Studies regarding tax practices used by large multinational companies to minimize tax payables have predicted aggressive tax planning in the news.
Aggressive tax planning is aimed at optimizing the tax situation by using tax planning and loopholes in tax systems, as well as the differences between the regimes applicable to the cross-border activities of multinational enterprises using them.
The concepts of tax evasion and tax fraud do not allow to capture this reality as it is. Tax planning has different aspects: a complex organization that spans several states, the use of tax competition, the organization of activities and financial flows based on tax motives for tax cuts.
Tax planning, organized for dominant or even exclusive tax purposes, the development of which has created a market for advisory services in this area, evaluated in terms of its effectiveness and methods, can qualify as aggressive in each case. The disclosure of information about tax planning services and the implementation of aggressive tax planning by many multinational companies and the disapproval of aggressive tax planning have given new impetus to actions and initiatives aimed at combating it. In particular, they gave impetus to international cooperation and effective budget transparency.
Journalist revelations and whistleblowers regarding tax practices used by large multinational companies to minimize tax payables predicted aggressive tax planning in the news, demonstrating the importance of this phenomenon and the inability to win for public finances.
The organization of the company schematically consists in entering into this tax jurisdiction in the form of income received from industrial property rights (payment of royalties “payment of royalties”). This organization may be accompanied by an agreement with the tax administration (tax notice) about the tax regime that will apply, including the applicable rate. The choice of state is not available equally for all companies, depending on their size and the nature of their activities. It is clear that multinational companies have already been created in different states, because then the comparison between the tax systems used in each state will be easier due to their presence in these states. Another difference exists between companies whose income is related to intangible activity, since intangible activity does not have its own location and is therefore easily mobile.
The development of an efficient and economically rational organization leads to the selection of the least taxable route. Available legal remedies include, for example, special measures or the use of tax loopholes. The freedom to practice, within certain limits, the optimization of the tax situation, synonymous with tax planning, opens up a fairly wide field of tax compliance.
On the other hand, the optimization of taxation and tax planning, aimed at making the connection between the structure for tax purposes and insignificant reality, is of a different nature and creates a large “gray area”. Structuring the company can be aimed at choosing the location of the main institution or head office for tax reasons (determination of the applicable tax jurisdiction). However, such structuring cannot be without connection with the reality of the activity, even in the case of intangible services.
To illustrate, when a company sells IT services to customers from a representative office established in a country to which customers are distributed who have sold the service or product, these services are unlikely to be performed by an institution located in another state that is limited to automatic billing to customers, living in the first country.
On the other hand, financial flows are based on the international dimension of the company, which does not correspond to tax planning services of value creation factors (in other words, which do not affect the basic tax value), which allows to reduce taxable profit. The organization of financial flows can be built in order to determine profit, where its taxation is the most profitable, taking into account the applicable tax legislation. This is, for example, the case when an organization relies heavily on royalties for the use of industrial property rights for countries offering a specific treatment for this income.