Singapore Telecom Australia Investments Pty Ltd entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore. Singapore Telecom Australia and the subscriber were ultimately 100% owned by the same company. The total amount of loan notes issued to the Participant was approximately USD 5.2 billion. The terms of the LNIA have been amended on three occasions, the first and second amendments being effective from the date the LNIA was originally entered into. The interest rate under the LNIA as amended by the third amendment was 13.2575%. Following an audit, the tax authorities issued an assessment under the transfer pricing provisions and disallowed interest deductions totalling approximately USD 894 million in respect of four years of income. In the view of the tax authorities, the terms agreed between the parties deviated from the arm’s length principle. Singapore Telecom Australia appealed to the Federal Court, which in a judgment published on 17 December 2021 upheld the assessment and dismissed the appeal. An appeal was then made to the Full Federal Court which, in a judgment published on 8 March 2024, dismissed the appeal and upheld the previous decision. Click here for translation ...

Since 2012, the French company SASU Alchimedics has been owned by Sinomed Holding Ltd, the holding company of a group of the same name set up by a Chinese resident domiciled in the British Virgin Islands. SASU Alchimedics was engaged in the manufacture and marketing of products using electro-grafting technology for biomedical applications and the licensing and assignment of patents in the field of electro-grafting technologies. SASU Alchimedics was subject to an audit for the financial years 2014 and 2015, as a result of which the tax authorities increased its income for the financial years ended 31 December 2013, 2014 and 2015 by the price of services not invoiced to Sinomed Holding Ltd. In addition, the non-invoicing of these services was considered to be a transfer of profits abroad within the meaning of Article 57 of the French General Tax Code and the amounts were therefore also subject to withholding tax. The tax authorities considered that SASU Alchimedics had committed an abnormal act of management by not re-invoicing to its parent company the services provided in connection with the “development and defence of patents”. The price of the services reintegrated as an indirect transfer of profits was determined by applying to the amount of the expenses recorded a cost plus 5%, considered to be a normal margin. These amounts were used as the basis for calculating the withholding tax, which is the only issue in this case. SASU Alchimedics appealed against the assessment and, by judgment of 2 December 2002, the Administrative Court rejected its application for a refund of the withholding tax. An appeal was then lodged with the Administrative Court of Appeal. Judgement of the Court The Administratibe Court of Appeal set aside the decision of the Administrative Court and decided in favor of SASU Alchimedics. Excerpts in English “… 6. In order to justify the existence of an advantage to the company, constituting an indirect transfer of profits, granted to Sinomed Holding Ltd, the tax authorities note that SASU Alchimedics is the owner of patents attached to a business acquired in 2007, and of an exclusive licence on patents and other intangible rights acquired, the same year, from the French Atomic Energy Commission (CEA) and that it entered into an agreement, on 1 June 2007, with Sinomed Holding Ltd, which will become its parent company, and Beijing Sun Technologie Inc, a company incorporated under Chinese law, owned by Sinomed Holding Ltd, which will become its sister company, a patent licence and sub-licence agreement granting them a perpetual licence for the techniques developed by Sinomed Holding Ltd in return for a one-off payment of 9,530,000 euros. The French tax authorities argued that it was not normal for SASU Alchimedics, following the technology transfer agreement of 1 April 2007, to bear the cost of registering and maintaining the patents and licences alone, without any “financial guarantee in the event of successful marketing of the related products, particularly on the European and American markets”, whereas Sinomed Holding Ltd, which now controls the strategy of the companies it owns, stands to benefit from any future successes and is in a position to prevent it from transferring its assets to a third party. It deduced that by not re-invoicing its parent company, Sinomed Holding Ltd, for services provided in relation to “the development and defence of patents”, despite the fact that it had always been in a loss-making position, SASU Alchimedics had granted an undue advantage to its parent company, constituting an abnormal management practice and an indirect transfer of profits abroad. 7. However, the tax authorities do not dispute that, as SASU Alchimedics points out on appeal, the costs of maintaining and protecting the patents, which were expensed, were its responsibility under the terms of the contract entered into in 2007, which it does not claim was no longer in force. Nor does it dispute that the research expenses invoiced by Beyond and Université Paris-Diderot, and the overheads deducted as expenses, were incurred in the interests of SASU Alchimedics. The fact that this company has a chronic deficit does not, in itself, justify the increase in operating income, nor does the fact that an asset is insufficiently profitable constitute, in itself, an abnormal act of management. The tax authorities have failed to identify the “patent valuation and defence” service that they claim to have identified for the benefit of Sinomed Holding Ltd and the exact nature of the advantage that they intend to impose, and have failed to demonstrate under what obligation SASU Alchimedics should have re-invoiced this company for these expenses. The fact that SASU Alchimedics does not have control over its strategy is not, in itself, a decisive argument proving the reality of services provided for the benefit of Sinomed Holding Ltd. Moreover, the contract concluded with this company and with the company that was to become its sister company was signed in 2007 at a time when it is not alleged that SASU Alchimedics was dependent on Sinomed Holding Ltd, and the investigation shows that SASU Alchimedics did in fact benefit from the patent concessions and sub-concessions, which were remunerated in the form of a single payment in 2007. Lastly, although the French tax authorities invoke the prospect of marketing in Europe and the United States the products already developed by the Sinomed group, and in particular by the Chinese company Sino Medical, under the contract concluded in 2007, during the period in dispute there was nothing to require SASU Alchimedics to have signed a contract with its parent company to have the latter bear the costs of maintaining, registering and defending the patents and licences of which it remained the owner and which are not yet used on its continents, where they were not registered. 8. In these circumstances, the French tax authorities have not established the existence of an advantage granted by SASU Alchimedics to Sinomed Holding Ltd and, consequently, of a practice falling within the scope of Article 57 of the French General Tax Code ...

The tax authority, based on the results of an audit, found that the prices in controlled export transactions of goods, carried out between “LK Ukraine Group” and related parties, did not comply with the arm’s length principle, i.e. the selling prices of the goods were lower than the minimum values of the arm’s length range. Disagreeing with this conclusion, “LK Ukraine Group” stated that the the method applied by the tax authority during the audit of prices in controlled transactions was unlawful and inappropriate due to the lack of information on all possible costs. At the request of the supervisory authority, “LK Ukraine Group” provided evidence that when determining the prices of goods, the group was guided by information based on monitoring, in particular, prices on the Euronext exchange, namely, the average selling prices of agricultural products on the terms of delivery EXW-port, which refuted the assertion of the authority that the controlled transactions did not comply with the arm’s length principle. The District Administrative Court dismissed the claim in a decision upheld by the Administrative Court of Appeal. The courts of previous instances concluded that, based on the Tax Code of Ukraine, the tax authority had calculated the median of the range to determine the price in a controlled transaction, which is consistent with the arm’s length principle. Judgement of the Supreme Court The Supreme Court also dismissed the appeal of “LK Ukraine Group” and upheld the challenged court decisions. If the audit of controlled transactions on export of “rapeseed” goods establishes that prices in controlled transactions on export of goods of the commodity carried out by the taxpayer (taking into account the adjustment for the cost of transshipment of goods on board the vessel) are less than the minimum values of price intervals (ranges), i.e., do not comply with the arm’s length principle and the selling prices are lower than the price range, the terms of such transactions differ from the terms and conditions applied between unrelated parties in comparable uncontrolled transactions. Click here for English translation Click here for other translation ...

Singapore Telecom Australia Investments Pty Ltd entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore. Singapore Telecom Australia and the subscriber were ultimately 100% owned by the same company. The loan notes issued totalled approximately $5.2 billion to the subscriber. The terms of the LNIA was amendet on three occasions – the first amendment and the second amendment were expressed to have effect as from the date when the LNIA was originally entered into. The interest rate under the LNIA as amended by the third amendment was 13.2575% Following an audit the tax authorities issued an amended assessment under the transfer pricing provisions and denied interest deductions totalling approximately $894 million in respect of four years of income. According to the tax authorities the conditions agreed between the parties differed from the arm’s length principle. Singapore Telecom Australia appealed the assessment to the Federal Court. Judgement of the Federal Court The court upheld the the assessment issued by the tax authorities and dismissed the appeal of Singapore Telecom Australia. Click here for translation ...

The issue in these two cases is whether withholding tax was payable on interest paid to foreign group companies considered “beneficial owners” via conduit companies covered by the EU Interest/Royalties Directive and DTA’s exempting the payments from withholding taxes. The first case concerned interest accruals totalling approximately DKK 1,476 million made by a Danish company in the period 2007-2009 in favour of its parent company in Sweden in connection with an intra-group loan. The Danish Tax Authorities (SKAT) subsequently ruled that the recipients of the interest were subject to the tax liability in Section 2(1)(d) of the Corporation Tax Act and that the Danish company was therefore obliged to withhold and pay withholding tax on a total of approximately DKK 369 million. The Danish company brought the case before the courts, claiming principally that it was not obliged to withhold the amount collected by SKAT, as it disputed the tax liability of the recipients of the interest attributions. The second case concerned interest payments/accruals totalling approximately DKK 3,158 million made by a Danish company in the period 2006-2008 in favour of its parent company in Luxembourg in respect of an intra-group loan. SKAT also ruled in this case that the interest payments/write-ups were taxable for the recipients and levied withholding tax on them from the Danish company totalling approximately DKK 817 million. The Danish company appealed to the courts, claiming principally that the interest was not taxable. The Eastern High Court, as first instance, dealt with the two cases together. The European Court of Justice has ruled on a number of preliminary questions in the cases, see Joined Cases C-115/16, C-118/16, C119/16 and C-299/16. In both cases, the Ministry of Taxation argued in general terms that the parent companies in question were so-called “flow-through” companies, which were not the “beneficial owners” of the interest, and that the real “beneficial owners” of the interest were not covered by the rules on tax exemption, i.e. the EU Interest/Royalties Directive and the double taxation conventions applicable between the Nordic countries and between Denmark and Luxembourg respectively. Judgement of the Eastern High Court In both cases, the Court held that the parent companies in question could not be regarded as the “beneficial owners” of the interest, since the companies were interposed between the Danish companies and the holding company/capital funds which had granted the loans, and that the corporate structure had been established as part of a single, pre-organised arrangement without any commercial justification but with the main aim of obtaining tax exemption for the interest. As a result, the two Danish companies could not claim tax exemption under either the Directive or the Double Taxation Conventions and the interest was therefore not exempt. On 3 May 2021, the High Court ruled on two cases in the Danish beneficial owner case complex concerning the issue of taxation of dividends. The judgment of the Regional Court in Denmark vs NETAPP ApS and TDC A/S can be read here. Click here for English translation Click here for other translation ...

A new huge leak of financial records revealed by ICIJ, once again shows widespread use of offshore accounts, shell companies and trusts to hide wealth and/or avoid taxes. The new leak is known as the Pandora Papers and follows other recent leaks – lux leak, panama papers, paradise papers. The International Consortium of Investigative Journalists obtained 11.9 million confidential documents from 14 separate legal and financial services firms, which the group said offered “a sweeping look at an industry that helps the world’s ultrawealthy, powerful government officials and other elites conceal trillions of dollars from tax authorities, prosecutors and others.” “The key players in the system include elite institutions – multinational banks, law firms and accounting practices – headquartered in the U.S. and Europe.” The Consortium said the 2.94 terabytes of financial and legal data shows the “offshore money machine operates in every corner of the planet, including the world’s largest democracies,” and involves some of the world’s most well-known banks and legal firms. “The Pandora Papers provide more than twice as much information about the ownership of offshore companies. In all, the new leak of documents reveals the real owners of more than 29,000 offshore companies. The owners come from more than 200 countries and territories, with the largest contingents from Russia, the U.K., Argentina and China.” “Pandora Papers” leaks: Statement by Bob Hamilton, Chair of the Forum on Tax Administration and Chris Jordan, Chair of the FTA’s Joint International Task Force on Shared Intelligence and Collaboration On October 14, a statement was issued by the OECD The Forum on Tax Administration and its Joint International Task Force on Shared Intelligence and Collaboration (JITSIC) are already working collaboratively in response to the recent “Pandora Papers” leaks. This follows the model successfully adopted for the Panama and Paradise Papers leaks. 14/10/2021 – The International Consortium of Investigative Journalists (ICIJ) has recently released information relating to its review of data leaks referred to as the Pandora Papers. As a result of the strong partnerships established through its JITSIC Network, the OECD Forum on Tax Administration (FTA) is well positioned to enable a collaborative approach to identifying and addressing aggressive tax avoidance and tax evasion involving multiple jurisdictions once the data becomes available. The FTA is dedicated to tax transparency and tax co-operation through the delivery of its collaborative work programme, and its members have access to a range of tools and platforms to help tackle offshore tax evasion and avoidance, including: The FTA’s JITSIC network, which provides an effective and well-established platform to its 42 members to cooperate directly on individual cases, as well as sharing their experience, resources and expertise. This direct and immediate collaboration proved to be very effective following the Panama and Paradise Papers leaks. JITSIC, like tax administrations more generally, operates under strict rules designed to protect the confidentiality of information and the confidence of taxpayers. As a consequence much of the work of JITSIC is not always visible to the public. The OECD standard on the exchange of information on request, which provides a powerful framework for tax administrations to receive detailed information on taxpayers’ offshore affairs from 163 jurisdictions. The OECD Common Reporting Standard (CRS) under which there is automatic reporting of information between more than 100 jurisdictions on the offshore financial accounts of non-residents, to their jurisdiction of residence. Information on these financial accounts, as well as the requirements envisaged by the transparency and exchange of information on request standard, ensure greater transparency of ownership of companies, trusts, and other similar structures, the importance of which has been illustrated in the Pandora Papers. As has been the case with previous leaks, JITSIC members will continue to work together to pool resources, share information and rapidly develop a more accurate picture of potential wrong doing in order to facilitate further investigations. While the information contained in such leaks can be of value in investigations, the inclusion of information about an individual or entity in a data leak does not automatically mean that there has been non-compliance ...

A new huge leak of financial records revealed by ICIJ, once again shows widespread use of offshore accounts, shell companies and trusts to hide wealth and/or avoid taxes. The new leak is known as the Pandora Papers and follows other recent leaks – lux leak, panama papers, paradise papers. The International Consortium of Investigative Journalists obtained 11.9 million confidential documents from 14 separate legal and financial services firms, which the group said offered “a sweeping look at an industry that helps the world’s ultrawealthy, powerful government officials and other elites conceal trillions of dollars from tax authorities, prosecutors and others.” “The key players in the system include elite institutions – multinational banks, law firms and accounting practices – headquartered in the U.S. and Europe.” The Consortium said the 2.94 terabytes of financial and legal data shows the “offshore money machine operates in every corner of the planet, including the world’s largest democracies,” and involves some of the world’s most well-known banks and legal firms. “The Pandora Papers provide more than twice as much information about the ownership of offshore companies. In all, the new leak of documents reveals the real owners of more than 29,000 offshore companies. The owners come from more than 200 countries and territories, with the largest contingents from Russia, the U.K., Argentina and China.” ...

Nidera S.A. exported commodities (cereals, oilseeds etc.) via group traders domiciled on the British Virgin Islands. In the absence of evidence to the contrary, in transactions involving entities domiciled in low-tax jurisdictions, it was presumed that prices had not been agreed in accordance with the arm’s length principle. The tax authorities issued an adjustment by applying the “CUP” method (Sixth method), considering the statistical average prices set as a reference value by the National Secretariat of Agriculture, Livestock and Fisheries, corresponding to the date of shipment (and not to the date of agreement as claimed by the claimant). However adjustments were only made to those transactions where the quoted price was higher than the one agreed by Nidera S.A. An appeal was filed with the National Court by Nidera S.A. In 2016 the National Court of Appeals issud ist decision in the case. The decision was in favour of Nidera S.A. in regards to the approach of the tax authorities were only the unfavorable pricing were being adjusted whereas the favorable pricing were not, and referred the case back to the lower court. In all other regards the appeal of Nidera was dismissed and the assessment upheld. Both the tax authorities and Nidera S.A filed an appeal against this decision. Nidera complained about the incorrect use of the “comparable uncontrolled price” method, as it considers that this only allows a comparison between controlled and uncontrolled “agreement” prices, but not the use the prices at the date of “shipment”, as the Treasury did. The tax authorities appealed the part of the judgment under appeal which revoked the ex officio assessment on the grounds that it was unreasonable that, in order to calculate Nidera’s income tax for the 2001 tax period, the tax authority had adopted as valid the “comparable uncontrolled” price only in those transactions in which it was higher than the “agreed” price, whereas it did not do so when it was lower than the price declared by the exporter.” Judgement of the Supreme Court The Supreme Court decided in favour of the tax authorities and amended the 2016 decision National Court of Appeals. The court considers that the tax authorities’ adjustment-criterion does not appear to be contrary to the system adopted by Law 25.063, which is intended to challenge transfer prices only when they are lower than those obtained in “normal market practices between independent parties”, in order to safeguard the integrity of Argentine source income. On the contrary, it is clear that when the price of the transaction declared by the exporter is higher than the price agreed in normal market practices between independent parties, the Tax Authorities should not object, since the Argentine source income is not, in that case, compromised. This does not imply granting retroactive validity to the provisions of Law 25.784, but rather a logical application of the mechanism established by the legislator when enacting Law 25.063 to challenge transfer prices in order to protect, as stated above, the integrity of Argentine source income. Click here for English Translation Click here for other translation ...

In 2013, Snowy Owl Energy Inc entered into a Consultancy Agreement (Subconsultant Services Agreement) with Rolenergy Inc. – a Hong Kong-based corporation organized and registered in the British Virgin Islands. Based on the Agreement, Rolenergy would serve as Snowy Owl Energy Inc’s sub-consultant. The tax authorities issued an assessment for deficiency income tax (IT), final withholding tax (FWT) and compromise penalty in relation to the sub-consultant fees it paid for taxable year 2013. Judgement of the Tax Court The Court decided in favour of Snowy Owl Energy Inc. Section 23(F)36 in relation to Section 42(C)(3)37 of the NIRC of 1997, as amended, provides that a non-resident foreign corporation is taxable only for income from sources within the Philippines, and does not include income for services performed outside the Philippines. Excerpts: “Indubitably, the payments made in exchange for the services rendered in Hong Kong are income derived from sources outside of the Philippines, thus not subject to IT and consequently to FWT.” ...

C. SA provides “services, in particular in the areas of communication, management, accounting, management and budget control, sales development monitoring and employee training for the group to which it belongs, active in particular in the field of “F”. C. SA is part of an international group of companies, G. group, whose ultimate owner is A. The G group includes H. Ltd, based in the British Virgin Islands, I. Ltd, based in Guernsey and J. Ltd, also based in Guernsey. In 2005, K. was a director of C. SA. On December 21 and December 31, 2004, an exclusive agreement for distribution of “F” was entered into between L. Ltd, on the one hand, and C. SA , H. Ltd and J. Ltd, on the other hand. Under the terms of this distribution agreement, L. Ltd. undertook to supply “F” to the three companies as of January 1, 2005 and for a period of at least ten years, in return for payment. Under a supply agreement C. SA agreed to sell clearly defined quantities of “F” to M for the period from January 1, 2005 to December 31, 2014. In the course of 2005, 56 invoices relating to sales transactions of “F” to M. were drawn up and sent to the latter, on the letterhead of C. SA. According to these documents, M. had to pay the sale price directly into two accounts – one held by H. Ltd and the other by J. Ltd. Part of this money was then reallocated to the supply of “F”, while the balance was transferred to an account in Guernsey held by J. Ltd. The result was, that income from C. SA’s sale of “F” to M was not recognized in C. SA but instead in the two off-shore companies H. Ltd and J. Ltd. Following an audit, the Swiss tax authorities issued an assessment where C. SA and A were held liable for withholding taxes on a hidden distribution of profits. A and C. SA brought this assessment to Court. Decision of the Court The Court decided – in accordance with the 2020 judgment of the Federal Administrative Court – in favor of the tax authorities and the appeal of C. SA and A was dismissed. Click here for English translation Click here for other translation ...

C. SA provides “services, in particular in the areas of communication, management, accounting, management and budget control, sales development monitoring and employee training for the group to which it belongs, active in particular in the field of “F”. C. SA is part of an international group of companies, G. group, whose ultimate owner is A. The G group includes H. Ltd, based in the British Virgin Islands, I. Ltd, based in Guernsey and J. Ltd, also based in Guernsey. In 2005, K. was a director of C. SA. On December 21 and December 31, 2004, an exclusive agreement for distribution of “F” was entered into between L. Ltd, on the one hand, and C. SA , H. Ltd and J. Ltd, on the other hand. Under the terms of this distribution agreement, L. Ltd. undertook to supply “F” to the three companies as of January 1, 2005 and for a period of at least ten years, in return for payment. Under a supply agreement C. SA agreed to sell clearly defined quantities of “F” to M for the period from January 1, 2005 to December 31, 2014. In the course of 2005, 56 invoices relating to sales transactions of “F” to M. were drawn up and sent to the latter, on the letterhead of C. SA. According to these documents, M. had to pay the sale price directly into two accounts – one held by H. Ltd and the other by J. Ltd. Part of this money was then reallocated to the supply of “F”, while the balance was transferred to an account in Guernsey held by J. Ltd. The result was, that income from C. SA’s sale of “F” to M was not recognized in C. SA but instead in the two off-shore companies H. Ltd and J. Ltd. Following an audit, the Swiss tax authorities issued an assessment where C. SA and A were held liable for withholding taxes on a hidden distribution of profits. A and C. SA brought this assessment to Court. Decision of the Court The Court decided in favor of the tax authorities. “The above elements relied on by the appellants in no way provide proof that the appellant carried out the said transactions on behalf of the other companies in the [G]B group. Moreover, they do not in themselves allow the conclusion that the appellant acted through the other companies in its group, as the appellants maintain. Insofar as, as has been seen (see recital 5.1 above), the contract for the sale of *** was concluded and the relevant invoices issued in the name of the appellant, which is moreover designated as the seller in the sales contract (see heading and point 9. 2(a) of that contract), and that the other companies in the group are never mentioned in the context of the transactions at issue, it is much more appropriate to hold that they were carried out, admittedly for the benefit of the appellant, but through the appellant acting in its name and on its behalf. Therefore, by renouncing the resulting proceeds to the appellant, the appellant did indeed make concealed distributions of profits, i.e. appreciable cash benefits subject to withholding tax” “In these circumstances and insofar as the proceeds from the sale of *** were paid directly by [C. SA.] O. to the companies [H Ltd and J Ltd.] Y. and X.     – which must undoubtedly be regarded as persons closely related to the appellant within the meaning of the case-law (cf. recital 3.2.1 above) -, without any equivalent consideration in favour of the appellant, and that part of those proceeds was reallocated to the supply of *** (cf. d above), the lower authority was right to find that there was a taxable supply of money (see recitals 3.2.1 and 3.2.2 above) and to calculate this on the basis of an estimate of the profit resulting from the purchase and resale of *** (see decision under point 4.3, pp. 10 et seq.)” “In the absence of any document attesting to an assignment to the appellant of the claims arising from the purchase contract with [L] M. and the supply agreements of November 2004 with [M] O.     In addition, there is no reason to consider that the allocation of the profit resulting from the purchase and resale of *** to the companies of the group based abroad constitutes the remuneration granted to the latter for the takeover of the two contracts (purchase and sale), nor is there any justification for deducting the value of those contracts from the amount retained by the lower authority. The appellant’s submissions to this effect (see the memorandum of 12 May 2015, pp. 22 et seq. [under para. 6]) must therefore be rejected. Accordingly, the court of appeal refrains from carrying out the expert assessment requested by the appellant in order to estimate that value (see the memorandum of 12 May 2015, p. 25 [under section V]; see also section 2.2.1 above).” “… it should be noted that, in view of the foregoing and the size of the amounts waived by the appellant, the taxable cash benefit was easily recognisable as such by all the participants. Consequently, and insofar as the appellant did not declare or pay the relevant withholding tax spontaneously, the probable existence of tax evasion must be accepted, without it being necessary to determine whether or not it was committed intentionally (see recitals 4.1 and 4.2 above). Accordingly, there can be no criticism of the lower authority’s application of the provisions of the DPA and, since a contribution was wrongly not collected, of Article 12 paras. 1 and 2 of that Act in particular.” “The contested decision must therefore also be confirmed in this respect. Finally, as the case file is complete, the facts sufficiently established and the court is convinced, the court may also dispense with further investigative measures (see section 2.2.1 above). It is therefore also appropriate to reject the appellant’s subsidiary claim that he should be required, by all legal means, to provide ...

By Javier Garcia-Bernardo, Jan Fichtner, Frank W. Takes, & Eelke M. Heemskerk Multinational corporations use highly complex structures of parents and subsidiaries to organize their operations and ownership. Offshore Financial Centers (OFCs) facilitate these structures through low taxation and lenient regulation, but are increasingly under scrutiny, for instance for enabling tax avoidance. Therefore, the identifcation of OFC jurisdictions has become a politicized and contested issue. We introduce a novel data-driven approach for identifying OFCs based on the global corporate ownership network, in which over 98 million firms (nodes) are connected through 71 million ownership relations. This granular firm-level network data uniquely allows identifying both sink-OFCs and conduit-OFCs. Sink-OFCs attract and retain foreign capital while conduit-OFCs are attractive intermediate destinations in the routing of international investments and enable the transfer of capital without taxation. We identify 24 sink-OFCs. In addition, a small set of countries – the Netherlands, the United Kingdom, Ireland, Singapore and Switzerland – canalize the majority of corporate offshore investment as conduit-OFCs. Each conduit jurisdiction is specialized in a geographical area and there is signifcant specialization based on industrial sectors. Against the idea of OFCs as exotic small islands that cannot be regulated, we show that many sink and conduit-OFCs are highly developed countries. Conduits-and-Sinks-in-the-Global-Corporate-Ownership-Network.pdf ...

Oxfam’s list of Tax Havens, in order of significance are: (1) Bermuda (2) the Cayman Islands (3) the Netherlands (4) Switzerland (5) Singapore (6) Ireland (7) Luxembourg (8) Curaçao (9) Hong Kong (10) Cyprus (11) Bahamas (12) Jersey (13) Barbados, (14) Mauritius and (15) the British Virgin Islands. Most notably is The Netherlands placement as no. 3 on the list. Oxfam researchers compiled the list by assessing the extent to which countries employ the most damaging tax policies, such as zero corporate tax rates, the provision of unfair and unproductive tax incentives, and a lack of cooperation with international processes against tax avoidance (including measures to increase financial transparency). Many of the countries on the list have been implicated in tax scandals. For example Ireland hit the headlines over a tax deal with Apple that enabled the global tech giant to pay a 0.005 percent corporate tax rate in the country. And the British Virgin Islands is home to more than half of the 200,000 offshore companies set up by Mossack Fonseca – the law firm at the heart of the Panama Papers scandal. The United Kingdom does not feature on the list, but four territories that the United Kingdom is ultimately responsible for do appear: the Cayman Islands, Jersey, Bermuda and the British Virgin Islands ...

Nidera S.A. exported commodities (cereals, oilseeds etc.) via group traders domiciled on the British Virgin Islands. In the absence of evidence to the contrary, in transactions involving entities domiciled in low-tax jurisdictions, it was presumed that prices had not been agreed in accordance with the arm’s length principle. The tax authorities issued an adjustment by applying the “CUP” method (Sixth method), considering the statistical average prices set as a reference value by the National Secretariat of Agriculture, Livestock and Fisheries, corresponding to the date of shipment (and not to the date of agreement as claimed by the claimant). However adjustments were only made to those transactions where the quoted price was higher than the one agreed by Nidera S.A. Judgement of the Court The Supreme Court accepted Nidera S.A.’s appeal in regards to the approach of the tax authorities were only the unfavorable pricing were being adjusted whereas the favorable pricing were not, and referred the case back to the lower court. In all other regards the appeal of Nidera was dismissed and the assessment upheld. Click here for English Translation ...

This case is about extensive tax evasion set up by the tax manager of the Asian Agri Group. According to the tax authorities income from export sales had been manipulated. Products were sent directly to the end buyer, whereas the invoices recorded that the products were first sold to companies in Hong Kong and then sold to a company in Macau or the British Virgin Islands before they were finally sold to the end buyer. The intermediary companies were proven to have been used only for the purpose of lowering the taxable income by under-invoicing the sales prices compared to the sales price to the end buyer. Various fees had also been deducted from the companies income to further lower the tax payment. These included a “Jakarta fee”, a Hedging fee and a Management fee. Judgement of the Supreme Court The court ruled that the tax manager was guilty of submitting an incorrect or incomplete tax return. On that basis the tax manager was sentenced to a probationary imprisonment for two years on condition that, within one year, Asian Agri Group’s 14 affiliated companies paid a fine of twice the underpaid tax amount – 2 x Rp. 1.259.977.695.652,- = Rp. 2.519.955.391.304,-. Click here for translation (Hundreds of pages from the judgement containing lists of thousands of invoices and payments have been omitted in the translated version) ...

The Brazilian group Marcopolo assembles bus bodies in Brazil for export. It used two related offshore companies, Marcopolo International Corporation, domiciled in the British Virgin Islands, and Ilmot International Corporation, domiciled in Uruguay, in a re-invoicing arrangement whereby the product was shipped from Marcopolo to the final customers but the final invoice to the customers was issued by the offshore companies. The tax authorities found that the arrangement lacked business purpose and economic substance and, on this basis, disregarded the transactions. Decision of the Administrative Court of Appeal The Court ruled in favour of Marcopolo. According to the Court, the transactions with the offshore companies had a business purpose and were therefore legitimate tax planning. Excerpts “6. The absence of an operational structure of the companies controlled by the Appellant, capable of supporting the transactions performed, even if, in isolation, it could be admitted within the scope of a “rational organization of the economic activity”, in the case at hand, gains greater significance because a) it constituted only one of the elements within a broad set of evidence presented by the tax authority; b) considering the size of the business undertaken (voluminous export), such absence cannot be such that one can even speculate on the very factual existence of such companies; and c) there is no effective evidence in the case records of the performance of the transactions of purchase and resale of products by such companies; 7. even if it can be admitted that the results earned abroad by the companies MIC and ILMOT were, by equity equivalence, reflected in its accounting, the Appellant does not prove having paid Income Tax and Social Contribution on Net Profits on those same results, thus not contradicting the arguments presented by the tax authority authorizing such conclusion; 8. There is no dispute in this case that a Brazilian transnational company cannot see, in addition to tax benefits, other reasons for conducting its operations through offshore financial centres. What is actually at issue is that, when asked to prove (with proper and suitable documentation) that its controlled companies effectively acquired and resold its products, the Appellant does not submit even a single document capable of effectively revealing a commercial relation between its controlled companies and the end recipients of said products; 9. it is also not disputed that the Brazilian economic environment, especially in the year submitted to the tax audit, is likely to lead to higher costs for national companies operating abroad, both in relation to competitors from developed countries, and in relation to competitors from other emerging countries. What is being questioned is that, specifically in the situation being examined herein, at no time did the Appellant at all materialize such costs, demonstrating on documents, by way of example, that in a given export transaction, if the transaction were effected directly, the cost would be X, the profit would be Y, and the tax paid would be Z, whereas, due to the form adopted, the cost would be X – n, the profit would be Y + m, and the tax paid represented Z + p. No, what the Appellant sought to demonstrate is that, considering a historical series of its exports, there was a significant increase in its revenues and, consequently, in the taxes paid. As already stated, if a significant capitalization of funds through evasive methods is admitted, no other result could be expected. (…) Thus, considering everything in the case records, I cast my vote in the sense of: a) dismissing the ex-officio appeal; b) partially granting the voluntary appeal in order to fully exempt the tax credit related to the withholding income tax, fully upholding the other assessments.” “I verify that, when doing business with companies or individuals located in Countries with Favorable Tax Treatment, the legislation adopted minimum parameters of values to be considered in exports; and maximum parameters in values to be considered in payments made abroad, under the same criteria adopted for transfer pricing. Here, it is important to highlight that the legislation did not equalize the concepts of business carried out with people located in Countries with Favorable Tax Regime and transfer pricing. What the law did was to equalize the criteria to control both, but for conceptually distinct operations. Thus, based on the assumption that Brazilian law specifically deals in its legislation, by means of a specific anti-avoidance rule, with transactions carried out with companies in countries with a favored tax regime, I cannot see how one can intend to disregard the transactions carried out by a Brazilian company with its foreign subsidiaries, since these are deemed to be offshore companies in the respective countries where they are incorporated. In fact, every country with a Favorable Tax Regime has, as a presupposition, the existence of offshore companies, in which the activities are limited to foreign business. In the case at hand, there are two wholly-owned subsidiaries of the Appellant, namely, MIC – Marcopolo International Corporation, located in the British Virgin Islands, and ILMOT International Corporation S.A., incorporated as an investment finance corporation – SAFI, in Uruguay. From what can be extracted from the case records, the deals carried out by the Appellant with the final purchasers of the products were intermediated by both companies, and the tax assessment charged, as income of the Appellant, the final values of the deals carried out by those intermediary companies with the purchasers abroad. However, this was not the legal treatment given by Brazilian law to business deals made with offshore companies established in Countries with a Favorable Tax Regime. Law 9430/96 is limited to checking whether the price charged is supported by the criteria set out in articles 18 to 22 thereof; once such minimum parameters are met, the business plan made by the taxpayer must be respected. Therefore, in this case, I believe that the Tax Authorities could not disregard the business carried out by the Appellant with its wholly-owned subsidiaries beyond what Law 9430/96 provides for the hypothesis of companies located in Countries ...