Manual for the Control of International Tax Planning: A Comprehensive Guide

Kiran Malik

04 Mar, 2023

As globalization continues to increase, businesses are increasingly operating across borders. The growth of cross-border trade and investment has led to increased complexity in the area of international taxation. The Manual for the Control of International Tax Planning provides a comprehensive guide to help countries address the challenges of international tax planning.

The Manual for the Control of International Tax Planning is a publication by the Organisation for Economic Co-operation and Development (OECD). The OECD is an intergovernmental organization that promotes economic growth, trade, and social well-being. The Manual is designed to help tax authorities in both developed and developing countries to address the challenges posed by international tax planning.

The primary purpose of the Manual is to provide guidance on how to identify and address international tax planning schemes that are abusive and artificially shift profits to low-tax jurisdictions. The Manual aims to provide a framework for countries to develop effective rules and regulations to prevent tax avoidance and evasion.

What is International Tax Planning?

International tax planning involves the use of tax laws and regulations in different countries to minimize taxes paid by multinational corporations^[1] (MNCs). MNCs may use a range of legal structures and arrangements to reduce their global tax liability.

These structures may include transfer pricing, which involves the allocation of profits and expenses between different subsidiaries of a multinational corporation. MNCs may also use tax havens, which are low-tax jurisdictions that offer favourable tax regimes to businesses. Tax havens may have little or no transparency or regulatory oversight, making them attractive to companies seeking to minimize their global tax liability.

Challenges of International Tax Planning

It poses significant challenges for tax authorities around the world. The complexity of international tax planning schemes can make it difficult for tax authorities to identify and address abusive tax practices. The lack of transparency in some tax regimes and the use of tax havens can also make it challenging to trace the flow of profits and expenses between different subsidiaries of a multinational corporation.

The result is that some MNCs may pay very little tax, even though they generate significant profits from their operations in different countries. This can lead to a loss of revenue for governments, which may have to make up the shortfall through other means such as higher taxes on individuals or reductions in public services.

Objectives of the Manual

The Manual for the Control of International Tax Planning aims to help countries address the challenges posed by international tax planning. The Manual has several objectives:

1. To provide guidance on how to identify & address international tax planning schemes that are abusive and artificially shift profits to low-tax jurisdictions.
2. To provide a framework for countries to develop effective rules and regulations to prevent tax avoidance and evasion.
3. To promote transparency and cooperation between countries on tax matters.
4. To ensure that MNCs pay their fair share of taxes in the countries where they operate.

Key Features of the Manual for the Control of International Tax Planning

The Manual for the Control of International Tax Planning is a comprehensive document that provides guidance to tax administrations on how to effectively control international tax planning. It is based on the latest international tax standards, such as the OECD’s Base Erosion and Profit Shifting (BEPS) project and provides a framework for identifying and combating tax avoidance and evasion.

The key features of the Manual for the Control of International Tax Planning include:

1. Risk assessment: The manual outlines a risk-based approach to identifying potential tax risks posed by international tax planning. Tax administrations are encouraged to assess the risk of tax avoidance or evasion based on various factors, such as the type of transactions involved, the location of the entities involved, and the complexity of the arrangements.
2. Exchange of information: The manual emphasizes the importance of international cooperation and exchange of information between tax administrations to combat tax avoidance and evasion. Tax administrations are encouraged to share information on cross-border transactions, including transfer pricing arrangements, to identify potential tax risks and take appropriate action.
3. Transfer pricing: The manual provides guidance on transfer pricing, which is a key area of international tax planning. It outlines best practices for determining arm’s length prices for intercompany transactions and provides guidance on how to detect and address transfer pricing abuses.
4. Anti-abuse measures: The manual provides guidance on anti-abuse measures, such as anti-avoidance rules, that can be used to prevent taxpayers from exploiting loopholes in tax laws to avoid paying taxes. It encourages tax administrations to adopt a comprehensive approach to anti-abuse measures, including legislative, administrative, and enforcement measures.
5. Mutual agreement procedures: The manual provides guidance on mutual agreement procedures, which are mechanisms for resolving disputes between tax administrations on the interpretation or application of tax treaties. It outlines best practices for using mutual agreement procedures to resolve disputes and prevent double taxation.

Benefits of the Manual for the Control of International Tax Planning

The Manual for the Control of International Tax Planning provides a number of benefits to tax administrations and taxpayers alike. These benefits include:

1. Increased transparency: The manual provides guidance on how to increase transparency in cross-border transactions, which can help prevent tax avoidance and evasion. By providing clear rules and guidelines, the manual can help taxpayers better understand their obligations and ensure that they comply with tax laws.
2. Greater international cooperation: The manual encourages tax administrations to work together to combat tax avoidance and evasion. By sharing information and working together, tax administrations can more effectively identify potential tax risks and take appropriate action.
3. Improved tax administration: The manual provides guidance on how to improve tax administration, including risk assessment, exchange of information, transfer pricing, anti-abuse measures, and mutual agreement procedures. By adopting these best practices, tax administrations can better control international tax planning and prevent tax avoidance and evasion.
4. Reduced tax avoidance and evasion: The manual provides guidance on how to identify and combat tax avoidance and evasion. By adopting the measures outlined in the manual, tax administrations can reduce the incidence of tax avoidance and evasion, which can help ensure that taxpayers pay their fair share of taxes.

Content of the Manual

Here are the key points of each part of the Manual for the Control of International Tax Planning:

• Part 1:
  • Overview of international tax planning and challenges for tax authorities.
  • Objectives of the Manual and guidance on how to use it.
• Part 2:
  • Guidance on identifying and addressing abusive tax practices.
  • Description of different types of tax planning schemes, such as transfer pricing and tax havens.
  • Guidance on assessing economic substance of transactions and determining arm’s length price.
• Part 3:
  • Guidance on developing effective rules and regulations to prevent tax avoidance and evasion.
  • Guidance on designing anti-avoidance measures, such as controlled foreign corporation rules and thin capitalization rules.
  • Guidance on enforcing rules through audits and investigations.
• Part 4:
  • Focus on international cooperation and exchange of information between tax authorities.
  • Guidance on establishing and implementing tax information exchange agreements and mutual assistance procedures.
  • Addressing issues related to confidentiality and data protection.
• Part 5:
  • Guidance on building effective tax administration systems to support implementation of measures and principles outlined in previous parts.
  • Guidance on developing risk assessment tools, building capacity within tax authorities, and improving efficiency of tax administration processes.

Conclusion

The Manual for the Control of International Tax Planning is an important tool for tax administrations seeking to control international tax planning and combat tax avoidance and evasion. It provides guidance on best practices for risk assessment, exchange of information, transfer pricing, anti-abuse measures, and mutual agreement procedures, based on the latest international tax standards. By adopting the measures outlined in the manual, tax administrations can increase transparency, improve international cooperation, improve tax administration, and reduce tax avoidance and evasion. Ultimately, this can help ensure that taxpayers pay their fair share of taxes and contribute to the well-being of society as a whole.

Also Read: The Principles of International Tax Planning