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Issue No. 2 - 2018 of the World Tax Journal is now available online.

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Number 2 - 2018 contains the following:

Addressing the Debt-Equity Bias within a Common Consolidated Corporate Tax Base (CCCTB) – Possibilities, Impact on Effective Tax Rates and Revenue Neutrality

Christoph Spengel, Jost H. Heckemeyer, Katharina Nicolay, Rainer Bräutigam and Kathrin Stutzenberger

Corporate tax systems encourage the use of debt rather than equity finance. This corporate debt bias is a matter of concern in light of its implications for macrofinancial stability. In October 2016, the European Commission addressed the issue in its relaunched proposal of a Common (Consolidated) Corporate Tax Base (CC(C)TB). Various reform options to alleviate the debt bias and increase financing neutrality of tax systems exist. Whether such reforms are indeed effective from the point of view of EU Member States depends on how they interact with the specific local tax codes. Based on the well-established indicators of the effective tax burden of companies according to the Devereux/Griffith methodology, this paper analyses the impact of four fundamental tax reform options on financing neutrality in each EU Member State. The results show that all fundamental tax reform options largely establish financing neutrality in the EU Member States but considerably differ in their consequences for corporate investment.

The Role of the Subjective Element in Tax Abuse and Aggressive Tax Planning

Paolo Piantavigna

This article aims to examine the role of the subjective element in how certain transactions should be taxed according to the international tax system in cases of tax abuse and aggressive tax planning (ATP). This article also analyses the nature and the different scope of the taxpayer’s subjective intent and: (i) the bona fide commercial reasons; (ii) the result of the transaction in terms of reduction (or elimination) of tax; and (iii) other possible outcomes that the taxpayer desired. In particular, this paper examines the meanings (and the weight accorded thereto) of the different terms of “intention”, “purpose”, “motive”, “object” and “aim”, as currently used by soft law instruments in international taxation (specifically by the OECD in the BEPS Final Reports and by the European Commission). The question is whether these terms are synonymous or if they actually have separate and distinct meanings in identifying the subject element in abusive practices and in ATP schemes. Since the taxpayer’s intention is subjective in nature and is determined by factors that vary according to the individual case, this article attempts to identify the objective elements that both the OECD and EU law consider in finding abusive practices or ATP schemes. In this regard, this article also highlights the importance of evidence to prove the subjective element behind the arrangement or transaction undertaken.

The Principal Purpose Test (PPT) in BEPS Action 6 and the MLI: Exploring Challenges Arising from Its Legal Implementation and Practical Application

Błażej Kuźniacki

This study contains a comprehensive, in-depth analysis of the principal purpose test (PPT) designed by the Organization for Economic Cooperation and Development (OECD) as part of the BEPS Action 6 Final Report, “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”. Unsurprisingly, the PPT was adopted by all signatories to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), setting out a minimum standard in accordance with the Action 6 Final Report. Once the MLI is ratified by the legislatures of signatories, it will apply to more than 2,000 treaties. From this perspective, not only does the PPT constitute the most important anti-treaty abuse rule under the MLI, but it also secures a 100% match between the tax treaties of the signatories. All the same, one may ask whether the PPT will prevent treaty abuse with a sufficient degree of precision and without giving too much discretion to tax authorities. If this is not the case, the principles of legal certainty and legality of taxation may be jeopardized, and the June 2017 victory of the executives may turn into a failure at the level of legislatures and/or jurisprudence in the near future. This article represents an attempt to map this unexplored terrain by undertaking a comprehensive analysis of the PPT in Action 6 and in the MLI with a view to examining the potential challenges arising from its legal implementation and application in respect of the PPT. Where appropriate throughout the article, alternative solutions will be proposed.

Back to Grass Roots: The Arm’s Length Standard, Comparability and Transparency – Some Perspectives from the Emerging World

Alessandro Turina

This article addresses some of the fundamental issues behind the current international tax policy debate on transfer pricing, espousing the perspective of the “emerging world”. Despite many calls to fundamental reform and the reconsideration of some of its corollaries in the wake of the BEPS Project, transfer pricing is currently rooted in the observance and implementation of the arm’s length standard. In that regard, this article engages in a qualified defence of the arm’s length standard, both from the specific perspective of emerging economies and in the light of fundamental findings concerning the suitability of the arm’s length standard to ensure the joint pursuit of the broad panoply of policy objectives currently (explicitly or implicitly) addressed at the global level through transfer pricing legislation, the breadth of which could, arguably, not be matched by the most commonly invoked alternative to the arm’s length standard, namely formulary apportionment. At the same time, this article acknowledges that the arm’s length standard needs some reform: the most urgent intervention not really concerning its fundamental assumptions but, rather, the channels through which it can be implemented. By reconstructing how the current transfer pricing methodologies, backed by international organizations, are the by-products of earlier challenges from national experiences (primarily by comparing the US and OECD – often influenced by diverging sensitivities among Member States – developments in this area), this study shows that the list of possible implementation approaches to the arm’s length standard should not be understood in crystallized terms. Rather, the arm’s length standard may have sufficient breadth to accommodate global, regional or even national incremental reform on topical issues. The author identifies “comparability analysis” as possibly the most serious challenge to transfer pricing implementation and, in the light of the above-mentioned incremental reform platform, highlights some country practices (which could be defined as “grass-roots” or “home-grown” experiences, as they developed independently of international recommendations or technical assistance inputs by international organizations) in this area that may be worthy of some consideration. Examples of “home-grown” solutions include the “predetermined margins” approach developed by Brazil, the “sixth method” developed by Argentina with regard to the trading of commodities and the approach developed by the Dominican Republic in relation to transfer pricing in the tourism industry. Such a selection of experiences from the “emerging world” is in line with the key perspective of this article – namely, addressing the transfer pricing challenges of a multiform constituency of world economies. However, the article is meant to stimulate a debate on a global scale, so that, where appropriately revised, some of these approaches could be considered “sustainable best practices” worthy of international consideration and propagation. As no transfer pricing policy proposal can be conceived in a vacuum in the current highly globalized transfer pricing debate, the author also attempts to contextualize these incremental proposals within the current international tax framework, characterized by, inter alia, the increasing relevance of the tax certainty agenda, the reconsideration of safe harbours and the promotion of advance pricing agreements. Such a contextualization may show that the analysed approaches could end up being remarkably in tune with such trends and may thus provide relevant inputs to the ongoing global transfer pricing policy debate.

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