 4.

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D) Functional Analysis A chart summarizing the Company’s risks and functions is attached as Annex 5. In addition, a

description of the Company’s business operations as well as a description of the risks and functions

of the Company and its pertinent subsidiaries is attached hereto as Annex 6.

E) Transfer Pricing Analysis under the OECD Guidelines

1. Background

The OECD Guidelines prescribe specified methodologies for determining the arm’s length terms for

the transfer of tangible property, intangible property, services, and capital between controlled taxpayers. In addition, the OECD Guidelines allow for the use of unspecified pricing methodologies where the specified methodologies set forth in the regulations are not applicable.6 The arm’s length

result of a controlled transaction must be determined under the method that, under the circumstances, provides the most reliable measure of an arm’s length result. The OECD Guidelines provide that the

traditional transaction methods (i.e., comparable uncontrolled price, resale price, and cost plus methods) are preferable to other methods.7 However, the OECD Guidelines provide that, if the traditional transaction methods cannot be reliably applied alone or cannot be applied at all, the “transactional profit methods” (i.e., the profit split or the transactional net margin methods) should be

applied.8 The discussion set forth in this paragraph E of the Transfer Pricing Report addresses which method is the best method for purposes of determining the related party transfer pricing of the Company.

2. Transfer Pricing Method Selection

The OECD Guidelines provide that an appropriate method must be selected to evaluate the arm’s-length nature of the intercompany transfer prices. The selected method should be the method that provides the most reliable result and takes two primary factors into account: (i) the degree of comparability between the controlled transaction (or taxpayer) and any uncontrolled comparables; and (ii) the quality of the data and assumptions used in the analysis.

The following analysis discusses the methods available for determining the reasonableness of the transfer pricing associated with the inter-company transactions between and among the Company and its foreign affiliates and documents the reasons for the selection of the transfer pricing method.

Important criteria for selecting an appropriate method involve the degree of comparability between the controlled and uncontrolled transactions, the reliability of assumptions used in the analysis, and the reliability of data.

As detailed in the next paragraph, the method was selected for the analysis of all related party transactions in this case.

Transfer Pricing Method Selection. Brief description of the selected method.

6 OECD Guidelines ¶ 1.68. 7 OECD Guidelines ¶¶ 2.49 and 3.49. 8 OECD Guidelines ¶ 3.1.

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3. Review of Other Transfer Pricing Methods

Prior to selecting the transfer pricing method as discussed in paragraph E.2., we considered whether other transfer pricing methods set forth in the OECD Guidelines should be applied to determine whether the related party transactions between the Company and the CFCs meet the arm’s length

criteria.

A summary of this analysis is set forth in the following table:

Best Method Analysis

Method Reason for Rejection

Comparable Uncontrolled Price Method Absence of comparable uncontrolled transactions.

Resale Price Method Add brief explanation for rejection.

Cost Plus Method Add brief explanation for rejection.

Transactional Net Margin Method Add brief explanation for rejection.

Profit Split Add brief explanation for rejection.

Comparable Uncontrolled Price Method. The CUP method evaluates whether the amount charged in a controlled transaction is arm’s length by reference to the amount charged in a comparable uncontrolled transaction.9 To utilize the CUP method, the taxpayer must establish that the products, contractual terms and economic conditions associated with the controlled transaction bear a close similarity to the products, contractual terms and economic conditions associated with the uncontrolled transaction.10

Since the CUP method involves a direct comparison of related party prices with arm’s length prices,

the CUP method is normally preferred as a way to evaluate whether related parties transact at arm’s

length. In this case, any third-party transactions engaged in by the Company and its CFCs are either (1) not sufficiently similar to apply the CUP method or (2) reliable comparable uncontrolled transaction data were not available. Consequently, the CUP analysis was not selected as the best method for analyzing the majority of intercompany transfers in this case.

Resale Price Method. Brief description similar to paragraph E.3.a.

Cost Plus Method. Brief description similar to paragraph E.3.a.

Transactional Net Margin Method. Brief description similar to paragraph E.3.a.

Profit Split Method. Brief description similar to paragraph E.3.a.

9 OECD Guidelines ¶ 2.6. 10 See OECD Guidelines ¶¶ 2.6 through 2.13.

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F) Economic Analysis

As noted above, the transfer pricing policy of the Company is to charge ____. As can be seen from Annex 2, the Company had the following related party transactions.

The Company has engaged XYZ Economics to conduct a search for independent, publicly listed firms comparable to the Company in terms of its operations and functions. A copy of the report titled “The

Company’s Transfer Pricing Analysis” is attached as Annex 7.

Based on the analysis, XYZ Economics concludes that the financial results for the selected companies are a comparable and reliable measure of transactions similar to that of the tested party. The 3-year average results for these companies are set forth in the following Table:

Table

Comparison of the Company’s Related Party Transactions and Comparable Companies

Returns Earned by Comparable Companies

Lower Quartile 2.5%

Median 5.0%

Upper Quartile 8.8%

3-Year Return Earned by the Company 5.5%

The 3-year return earned by the Company of 5.5 is within the inter-quartile range of the three year average mark-up established by comparable companies. Consequently, because the transfer pricing results for the related party transactions are within the range of comparable companies, we conclude that the transfer pricing of the Company and its related subsidiaries satisfies the arm’s length principal

of the OECD Guidelines.

G) Conclusion

Based on the review of the financial information and documentation provided by the Company, we conclude that all related party transactions comply with the arm’s length principle under the OECD Guidelines and local country law.

II. Local Country Transfer Pricing Requirements

A) Local Country Transfer Pricing Legislation 1. Transfer Pricing Law and Administrative Guidelines

Brief overview of local country transfer pricing legislation. If applicable add language similar to “the local country transfer pricing rules generally conform to the transfer pricing guidelines of the OECD.”

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2. Documentation Requirements

Brief overview of local country contemporaneous documentation requirements.

3. Transfer Pricing Penalties

Brief overview of any applicable transfer pricing penalties.

4. Analysis and Conclusions

Company Foreign is a foreign subsidiary of the Company (“CompFor”). To the extent that CompFor

purchases or leases goods, or utilizes services from other group affiliates, the results for those aggregated transactions are described above and detailed in Annex 8, Local Country Financial Statement Information. In addition, a copy of the CompFor’s Audited Financial Statements is attached as Annex 9.

As noted above, the XYZ Economics report concludes that the range of returns should be between 2.5% and 8.8%, with a median of 5.5%. CompFor’s returns are 4.8% for 20XX as illustrated in Annex

8. CompFor’s returns are well within the arm’s length range of comparable companies. Therefore we

conclude that the aggregated transactions involving purchase or lease of goods or services by CompFor satisfy the arm’s length principle under local country law.

Given that the local country transfer pricing guidelines are substantially similar to the OECD Guidelines, the analysis in paragraph I is directly applicable and addresses these matters in greater detail. In addition, as noted above, the analysis set out in this report meets the documentation requirements of local country.

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ANNEX 3

39

40

41

ANNEX 4

42

ANNEX 5

43

ANNEX 8

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AN OPTIONAL COMMON CONSOLIDATED CORPORATE TAX BASE IN EUROPE: IMPLICATIONS FOR BUSINESSES WORLDWIDE

Document 180 /496 (11 June 2007)

Background In March 2000, the European Council launched the so-called Lisbon Strategy, which sets out the ambitious objective for the EU of becoming, by 2010, the most dynamic and competitive knowledge-based economy in the world. The importance of improving taxation policies throughout the EU as a means to achieve the Lisbon goals has been highlighted many times. At present, the existence of 27 different and often incompatible tax systems constitutes a significant obstacle to economic efficiency and the functioning of the internal market. Double taxation, the lack of tax consolidation, tax-related hindrance of business restructuring and enormous compliance costs are just some barriers to a more competitive and open European market.

Removing these obstacles would significantly spur investment and contribute to enhancing the competitiveness of the EU economy.

For this reason, in October 2001, the Commission presented a new plan for an internal market without tax obstacles, acknowledging that the issue of reforming EU company taxation is crucial for achieving the Lisbon objectives. The technical work on a Common Consolidated Corporate Tax Base (CCCTB), however, only commenced in 2004 through the creation of a Commission Working Group in which all Member States participate. As has been stated repeatedly by Commission representatives, it is the firm intention of the Commission to present a legislative proposal during 2008.

Purpose and key features of the CCCTB The core purpose of the CCCTB is to establish a single, consolidated computation of taxable corporate income for businesses operating within the EU that may be adopted at the option of the taxpayer. Such a common tax base will make it possible for businesses to opt for taxation according to a single consolidated corporate tax calculation instead of the multiple national tax bases that now apply.

It should be underlined that the objective is not to harmonize tax rates among the Member States. On the contrary, tax sovereignty with respect to tax rates is instrumental to ensure sound tax competition among Member States and thus to promote efficiency. The objective is, rather, to create a more efficient market and tax system for companies operating within the EU by providing for a common and competitive tax base. It is likely that only some Member States in the EU will initially introduce the CCCTB. Other Member States can then join the regime at a later stage.

Nonetheless, countries joining at a later stage, and even countries outside the EU, will also be immediately affected by the adoption of the CCCTB. This should be taken into account in the process of establishing a CCCTB in the EU. The ICC would like to bring some important issues in this regard to the attention of policymakers.

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International taxation under the CCCTB There are two basic options available in providing recognition for foreign taxes: the exemption system (territoriality) and the credit system (world-wide taxation). ICC believes that the CCCTB should be based on the exemption approach11.

A CCCTB based on source taxation (territoriality) would effectively not include foreign source income. The “source” of an item of income refers to the place where the income-generating activity is carried out (for example, royalties generally have their source where the licensor is situated, interest income where the lender is situated, dividends where the subsidiary resides and business profits where the business activity is performed). Such a system would be compatible with existing tax treaties Member States have with non-participating countries. Exempting foreign source income should not prevent businesses in participating Member States from deducting losses in third countries. Such a provision in the CCCTB could be accompanied by a recapture mechanism to ensure taxation of net profits.

If, on the other hand, the CCCTB is based on a world-wide rather than a territorial regime, it is important to ensure that foreign source income should not face double taxation. This can be achieved by providing for a full tax credit in respect of foreign taxes. However, such a credit method must take into account the total tax burden a company faces under the CCCTB . Since the tax burden depends not only on the tax base (CCCTB) but also on the national tax rate in the participating Member State, the credit method is complex and may not deliver single taxation of the net profit. In either case, foreign dividends must be excluded from the CCCTB to prevent economic double taxation.

In relation to third states, the CCCTB should provide for common transfer pricing rules based on the arm’s length principle and be accompanied by a clear dispute resolution mechanism.

ICC encourages participating CCCTB countries to allow for mandatory arbitration.

This could be instrumental in promoting the development of suitable arbitration mechanisms in the tax area, ensuring timely settlements. Allocation of profits and losses to a permanent establishment (PE) should follow the arm’s length principle established in the OECD Model Tax Convention (MTC).

Consolidation One of the main benefits of the CCCTB is consolidation within a group, eliminating the increasingly onerous Transfer Pricing compliance burden and reducing the number of associated cross border disputes. Consolidation furthermore allows a group to be taxed on its net profit, since cross-border loss offset would be given and intra-group transactions eliminated before taxable profit is calculated. By allowing for net taxation, consolidation will enhance economic efficiency and reduce the risk of double taxation.

11 ICC concluded in its Policy Statement dated 3 October 2003 that both the exemption system and the tax credit system are useful approaches to avoiding double taxation on cross border dividend flows but, on balance, favoured an exemption system. In the context of the CCCTB, the exemption system is preferable. Whereas the exemption method relieves the double taxation at the level of the tax base, the credit method applies to the tax liability. As a result, the tax rate is reflected in the latter approach but not in the former. As the CCCTB will provide for rules on how the tax base is calculated and shared among Member States but not how the tax liability should be calculated, the application of a method reflecting actual tax rates (i.e. the credit approach) would be outside its scope.

A CCCTB based on a credit method would frequently lead to complexities triggered by the parallel application of the CCCTB and the current network of double tax treaties. As the CCCTB does not involve the renegotiation of current double tax treaties, taxpayers would presumably be entitled to request treaty benefits where the treaty gives more preferable tax relief than the CCCTB (typically in relation to exemption treaties). This would in turn require some rules to monitor the allocation of foreign income (or loss) and to ensure that the “right treaty” is applicable on the relevant income. How this would be achieved is difficult to foresee. It does, however, seem to require that the foreign income be earmarked so that it can be traced and allocated to the Member State which is to apply its double tax treaty with the relevant third country. Apart from the administrative burden this would impose, it appears very difficult to combine such a scheme with a system where all income and losses are to be consolidated in a single location.

A CCCTB based on Capital Import Neutrality would minimize the difficulties of having to apply bilateral double tax treaties inthe context of the CCCTB. As double tax treaties can only reduce the tax liability, their applicability is limited to situations where the underlying tax legislation (i.e. the CCCTB) provides for a less favourable relief than the treaty. Thus, where the CCCTB provides for a comprehensive relief by means of exemption, the problems of having to apply and/or renegotiate existing treaties are kept to a minimum.

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ICC regards consolidation as a fundamental and necessary element of the common tax base. The CCCTB should provide for consolidation from the very start. A two-step approach, with first a common tax base and consolidation only at a later stage, would not find support in the business community. The main objectives of the CCCTB of removing transfer pricing concerns and providing for cross-border loss relief would not be fulfilled by only having a common tax base. ICC furthermore encourages all countries to allow for domestic group consolidation combined with the possibility for cross-border loss relief on a timely basis.

Anti-avoidance rules The CCCTB is likely to include anti-avoidance rules. Such rules should only be adopted where absolutely necessary to ensure that they do not infringe on the principle of net taxation.

Countries with a lower tax rate should not face the burden of additional corporate taxation on their domestic investments undertaken by businesses taxable under the CCCTB. In particular, controlled foreign corporation (CFC) rules should be avoided and, to the extent used, only apply to wholly artificial arrangements.

Administration In order for the CCCTB to be an attractive tax system for both businesses and governments, delivering much needed simplicity, it must allow for single compliance in a single location (onestop-shop). Hence, the taxpayer should only be required to file one tax return in one country for the entire group. The one-stop-shop approach must equally apply to the apportionment of the calculated profit or loss. The chosen single key for allocating tax revenues to participating countries must be simple, robust and avoid reintroducing transfer pricing concerns for businesses. Any disagreement among the Member States should be resolved at a common and single point of authority. Without a one-stop-shop approach, administrative costs may not be reduced sufficiently to merit support and interest from the business community.

There will still be a need to negotiate tax treaties between each Member State and third countries, since not all companies will opt for taxation according to CCCTB rules but will retain taxation under national rules. As a long term goal, common tax treaties with outside countries should be negotiated from a single location and then applied uniformly in CCCTB countries.

Conclusion ICC welcomes the initiative to make the European market more efficient by reducing tax distortions and compliance costs. For the CCCTB to be successful, it is vital that the system is optional to businesses, consolidated from the start with an administration of the system according to a one-stop-shop approach. Compliance costs and distortions must be reduced, also in relations with countries not having the CCCTB. Businesses in outside countries should not face tax induced distortions in their activities in the European economy.

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EXIT TAXES: SERIOUS OBSTACLES FOR INTERNATIONAL BUSINESS RESTRUCTURINGS AND MOVEMENTS OF CAPITAL

Document 180-488 Final (16 June 2006)

Introduction Increasingly, states are implementing so-called exit taxes to protect their taxation rights where companies transfer their seat or their assets to another country. These measures may entail significant double taxation, acceleration of tax claims and considerable compliance burdens for companies. Such corporate transfers of seat or assets have become progressively more common given the international mobility of capital.

As discussed below, exit taxes generally seek in some manner to tax unrealized gains at the moment the company or assets leave the country. However, the fact that the former state has already taxed part of the gain does not automatically mean that the new state in which the realization actually takes place, will take account of such taxes by limiting its taxation right to the value accrued in its country or by granting a tax credit for the taxes paid in the former state. Tax treaties do not generally afford sufficient protection because they lack precise rules to deal with such situations.

Ideally, states would find means to protect their tax bases without resorting to exit taxes. Where such taxes are enacted, ICC believes it is important, in the interests of avoiding excessive or double taxation and protecting the free movement of capital and the efficient functioning of enterprises, that certain safeguards be included.

Different kinds of exit taxes The domestic law of most states includes provisions to tax unrealized gains when the seat of a company or its assets are transferred abroad. Technically, these regimes generally measure the amount of such unrealised gains by determining the amount which would have been realized had the assets been sold in the market. In effect, the enterprise realises “phantom” income as if it had sold its inventory, fixed assets and perhaps intangible property at market value.

The scope of such exit taxes varies among states. In addition to the taxation of unrealized gains, states may also provide in their domestic law for the recapture of previously enjoyed deductions or deferrals, such as depreciation or reserves. Some states also impose a tax in lieu of dividend withholding tax.

Harmful effects for the business community Exit taxes have a number of adverse effects on international business:

They make it more difficult for companies to restructure and adapt to changing economic conditions in a globalised world. The taxation of phantom income may be an insuperable obstacle to commercial reorganizations that would otherwise occur.

They withdraw liquidity and net equity by taxation of unrealized gains or by an obligation to provide adequate security for such deemed gains.

Exit taxes create new complexity and increased burdens of compliance and administration for both companies and tax authorities. A substantial difficulty is to determine the market value of transferred assets.

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Such taxes may lead to double taxation of the same gains. In many cases, the second state simply taxes the full gain on realization with no recognition of the exit taxation previously applied. Even if the second state does provide some form of recognition, excessive taxation may remain if the states do not apply the same valuation.

ICC recommendations on exit taxes ICC would prefer that states not enact exit taxes of general application. That position is consistent with certain supranational rules such as EU law providing for non-discrimination and free movement of capital. Exit taxes should, rather, be reserved for exceptional circumstances, perhaps in cases of abusive tax avoidance or where a coordination of taxation between the two states is rendered difficult by the absence of a bilateral tax treaty.

If states believe that they must protect their tax bases by retaining the right to tax unrealized gains in respect of assets transferred abroad, then they should rely on cooperation with other jurisdictions and bilateral tax conventions to preserve their right to tax only upon the actual alienation of property in such a manner as to avoid all double taxation. Such substantive measures of coordination may be coupled with appropriate exchange of information and assistance in collection provisions in the tax convention.

If states do, nonetheless, continue to apply exit taxes, ICC makes the following recommendations as minimum standards in the design and application of such measures.

1. Avoidance of double taxation Exit taxes lead to double taxation if neither the domestic laws of the states involved nor a tax treaty provides a solution. And even if provisions that address double taxation exist, they may be insufficient to eliminate it.

The avoidance of double taxation must be addressed and resolved if countries wish to impose exit taxes. Exit taxation should not be applied if the new country does not provide proper recognition for the gain already taxed by the former state.

2. Valuation to follow the arm’s length principle

Where an exit tax is based on the fair value of assets at the time the seat or assets of the company are transferred abroad, the determination of value should be based on the application of the arm’s length principle, following the OECD guidelines. The new state of residence should adopt the same principle in measuring the gain to be taxed on ultimate disposition. Disputes should be resolved by the means provided for in the applicable tax treaty. Such basic principles for determining value are important to reduce both the risk of double taxation and the complexity of compliance.

3. Other recommendations on dealing with exit taxes Where exit tax is exigible, a taxpayer should always have the possibility to provide adequate security to cover the future tax claim, rather than having to pay the tax immediately. In case of transfer of the seat of a company, when a permanent establishment (PE) remains in the former state, no exit tax should be levied as long as the PE provides sufficient security for the payment of tax on the deferred gains.

Compliance burdens connected with exit taxes must be minimised. There should be no obligation for the taxpayer to register in both the former and the new state; nor should third parties be obliged to report when a sale of assets takes place or to collect a withholding tax.

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IMPROVING TAX EFFICIENCY: THE RESPONSIBILITIES OF TAX ADMINISTRATIONS AND TAXPAYERS

Document 180-491 Final (16 June 2006)

Governments must assess and collect sufficient revenue to meet their goals and obligations. However, it is important that the costs of compliance and administration for taxpayers and tax administrations be reduced wherever possible.

This ICC Policy Statement makes recommendations intended to improve the efficiency in administering and complying with a particular tax system. ICC’s comments are based on the following economic proposition:

“Given a particular targeted level of tax revenue, a tax system that requires fewer resources to administer (monitor, legislate, audit and collect) and to comply with (understand, comply, report and transfer tax payments) is better than a tax system that costs more.”

This economic proposition is referred to as “efficiency.” ICC offers the following suggestions or best practices which can reduce the overall cost of tax compliance and administration for tax administrations and taxpayers, thereby promoting an efficient tax system. Tax administrations should view themselves similar to business that provide services to customers and should constantly strive to improve the manner in which they provide such services.

Simplification Tax administrations should administer the substantive tax regime in a manner that is no more complicated than necessary to assess and collect tax.

All else being equal, simplification should result in lower costs for tax administrations and taxpayers because:

1. fewer resources are required to apply simple rules than to apply complex ones;

2. the time to conduct an audit may be shortened and thus reduce the costs typically associated with protracted audits;

3. fewer tax controversies may be expected to arise; and

4. simpler rules provide more certainty over tax reporting which thus improves financial reporting.

Tax administrations should accept that they cannot capture absolutely all of the taxable economic activity. The increased costs associated with a complex administrative tax regime may outweigh the additional tax revenue collected, thereby suggesting the need for balance.

Shorter audits A reduction in the time for tax administrations to begin and conduct a compliance audit would lead to considerable cost savings.

Tax administrations should strive to begin and conclude a tax audit as soon as possible after a tax return is filed. A taxpayer can more quickly respond to a tax audit when the needed information is readily available to the taxpayer and its tax department. A taxpayer is more likely to recall and locate relevant information shortly after the filing of a tax return than many years after the filing. In addition to turnover within the taxpayer’s tax department, which inherently reduces responsiveness, the passage

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of time makes it more difficult to locate documentation responsive to a particular question even if such documentation is available.

Delay in the tax audit also compound the potential impact of an audit adjustment as a taxpayer may have adopted a similar position to that challenged by the tax administration on subsequent returns. A proposed adjustment by a tax administration is less likely to be resisted if future tax filings are not as heavily impacted, which will be the case if tax returns are reviewed promptly and tax audits concluded relatively swiftly.

Transparency The increased transparency of tax rules should be a continuing goal of every tax administration.

Taxpayer’s should know the rules of the game under which their economic activities will be taxed.

A useful definition of transparency is provided by the International Monetary Fund:

“Tax laws, regulations, and other documents relating to administrative interpretation of tax law should be accessible to the general public. Explanatory materials (e.g., instructions and pamphlets), usually prepared by the tax agency, should also be kept up-to-date. New budget revenue measures should be given sufficient publicity so that taxpayers understand how they might be affected. To this end, the material the tax agency uses in applying the tax laws (e.g., manuals and legal opinions) should be publicly available and there should be mechanisms in place whereby taxpayers can have their queries answered (e.g., by setting up a dedicated office in the tax agency to do so).”12

Training of tax administrators Both tax administration examiners and corporate tax professionals need to be properly trained to perform their duties. The training should permit both parties to operate on approximately the same level of tax knowledge. A tax system can only minimize costs if both “sides” are equally versed in the underlying rules.

Tax authorities should be adequately resourced to attract and retain appropriate personnel with the skills required to conduct their business.

Prospectivity of rule changes A tax administration that quickly audits compliance will be able to respond to positions it believes are inappropriate. Such response may include a modification in administrative positions and practices. However, these changes should be prospective only. ICC believes that this recommendation may also reduce the long-term cost of tax administration because each party will have less time and costs invested in any particular tax position, given the possibility of prospective changes.

Use of business records The assessment of tax liability depends upon the review of the taxpayer’s books and records.

Three aspects of record-keeping are particularly relevant to the reduction in the costs of compliance and administration.

12 IMF, Manual on Fiscal Transparency, I. Clarity of Roles and Responsibilities, The Framework for Fiscal

Management, Par. 46 available at http://www.imf.org/external/np/fad/trans/manual/sec01b.htm.

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First, taxpayers should ensure that books and records appropriate to their economic activities are created and maintained. The cost of administration increases when taxpayer records are inadequate or unavailable.

Second, the books and records reasonably maintained by a taxpayer for the purposes of its enterprise should normally be sufficient for the tax administration. It should not normally be necessary for a taxpayer to create or reformat its books and records to comply with the requirements of tax compliance.

Third, once reasonable business records have been provided, the burden of persuasion should be on the tax administration to demonstrate that a taxpayer has not properly complied with the transparent tax regime.

Confidentiality Tax administrations must continue to strive to maintain the confidentiality of tax return information they receive. Strict adherence to this standard is in the best interests of tax administrations as it facilitates the willingness of taxpayers to provide the information tax administrations need to audit tax filings.

Maintenance of an impartial appeal process Inevitably, reasonable disagreements may arise even under the most transparent tax systems. In such situations, an impartial adjudication process should exist that has as part of its function the publication of its decisions, taking into account privacy concerns of the affected taxpayer. Such a procedure will promote confidence in the system, ultimately increasing voluntary tax compliance. An adjudication system that rarely sustains the position of a taxpayer is unlikely to be viewed by taxpayers as being fair.

ICC RecommendationsICC encourages tax administrations to adopt the suggestions in this paper to improve their tax systems including:

Implementing rules that are no more complicated than necessary to assess and collect tax

Reducing the time to begin and conduct a compliance audit

Increasing the transparency of tax rules

Increasing the resources of tax administrations in order to perform tax audits in a timely manner and improving the training of tax administration personnel

Making only prospective changes to tax practices and policies

Using business records created by enterprises

Maintaining the confidentiality of taxpayer records

Maintaining an impartial tax appeals process

Many Minds On Your Tax Matters.

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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”.

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