Living in interesting times for international tax

Living in interesting times for international tax





By Kyriakos Iordanou
General Manager
Institute of Certified Public Accountants of Cyprus

It was my great pleasure and honour to chair for a second consecutive year the Cyprus International Tax Conference which took place in February 2019in Nicosia. This is a particularly important forum, that brings together on the same stage the relevant government officials for the tax policy and compliance, experts from abroad and the local professionals.

This year’s theme orbited around the main challenges of the international taxation, as a result of the recent international and EU Directives and initiatives, such us the BEPS project and the Anti-Tax Avoidance Directive. Particular emphasis was also placed on the effects of a no-deal Brexit.

The way business fluctuatesgives rise to regulation, such as tax compliance tools, as well as to business enabling conditions, such as tax planning techniques. We do see the opposite happening too, where regulation shapes the way business is conducted.

In order to ascertain the evolution of the above, it would be useful to walkthrough the historical flow of events. Traditionally, trade and business developed from barter arrangements between two persons into an inter-country activity. Initially done,maybe, by ancient Phoenician, then Greeks and Romans, centuries later by the merchants of Genoa and Venice and later by the various empires established by Europeansacross the world and,eventually, through the course of time, to today’s globalised system.

This advancement of international trade and business also led to the corresponding development of the financial services industry, for supporting and financing traders. Hence, during the last decades we have seen the establishment of cross border activities and the emergence of various international business hubs to facilitate these activities. Such a hub or centre is of course Cyprus, which mounted on this route more systematically since the late seventies.

International business requires free movement ofgoods, services, people, labour andcapital, hence a number of conventions and treaties have been established to reduce and even alleviate any hurdles and barriers.

An even greater expansion of the international business and movement of capital and services was evident during the early nineties, after the collapse of the regimes in the Eastern Europe.

Today we live in an environment which is dependent upon globalisation and digitalisation. Possibly these two words are the most important ones in the contemporary vocabulary.Globalisation and digitalisationachieve, inter alia:

• The diminishment of time and distances, rendering thus traditional geography less relevant.
• The removalof physical barriers and bridge countries and continents, cultures, civilisations and religions.
• Conveyance of information in real time terms.
• Identification and meeting of the demands of people all over the world, with products and services produced all over the world, through channels from all over world.
• Interaction and business practices for virtual goods, with virtual money, in virtual markets, sometimes referred to as the “internet” or “the cloud”.

To support and facilitate international trade and business, a framework was required in order to lay down rules and principles, as well as identify the best possible opportunities for entrepreneurs, includingthe development and application of international tax. The international tax framework is adjusting and adapting as international business is shaping. Organisations like OECD, GAAT, WTO, EU etc, wereestablished to address these issues. A system of double tax treaties has been introduced to enable economic activity between countries at lower tax costs. Measures against protectionism and pro market openness have also been taken.

Although international taxation was developed to facilitate international business and economic activity, it was also used as a mechanism to enhance the competitiveness and attractiveness of jurisdictions in their quest to draw foreign direct investments, funds, and the coveted taxable income.

But these very sought-after globalisation and digitalisation concepts, as well as possible behaviours outside the norms and ethics, seem to have turned the arrowof attention towards the opposite direction now.

The decade in which we currently live could be indicatively characterised as the age of compliance and regulation. The ease in doing business internationally,in the way we knew it so far, is fast changing.

To start with, the free movement of capital is no longer particularly free, as verification of the sources of funds and of the wealth of the individuals is needed, coupled by information as to where these funds will be directed to and for what purpose.

Transparency is surging and adequatebackground datamust be kept about the true owners of the business entities, known as UBOs, by applying a series of tools such as KYC and due diligence procedures and appropriate keeping of records.

So, anonymity and “confidentiality”, especially in the financial services sector, are evaporating, particularlyafter the introduction of the Common Reporting Standard and FATCA, both of which established a formal communication between the tax authorities of various jurisdictions.

Exchange of information between government authorities is peaking, with the establishment of multilateral agreements (MLI) being the new trend.

Specific projects and regulatory tools have been devised by international organisations, such as the Base Erosion and Profit Shifting (BEPS) project of OECD and EU’s Anti-tax Avoidance Directive and DAC 6 Directive, as well as the ideas of imposing a Financial Transaction Tax and common tax base/rate in the EU countries.

One could argue that such measures might suggest going back to a concealed protectionism, something which is actually evidentin a number of countries lately, as suggested by the trade measures they have adopted.

Moreover, the anti-money laundering concept becomes more and more important, obtaining an overarching role. We see today, for instance,the EU issuing new directives and guidelines. Currently the 4thEUAMLDirective applies to all EU Member States, with the 5thbeing due for implementation as of January 1s, 2020, and the 6thone being already on the way.There is also a particularly growing sensitivity about the potentialfinancing of terrorism.

A “blurred” agency concept greatly practised for many years in rather “notorious but convenient tax heavens”is being challenged and is replaced by stricter substance rules, physical presence and permanent establishment requirements.

Traditional tax planning practices are now heavily scrutinised, with the so-called aggressive tax planning techniques being considered as money laundering offences.

In addition, the development of technology and the spread of the production and distribution lines give a greater challenge to classical tax questions such as, where and when value is created, the profits or taxable income are generated, the goods/services are ultimately sold or enjoyed, and which jurisdiction has the legal ownership of the tax revenue. This also led to the digital tax proposals.

As a result of the above, we can observe today conflicts between jurisdictions on the one hand, as well as conflicts between governments and corporations, on the other, with each one claiming its own fair share of tax. The latter gives rise to a mistrust between governments and international companies, mainly multinationals.

There is also the wishful intension of harmonizing tax practices, bases and rates within alliances of countries such as the EU, without even considering a parallel harmonization and integration of fiscal, budgetary and social policies.Worries are raised as this may have an adverse effect on each individual country’s sovereignty, as each country may use the local taxation to denote the level of the social and welfare policies it wishes to offer its citizens, defining also the extent of investments on defense, healthcare, education and generally the people’s welfare.

It is indeed an interesting, yet a challenging era. There is uncertainty in the air as to how things may evolve, with phenomena like a Brexit with or without an agreement making the situation even more complicated.

So, the way things are changing cause the current state of play in the international business arena to adapt accordingly, thus affecting the international tax as well.

During the above mentioned conference,we had the opportunity to highlight the concerns and proposals stipulated above, and there was a common conclusion that adherence to the action points of the BEPS project, the EU Directives and the overall compliance issues on the intentional scale is the way forward.

For Cyprus particularly, there is a recognised need to upgrade the procedures and systems used by government in general and the Tax Department in particular, in order to adapt to the digital age. This has been underpinned in the Tax Departments strategic plan.

The stake for Cyprus is to maintain and enhance its reputation and credibilityas a regional business centre of choice, and this can be facilitated by adhering to the internationally applicable frameworks, and by being responsive, prompt and efficient. At the same time, it is essential to focus on the continual improvement of the country’s competitiveness and range of products/services offered. This is a dual objective that requires a clear vision and commitment, careful tactical management, planning and coordination, whilst engaging all stakeholders to these goals.