INVESTMENT AND BUSINESS STRATEGY MANAGEMENT

This
is a continuation of the article on misuse and abuses of transfer pricing. The tax authorities have over the years
taken positive steps that will help reduce the scope of tax avoidance
occurrences in the UK. The OECD Transfer Guidelines for Multinational
Enterprises and Tax Administrations (TPG) which was originally issued in 1995
to provide internationally accepted guidance on the application of arm’s length
principle contained in article 9 of the OECD and UN Model Tax Convention was
substantially revised in 2010. Aspects of the 1995 OECD guidelines that were
amended are chapters 1, 2, and 3 dealing with; the arm’s length principle,
transfer pricing methods and comparability analysis respectively. Another
feature of the July, 2010 TPG that is not in the 1995 version is the new
chapter (chapter ix) on transfer aspect of business restructuring.

Although
Prusa (1990) had earlier stated that alternative approach (based on incentives)
should be used to tackle the transfer pricing problem. Looking at it from the
point of view of Prusa (1900), one might be tempted to hastily conclude that
one of the mission of the OECD which is to promote the expansion of
multilateral trade in an unbiased manner will be defeated if strict measures
that might affect the operations of OECD members is taken. Yet, a second look
at solely relying on persuasion will reveal the moral hazards effects that will
only take a while to prove detrimental to all involved. Take the case of the
banking crisis where moral persuasions were employed to tackle the problem of
toxic assets creation and distribution. To this end, this section is devoted to
the discussion of changes to legislation aimed at reducing the occurrence of
tax avoidances.

INFORMATION
EXCHANGE AGREEMENT

Keen
and Ligthart (2006) stated that tax information sharing amongst tax authorities
of different nations of the world has probably emerged over the last few years
as a central issue on international tax policy agenda. This finding of Keen and
Ligthart (2006) is corroborated by various comments made by key players of the
Organization for Economic and Co-operation Development (OECD). For example, according
to the OECD website (2011), huge progress towards achieving full and effective
exchange of information has been made. This is evidenced by the fact that more
countries of the world are signing the OECD information exchange agreement. The
OECD is relentlessly working towards the development of information network.
This objective of OECD will according to her be achieved through the Global
Forum on Transparency and Exchange of Information for Tax Purposes. The most
recent countries to sign this agreement as at the time of this writing are
Ghana and Liberia.

Pier
Carlo Padoan, Deputy Secretary-General and
Chief Economist to G20 Finance Ministers while making a presentation at the
Seoul, 12 November, 2010 G20 conference happily told the members that more than
500 information exchange agreement have been signed. Bacchetta and Espinosa
(2000) described information sharing amongst tax authorities as an important
element of international tax system. The problem however is that the
international tax information system does not work for all countries due to
some reasons identified by Bacchetta and Espinosa (2000). Dharmapala and Hines
Jr. (2007) while looking at the features of countries that eventually become
tax havens concluded that small, rich, affluent countries with good corporate
governance are likely to become tax havens. The implication of having good
corporate governance is that transparency in information exchange forms the
basis of all dealings Armstrong et al (2011). If the observation and findings
of Armstrong et al (2011) holds, it could then be argued that tax information
exchange is nothing but mere formalities. Notwithstanding these problems, substantial
progress in getting countries both developed and developing in the area of
sharing tax and other fiscal information has been made in the last ten years as
evidenced by the fact that over 500 countries have signed the information
exchange treaty.

According to the report delivered at the Global
Forum annual 3^rd plenary meeting, 14 out of the 25 jurisdictions
that were reviewed in the previous meeting have made significant changes to
their domestic legislations with Belgium still on the talk on how to end bank
secrecy.

2011
CHANGES IN THE TAX AVOIDANCE SCHEME PROMOTERS’ DISCLOSURE REQUIREMENT

Tax avoidance scheme promoter disclosure
requirement is a regulation mandating promoters of tax avoidance schemes to
disclose the extent of benefits that has been made from the use of such scheme.
Since the introduction of the tax avoidance scheme promoters disclosure law in
2004, a lot of changes have been made to it. This section will not in any way
delve into the discussion of detailed provisions of the law but will only
highlight the change that is made in 2011 towards curtailing the activities of
both the users and promoters of tax avoidance scheme.

HMRC opened a consultation with tax advisors, professional
bodies and businesses that will last from the 31^st day of May, 2011
to 31^st August, 2011. The aim of the consultation is to deliberate
on the removal of cash flow benefits from those who use listed high risk tax
avoidance schemes. Although this consultation will not have been concluded
before this research is concluded, it is expected that the outcome of the
consultation will be a reduced use of tax avoidance scheme. This reduction in
use of the scheme might be a temporal one as the promoters will quickly work
out a way within the ambit of the law that will still enable them entice their
clienteles, after all, you do not expect the tax advisors to completely close
shop but to innovate the tax packages.

A major challenge in this direction is the
allocation of burden of proof. The allocation of burden of proof according to
the 2010 OECD guidelines is an important aspect of transfer pricing that needs
to be handled with care. The tax administrators in most cases bear the burden of
providing prima facie evidence as to the existence of inconsistencies in a tax
payers transactions – which includes proving that necessary information are
being withheld. This inevitable bitter fact makes it all lot more difficult for
fruitful legal action to be raised against some savvy and crafty MNEs and could
coupled with the fact that MNEs have over time accumulated enormous commercial
power make it more difficult for changes made to tax avoidance promoters scheme
to do much as far as reducing the scope of tax avoidance freedom that MNEs
enjoy is concerned.

RECENT
DEVELOPMENTS IN THE UNITED NATIONS MODEL TAX CONVENTION

In a presentation made at Asian Development Bank (ADB)
13^th Tax Conference that was held in Japan, Kosters (2003) stated
that tax treaties originated from Germany. Unlike the OECD Model Convention
that is updated between every 2-3 years, The UN Model Tax Convention was last
updated in 1998 before the recent 2010 update that is largely a reflection of
the OECD Model Convention.