«The rules of play in international tax planning have been changing dramatically — the instruments effective today may harm the client tomorrow», сautions Pavlo Khodakovsky, Partner at Arzinger Law Office
— What relevant trends would you highlight in the field of international tax information exchange?
— A global trend to be noted is the achievement of a critical level of consensus, primarily among national governments, international organizations as well as a large part of the business community on the need to substantially review the volume of and procedures for international tax information exchange so as to minimize the possibilities for aggressive tax planning and tax evasion.
One of the key goals on this path is to implement automatic tax information exchange and involve as many countries as possible.
In this context, the pressure on involving low-tax (offshore) jurisdictions in the international tax information exchange is growing as well. A number of classical offshores either participate in existing tax information exchange mechanisms or have agreed to join them in the near future. To this end, some of them have revised their internal corporate and taxation law.
Financial institutions, in particular banks, are also getting more active as an element of the information exchange system for tax purposes.
— Please explain, how is Ukraine involved in these processes?
— As a member of the Global OECD Forum (Organization for Economic Cooperation and Development) on transparency and exchange of information for tax purposes, Ukraine is actively involved in the processes of implementing new tax information exchange models. Although Ukraine has not yet acceded to the automatic exchange mechanisms for tax purposes, I am sure that this is only a matter of time.
— If the tax information exchange mechanisms mentioned by you do not operate in Ukraine, does it mean that there is nothing to worry about?
— It is not quite so, as other "non-automatic" mechanisms remain available. To date, in particular, exchange takes place based on the Convention on Mutual Administrative Assistance in Tax Matters as well as bilateral agreements on avoidance of double taxation. It is notable that offshore states are actively joining the Convention on administrative assistance. Thus, in early October the Seychelles did so, and it is already known that low-tax jurisdictions respond increasingly to the Ukrainian party’s requests for tax information. Also, the possibility to conduct tax audits abroad, as provided for by the Convention on Administrative Assistance, is interesting in terms of practice.
Among other things it should be noted that Ukraine ratified the majority of agreements on avoidance of double taxation back in the 1990’s. However, they do not take modern exchange standards into account. It serves as grounds for a number of states to refuse to exchange tax information with Ukraine. The current wording of the OECD Model Convention as well as the agreements on avoidance of double taxation concluded by Ukraine on its basis (e.g. with Cyprus) stipulate that information exchange may be carried out regarding the taxes that are not expressly mentioned in the convention or agreement as well as regarding persons that are not residents of the parties to the convention/agreement.
— Who makes a request for tax information? How long does one usually have to wait for a response?
In Ukraine, the tax information exchange procedure is carried out through the Department of International Relations of the State Fiscal Service as well as through the Main Investigative Department for Financial Investigations of the State Fiscal Service of Ukraine (tax police). The time for processing an information request from both sides is about 5-6 months. To date, request-based exchange is the main instrument for Ukraine.
— Business circles have been actively discussing information exchange within FATCA. What should be expected from the implementation of this mechanism?
— As of 16 October of this year, the USA has concluded agreements based on FATCA with 76 countries. With more than 30 countries, including Ukraine, agreements have been reached on the application of relevant agreements on their merits as of a certain date.
FATCA is initially aimed at nationals and residents of the USA and legal entities controlled by them. It implies that target information is provided to the Internal Revenue Service of the United States (IRS) on accounts opened with any financial institutions in a country that is a party to the agreement, including Ukraine, by such U.S. residents or their affiliates.
At the same time, it should be noted that FATCA is the basis for the development and application of a broader mechanism of automatic tax information exchange on the basis of the relevant OECD standard.
— What advice would you give to businesses in times of global changes?
—First of all, it should be understood that the playing rules in international tax planning have been changing dramatically. The instruments effective today may harm the client tomorrow.
In combination with the opening of the registers of beneficial owners of groups of companies and a fully-fledged launch of the transfer pricing mechanism, tax information exchange can be a significant hindrance to standard tax planning mechanisms.
Apart from that, we should pay attention to the recently adopted final version of the recommendations in the framework of the BEPS program – the OECD Action Plan on Base Erosion and Profit Shifting. The relevant set of actions has already been approved by the Finance Ministers of the G20, and ongoing efforts will focus on the development of mechanism for implementation of the action plan.
With regard to the BEPS program, we can already speak about increased attention to the transparency of business and its real presence in the relevant state for application of its preferential tax regime. In other words, it becomes necessary for companies to prove the actual exercise of commercial activities in the relevant state and the equitable application of tax incentives. This is only one of the many important aspects of the OECD action plan, under which the "presence" and "reality" rules are becoming deeper and more complex. Also, it is often the case that the use of companies specifically founded for a "presence" in a particular state (the so-called conduit companies) is recognized as illegal.
Therefore, international businesses face the need to use new approaches and more complicated decisions based on rapidly changing playing rules.
It has become necessary to understand that the new rules will apply to all international groups of companies without exception. In view of this fact, I would recommend that you think about business restructuring so as to avoid possible adverse effects, to cope with the new requirements as well as to avoid the scrutiny of tax authorities both in Ukraine and in countries in which your group is present and/or enjoys preferential tax law provisions.