Globalization & New Taxation Approaches
In 2010 the historical document was adopted in the USA - Foreign Account Tax Compliance Act. The purpose of this new law was to expand US tax jurisdiction on foreign financial institutions accounts of overseas American citizens, American companies and other related persons.
All financial institutions holding such accounts were obliged to report relevant information to Internal Revenue Service (IRS).
This document became the progenitor of subsequent ones, including Common Reporting Standard (CRS) from 2014, which decrees countries to obtain information from their financial institutions and automatically exchange it with other countries annually. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
The further global principles were summarized by Organisation for Economic Co-operation and Development (OECD) at the counter plan of base erosion and profit shifting (BEPS) - a tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions, thus "eroding" the "tax-base" of the higher-tax jurisdictions.
The part of this plan was the signing of MLI by a majority of countries, which is the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.
The MLI is entered into force on 1 July 2018 and already covers 94 countries all over the globe.
The MLI provides to the countries governments with readymade solutions to close the gaps in the existing international tax rules. It also implements minimum standards to counter treaty abuse, and to improve the mechanisms of solving disputes while providing flexibility to accommodate specific tax treaty policies.
The new rules create new challenges for international business. Complexity and inclusiveness of acts call on transparency in international business ownership, management and tax reporting.
At the same time for companies residing and operating in favorable jurisdictions, and which follow all required procedures - it may become safe to exist using thereof benefits. The main message of all newly created strategies is a substance at business place as well as lawfulness.
“Due to rapidly changing trends, we advise our clients to get closer to their actual place of business. E.g. if you serve clients from some jurisdiction, providing them with certain services, think about opening a company there, have a bank account, rent an office, hire local employees and carry out activities. This will protect and stabilize your business, reduce risks, more likely, improve brand recognition and increase the flow of local customers.”
Partner at LegalWelt
PhD in Law, Sergey Malomuzh